Senate Budget Committee Chairman Patty Murray, D-Wash., and two other prominent Senate Democrats introduced legislation Wednesday to update the Tax Code to help workers and families keep more of what they earn, but also double the penalty on tax preparers who do not follow the Internal Revenue Service’s due diligence requirements for claiming the Earned Income Tax Credit.
Murray’s bill, the 21st Century Worker Tax Cut Act, co-sponsored by Senators Jack Reed, D-R.I., and Sherrod Brown, D-Ohio, includes a new tax cut for two-earner families. It would allow a 20 percent deduction on a secondary earner’s income. In order to qualify, both spouses would have to earn income during the year and have at least one child under the age of 12.
The new deduction would also reduce earned income for purposes of calculating the EITC to ensure low-income, two-earner families who do not owe income tax because their combined income is too low and who otherwise would not benefit from the deduction, instead benefit through an enhanced refundable EITC.
The bill would also boost the Earned Income Tax Credit for childless workers. Murray’s office pointed out that in 2013, a single worker with no dependent children is eligible for a maximum credit of only $487 and is entirely phased out of the credit once his or her income reaches just $14,340, roughly what a full-time, minimum-wage worker would earn in one year. In addition, childless workers under the age of 25—a group enduring historically low labor force participation rates—are completely ineligible for the EITC regardless of their income. The legislation would increase the maximum EITC for childless workers to approximately $1,400 in 2015 and expand the income eligibility range so childless workers would remain eligible for the credit up to about 133 percent of full-time earnings at the current minimum wage.
The bill also would reduce the eligibility age for childless workers to quality for the EITC from 25 to 21. The Treasury Department has estimated similar changes would help more than 13 million struggling workers climb the economic ladder.
At the same time, the bill would crack down on improper EITC payments by doubling the penalty on tax preparers who do not follow the IRS’s due diligence requirements.
“As we expand the EITC, we have a responsibility to do everything we can to make sure we are doing everything we can to make sure that this credit is going straight to the workers and families that need it,” said Murray in a speech on the Senate floor Wednesday. “And part of that responsibility is to make sure that the EITC claims are filed correctly. Professional tax return preparers complete 70 percent of these EITC claims. Under our bill, the 21st Century Tax Cut Act, they would receive twice the current penalty if they don’t follow due diligence requirements that were put in place by the IRS.”
Murray called for increasing the minimum wage as well. “As we continue this important debate about how to expand opportunity to those who are struggling, we need to make sure we are giving today’s workforce the best shot at success in today’s economy,” she said. “We should increase our outdated minimum wage to give millions of workers a raise, and then Democrats and Republicans need to come together to update our tax code, and give today’s struggling workers the tax relief they deserve. The 21st Century Worker Tax Cut Act would be a strong, fiscally responsible step toward that bipartisan goal, and I am hopeful that we can get this done for our workers as quickly as possible.”
The cost of the bill would be $144.9 billion over 10 years and would be paid for by closing a number of tax loopholes that some members from both parties have proposed to eliminate.
Among them would be ending a tax break for corporate stock options. Major corporations are currently able to claim large tax breaks by paying their executives in stock options instead of regular paychecks, thereby skirting a tax rule that limits deductible cash compensation to certain corporate officers to $1 million per year. Murray argued that the tax break encourages executives to assume riskier management approaches in the hope of driving near-term profits and stock price gains. The bill would end that practice by subjecting stock options to the same $1 million per year deduction limit that already applies to cash compensation and apply the deduction limit to every employee’s income, not just that of a small group of corporate officers.
The bill also aims to prevent companies from avoiding taxes by shifting profits to tax havens. It would combat tax haven abuse by treating as Subpart F income—that is, eliminating deferral of—foreign income subject to an effective tax rate of 15 percent or less, with an exception for income attributable to legitimate business operations in a foreign country.
Murray’s office said some of the same proposals for eliminating tax loopholes had been supported by some Republicans, including the tax reform discussion proposals of House Ways and Means Committee Chairman Dave Camp, R-Mich. However, Sarah Swinehart, a spokesperson for the Republican side of the Ways and Means Committee, disputed this. “This is laughable,” she said in a statement. “Not only does Sen. Murray have the policy wrong, she is clearly confused about Chairman Camp's tax reform plan that grows the economy for all American workers and puts an extra $1,300 in the pockets of middle-class families. What she has proposed is a set of tax increases to fuel more Washington spending on a program that the IRS's own Inspector General has said loses billions of dollars a year to fraud. This is why tax policy should not be written by Democrat appropriators. They only know how to spend money and are perfectly happy to tax anyone—including hardworking families—to spend more.”
Republicans also dismissed the idea that the proposal for doubling the penalty on tax preparers came from their side of the aisle.