Democrats’ tax plan could mean lower taxes for lower-income residents

People earning less than $24,900 annually could receive a tax cut of nearly $1,400 next year if a proposed spending bill in Congress passes, according to a new analysis.

But the bill could also raise taxes for those in the top 1% by more than $80,000 next year, says the report from the Institute of Taxation and Economic Policy, a Washington economic research firm.

The bill faces hurdles before becoming law, but here’s how a proposed version could affect Texans’ taxes.

Which Texans would get tax breaks?

Low-income people with children and low-income working individuals with no children are the most likely to benefit from the bill, said Steve Wamhoff, the report’s co-author.

Those earning less than $24,900 could see a tax cut next year amounting to $1,390. Those earning between $24,900 and $43,200 could see a tax cut amounting to $910.

“People in Washington are always kind of bickering about things which doesn’t really affect anyone’s life,” said Wamhoff, the firm’s director of federal tax policy. “But when you look at some of the things, you realize this actually could make a big deal.”

The report is based on a tax plan approved last month by the House of Representatives’ Ways and Means Committee. It’s part of a $3.5 trillion tax and spending plan, but that figure is expected to come down as moderate Democrats find it too expensive.

The tax cuts are mostly due to the proposal to extend the expansions of the Child Tax Credit and Earned Income Tax Credit. Congress expanded both earlier this year, but they are set to expire at the end of the year.

Individuals eligible for the full Child Tax Credit are single parents earning up to $75,000 a year, head of households earning up to $112,500 annually and couples earning up to $150,000. The credit then phases out as incomes climb.

The Earned Income Tax Credit is designed to help workers without children. The bill would also permanently raise the maximum credit from roughly $540 to around $1,500. The income cap would also be permanently raised from $16,000 to at least $21,000.

A tax on the rich

While low-income people could reap the most benefits from the bill, tax increases would most likely hit the top 1% the hardest.

Most of the tax increases come from income tax increases on individuals.

The bill would raise the top individual income tax rate to 39.6% for single individuals making more than $400,000, for heads of household earning above $425,000 and for joint filers making more than $450,000. The current top rate is 37%.

The report estimates that on average those with annual incomes of at least $698,600 would see tax increases next year of 4.1% of their annual income, amounting to $51,870.

“I wouldn’t exactly call it soaking the rich. I mean, it’s 4%. It’s a significant thing that people will notice, and people will talk about it,” Wamhoff said.

Bill not popular among all Texas economists

Some Texas economists are opposed to the proposed bill.

Ray Perryman, president and CEO of The Perryman Group, an economic research and analysis firm in Waco said in an email that “the U.S. has a very large debt burden that has been generated largely by decades of poorly conceived fiscal policy by both parties” — a situation that extensive spending during the pandemic worsened.

Vance Ginn, who served in the Trump administration as the associate director for economic policy at the Office of Management and Budget, is the chief economist at the Texas Public Policy Foundation.

“There’s a large increase in taxes, increases in government payments that increases government dependency,” Ginn said. “It ultimately will punish the middle class.”