We all know the pandemic and the coverage response to it dramatically increased the number of households that did not pay federal individual income tax in 2020 and can achieve this once more this yr. The bump was transitory, attributable to a troubled 2020 economic system and enactment of large however short-term tax cuts.
However what would occur to the variety of non-payers if Congress extends one set of tax adjustments—the extra beneficiant refundable tax credit for low- and moderate-income households first authorised by Congress earlier this yr?
A new TPC estimate finds that persevering with these beneficiant tax advantages would have a noticeable, however comparatively modest, affect on the variety of federal revenue tax payers. If the credit are continued, 45 % of households wouldn’t pay federal revenue tax in 2022, in comparison with a bit lower than 42 % if the upper credit are allowed to run out.
It is a crucial query as a result of President Biden and congressional Democrats have made no secret of their enthusiasm for persevering with the extra beneficiant credit that embody the Child Tax Credit (CTC), the Earned Income Tax Credit (EITC) and the Child and Dependent Care Tax Credit (CDCTC). Congress made all of them extra beneficiant as a part of the American Rescue Plan it handed in March.
Total, the share of non-payers still would be significantly lower than in 2020, when it approached 61 %, or this yr, when it’s anticipated to high 57 %.
Relative to permitting the expanded credit to run out, persevering with the extra beneficiant credit would improve the variety of non-payers for almost all revenue classes. However the largest share improve can be amongst households with annual revenue between about $100,000 and $180,000 (the fourth quintile of revenue). The share of non-payers in that group would greater than double, from about 1.4 million to three.2 million, or from 4.5 % to about 10.5 %.
In contrast, the variety of non-payers among the many lowest revenue households would rise solely barely, from 89 % to 92 % in 2022.
TPC’s evaluation highlights the significance of the expanded CTC and CDCTC for middle-income households with youngsters. Subsequent yr, almost 62 % can be non-payers if the expanded credit are prolonged whereas solely 35 % will probably be off the rolls if the extra beneficiant credit are allowed to run out as scheduled beneath present regulation.
The restricted affect of extending the extra beneficiant credit suggests the large increase within the variety of non-payers in 2020 and in 2021 primarily has been because of two different elements—the a number of rounds of Financial Affect Funds (EIPs or stimulus funds) and the poor pandemic economic system that price greater than 20 million staff their jobs and diminished hours or pay for tens of tens of millions—principally in 2020.
It’s unlikely that the nation will see extra EIPs within the close to future. And, regardless of the present resurgence of COVID-19, the economic system seems on a comparatively robust footing. Thus, the share of non-payers is more likely to fall sharply subsequent yr, whether or not or not Congress decides to increase these beneficiant refundable tax credit.