Trump's first budget would restrict eligibility for EITC and CTC

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President Trump released his budget proposal Tuesday for the 2018 fiscal year titled "A New Foundation for American Greatness." The budget would aim to cut approximately $3.6 trillion in government spending over the next decade, some of which would be attributable to eligibility changes relating to the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC), and some of which would result from specific actions undertaken by the IRS to reduce improper payments made by the government.

In addition to the budget, the Administration also released a separate document describing major savings and reform proposals in the budget, as well as a "blueprint" providing details on discretionary funding proposals.

Big picture. In his budget proposal, in addition to "reprioritiz[ing] Federal spending", the President also highlighted a number of other major legislative goals that he views as central to achieving faster economic growth, including health care reform and tax reform. The passage of the American Health Care Act and the President's tax reform proposals are assumed in the budget. It is further assumed that the tax reform proposals are revenue-neutral.

As described in the budget, the President's tax reform objectives for American families include:

• Lowering individual income tax rates;

• Expanding the standard deduction and helping families struggling with child and dependent care expenses;

• Protecting homeownership, charitable giving and retirement saving;

• Ending the alternative minimum tax;

• Repealing the 3.8 percent net investment income tax; and

• Repealing the estate tax.

The tax reform objectives for businesses include:

• Reducing the business tax rate;

• Eliminating most special interest tax breaks; and

• Transitioning to a territorial system of taxation, including a one-time repatriation tax on already accumulated overseas income.

Tightened eligibility for the EITC and CTC: In order to claim either of these credits, the budget proposal would require taxpayers to provide a Social Security Number. The budget provides that this requirement is intended to limit these credits to those who are authorized to work in the U.S.

According to the "2018 Major Savings and Reforms" document, households who do not have SSNs that are valid for work may claim the CTC under current law, and "gaps in current administrative practice" allow some people who have SSNs that are not valid for work to claim the EITC.

The budget projects that adding this requirement would result in approximately $40.4 billion in reduced spending over a 10-year period.

Reduction of improper payments: The budget proposed to "curtail Government-wide improper payments by half through actions to improve payment accuracy and tighten administrative controls." Two of the action items to achieve this goal pertain to IRS: increase oversight of paid tax return preparers (which was projected to reduce improper payments by $439 million over the 10-year period), and provide more flexibility for the IRS to address correctable errors (which was projected to reduce improper payments by $655 million over the 10-year period). "Correctable errors" were not defined in President Trump's budget, but have been defined elsewhere as essentially broadening IRS's authority to correct simple errors in certain narrow circumstances, akin to IRS's existing authority to correct math errors.

IRS funding: The President requested $12.1 billion in discretionary resources for the Treasury Department’s domestic programs—a $519 million decrease from the 2017 annualized Continuing Resolution (CR) level. With respect to the IRS, the budget stated that it would ‘‘preserve key operations’’ to ensure IRS’s continued efforts to ‘‘combat identity theft, prevent fraud and reduce the deficit through the effective enforcement and administration of tax laws,’’ but would also achieve significant savings by ‘‘[d]iverting resources from antiquated operations.’’ Overall, the President requested a funding reduction of $239 million from the 2017 annualized CR level of $11.2 billion.

As described by Treasury Secretary Mnuchin, the budget "focuses Treasury on our core missions of collecting revenue and managing the nation's debt, while modernizing, streamlining and increasing efficiencies to reduce operating expenditures."

What's next? Whether any or all of the President's budget proposals become law is uncertain at this point. The process for passing a budget generally begins with the President submitting a comprehensive detailed budget request to Congress. Then, the House and Senate Budget Committees typically hold hearings on the President's budget request, inviting White House officials to testify, then pass their own respective budgets, which are in turn negotiated by the full House and Senate before passage of a single congressional budget resolution. The budget resolution is then the basis of annual appropriation bills.

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