Tag: eitc
Lawmakers Confront IRS Over Tax Audits That Target The Poor

Lawmakers Confront IRS Over Tax Audits That Target The Poor

Over the past six months, ProPublica has detailed the myriad ways the IRS has been gutted and how that has impacted its ability to do its job. In sum: The wealthy escape scrutiny while the working poor, an easier target, are audited at high rates.

This week, Congress, in two separate hearings, confronted IRS Commissioner Charles Rettig with the findings.

“How can the Congress stand by a tax-enforcement system that punishes working people and gives the wealthy a green light to cheat?” asked Sen. Ron Wyden, D-Ore., ranking member of the Senate Finance Committee, during his opening statement on Wednesday.

Wyden was referring to a ProPublica investigation last week into the fate of the elite unit the IRS formed to keep up with the complicated tax-avoidance schemes of the wealthy. Faced with staff cuts and blowback from the wealthy and their tax representatives, the effort fumbled and was scaled way back.

Wyden demanded that Rettig produce a plan within 30 days on how his agency will change a system that is “stacked in favor of the wealthy” and “against the most vulnerable.” Rettig promised to do so.

One day earlier, at a hearing before the House Appropriations Committee, Rettig was also questioned about a map showing where in the country IRS audits are most concentrated. The top five most audited counties, ProPublica found, were rural, mostly African American ones in the Deep South. (On Wednesday, Wyden called the map “shameful.”)

Rep. Charlie Crist, D-Fla., displayed the map during the hearing and asked: “The map looks like the IRS is targeting black, Hispanic and Native American populations for audit. Is that the case?”

Rettig said that it wasn’t, adding that the IRS did not screen for race when selecting returns for audit.

But Crist said the findings amounted to “disparate impact,” the idea that even if unintentional, systems can produce “racial discrimination in practice.” He asked how the IRS would avoid “implicit or explicit” bias going forward.

Rettig didn’t have a clear answer. The IRS audited such a large number of low-income families because they claimed the earned income tax credit, he said. The EITC is one of the country’s largest anti-poverty programs. But the IRS estimates that of the more than $70 billion paid out last year through the program, $18 billion was claimed improperly, Rettig said. This made the program a priority for the IRS to audit, he said. As previous IRS commissioners have done, he blamed the complexity of the law as the main cause of those incorrect claims.

While that $18 billion figure sounds impressive, experts within and outside the IRS have argued that the agency’s estimate is far too high, largely because low-income taxpayers are much less likely to have competent representation to dispute the IRS’ conclusions.

The $18 billion is also just a pittance when compared with the vast universe of unpaid taxes. The IRS produces an estimate of what it calls the “tax gap,” which is how much tax is actually paid compared with what should have been paid. It’s been a few years since the last estimate, but assuming the rate of compliance has not changed (if anything, it’s gotten worse), the tax gap in 2018 would have been between $600 billion and $700 billion. At most, incorrect EITC payments account for around three percent of that.

By comparison, in 2017, the last year for which data is available, audits of EITC recipients accounted for 36 percent of all audits.

Since the 1990s, Republicans have put pressure on the IRS to address incorrect EITC payments, and Republican senators in Wednesday’s hearing continued that pressure.

“This is a big problem,” said Sen. Pat Toomey, of Pennsylvania, referring to improper EITC payments. “This is where the money is,” said Sen. Bill Cassidy, who represents one of the most heavily audited states, Louisiana.

Rettig expressed a willingness to work with Congress to address incorrect payments of the EITC, perhaps by simplifying the requirements. He notably did not suggest that the IRS might scale back the number of audits. As ProPublica reported last year, the IRS is understaffed, so people who are audited for claiming the credit and send in documents supporting their claim often must wait a year to find out if their proof is accepted.

When it comes to auditing the wealthy, Rettig did say that one of his “focal points” was “to get the audit rates up for the more wealthy taxpayers.”

“I’m an enforcement person,” he assured lawmakers on Tuesday after they expressed concern about how far the audit rate has fallen. “I’m an enforcement-minded person. … Personally, I have both eyes focused on enforcement.”

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Alabama Senator Tells IRS To Stop Picking On Southern Poor

Alabama Senator Tells IRS To Stop Picking On Southern Poor

On Monday, ProPublica published a map showing where IRS audits are most concentrated. The South stood out.

The reason is because of an intense focus at the IRS on auditing recipients of the earned income tax credit. The EITC is one of the country’s largest antipoverty programs, in the form of a tax refund for low-income workers, especially those with children. The typical EITC recipient earns less than $20,000 per year.

In practice, the IRS’ emphasis on EITC recipients means states with concentrations of low-income workers see the highest audit rates. One of those states is Alabama. Sen. Doug Jones (D-AL), wasn’t pleased.

“To take such a large portion of limited IRS resources and to focus them so intensely on rural communities in Alabama and the Southeast makes little fiscal sense,” Jones wrote in a letter to IRS Commissioner Charles Rettig. “Moreover, the practice appears to be blatantly discriminatory.” (An agency spokesperson previously told ProPublica that audit subjects are chosen without regard to race or where the taxpayer lives.)

The map, which stemmed from a study by Kim M. Bloomquist, formerly a senior economist in the tax agency’s research office, showed that the highest audit rates were to be found in rural, mostly African American counties in the South. Among states, Alabama had the fifth highest audit rate in the country, behind Mississippi, Georgia, Louisiana and Florida.

“In an effort to focus its resources and ensure fair treatment of all taxpayers, I believe the IRS should undertake a full and thorough review of the policies and practices that led to such a disparate geographic impact of its annual audits,” Jones wrote. He ended his letter with a number of questions about IRS audit policies.

As we explained in December, Republicans in Congress have pressured the IRS since the 1990s to prevent payments of the credit to people who aren’t eligible for it. Meanwhile, critics, some within the IRS, such as Taxpayer Advocate Nina Olson, have long criticized the focus on EITC audits as disproportionate, especially since IRS studies show that far more revenue is lost through cheating by those higher up the income scale. Furthermore, in recent years, budget cuts have hampered the IRS’ ability to pursue wealthy taxpayers, while audits of EITC recipients, which are largely automated, have been slower to decline. The result is an increasingly unequal mix of audits.

Lawmakers will have an opportunity to ask Rettig about the audit choices in a hearing next Wednesday before the Senate Finance Committee.

“There are two tax codes in America, and there are also two enforcement regimes,” said Sen. Ron Wyden, D-OR), the committee’s ranking member. “It takes significant resources to go after wealthy tax cheats with savvy lawyers and accountants, and the IRS simply doesn’t have those resources after years of Republican attacks. Ensuring wealthy taxpayers pay what they owe shouldn’t be a partisan issue, and this will be a focus with Commissioner Rettig.

ProPublica is a Pulitzer Prize-winning investigative newsroom. Sign up for The Big Story newsletter to receive stories like this one in your inbox.

IMAGE: Senator Doug Jones, the Alabama Democrat who criticized the IRS for conducting too many senseless audits of his rural poor constituents.

In Both Red And Blue States, Talk Of Middle-Class Tax Cuts

In Both Red And Blue States, Talk Of Middle-Class Tax Cuts

By Jake Grovum, Stateline.org (TNS)

WASHINGTON — Red and blue states are poles apart on just about every issue. But governors and state lawmakers from both parties are speaking the same language when it comes to offering tax cuts and credits for low- and middle-income Americans.

The actual plans taking shape are different depending on which party is in charge at the statehouse. What they have in common is a strain of populism and the stated goal of helping those who feel they’ve been left behind during the economic recovery.

Proposals in Republican-dominated states, such as Arkansas, Ohio and Maine (where Democrats control the House), focus on lowering income tax rates, either for everybody or specifically for low- and middle-income taxpayers. In New York and Minnesota, where Democrats hold more sway, the idea is to boost low- and middle-income households through targeted property tax cuts or child care income tax credits, respectively.

Some states, including some with Republican governors such as Michigan and Massachusetts, are interested in expanding their states’ versions of the federal Earned Income Tax Credit. Other states that don’t have a state EITC, such as California, are thinking of creating one. The credit, which reduces the amount of taxes that low- to moderate-income households owe, has long attracted bipartisan support.

The proposals come amid a growing national conversation on economic inequality.

“There are a lot of folks across the states who are very aware of the widening gap,” said Erica Williams of the Washington-based Center on Budget and Policy Priorities. The left-leaning group has criticized income tax cuts as a poor strategy for helping the poor, but Williams said “it’s good that lawmakers in the states, and maybe in some less typical states, are looking at how do we help folks in the low end of the income spectrum. But there are questions of whether some of these proposals really do that.”

Peter Wehner of the Ethics and Public Policy Center, who has served in the last three Republican presidential administrations, recently laid out the conservative case for addressing middle-class anxieties in “Room to Grow: Conservative Reforms for a Limited Government and a Thriving Middle Class,” a collection essays published last year.

“The chief fear of middle-class Americans is that just as it is getting harder for poor people to climb into the middle class, a stagnant economy is making it all too easy for those who have achieved middle-class status to fall out of it,” Wehner wrote. “Conservatives must understand the concerns of the middle class and speak to their aspirations and worries.”

State revenues are expected to total $748.3 billion in fiscal 2015. That is about 3 percent more than the $726.1 billion states collected in fiscal 2014. But when those figures are adjusted for inflation, revenues are still 2 percent lower than they were at their peak before the recession.

Because budgets remain relatively tight, some governors who want to cut income taxes for low- and middle-income households are proposing tax increases in other areas to make up the difference. That trade-off is sparking some resistance from members of both parties.

In Ohio, where Republicans control the governor’s office and both chambers of the Legislature, Governor John Kasich has proposed a 23 percent cut to all income taxes over the next two years and the expansion of an income tax exemption that might spare 200,000 low- and middle-income Ohio households from paying any state income taxes.

“Ohio is beginning to give the people at the bottom the kind of relief they need and the incentives to work more,” Kasich said at an event last month, pointing to his latest tax-cut proposal in addition to an expansion of the state’s EITC he signed into law last year.

But to pay for the cut, Kasich has proposed a raft of tax increases: higher tobacco levies, higher taxes on the state’s oil and gas industry and higher sales taxes, among other changes. The plan is similar to “pro-growth” tax cuts proposed by Republicans elsewhere, in the name of stoking economic activity. Still, the reaction from Kasich’s GOP counterparts in the Legislature has been skeptical.

Republicans in the Ohio House had tough questions for the governor’s budget director in a hearing earlier this month, expressing worry that the proposed tax hikes would dampen economic activity. They also said they were concerned that increasing levies on fracking would exacerbate the problems the industry already is facing because of falling oil prices. Republicans have promised to consider Kasich’s plan, but some are already drawing parallels to 2013, when a similar tax plan failed to pass in the Legislature.

Democrats were no more receptive. State Rep. Denise Driehaus, who is the ranking minority member on the Finance Committee, pointed out that the sales tax is a regressive tax that hits rich and poor equally, while income-tax brackets are based on a household’s annual earnings, with the rich paying a greater percentage. “It’s disingenuous to suggest that the middle class benefits from this,” Driehaus said.

A similar dynamic could play out in Maine, where Republican Governor Paul LePage has proposed a significant shift away from the state’s income tax (with the eventual goal of eliminating it entirely) toward more taxes on sales and services, which he says would spare state residents while reaping revenue from tourists. LePage’s plan would offer tax credits to low-income earners to help offset the higher sales tax burden, along with property tax relief for low-income earners.

The reaction so far in Maine has been more reserved than in Ohio. Yet some are already pointing out that voters there rejected a plan to shift from income to sales taxes in 2010, and like elsewhere, it’s been derided as a regressive tax plan overall. Democratic House Majority Leader Jeff McCabe said there are also worries that the plan could lead to property tax hikes around the state, squeezing middle-class homeowners even more.

For now, McCabe called the plan a “very bold proposal,” and a “great place to start.” But he asked: “Is this really going to help build the middle class?”

“We still have a lot of listening to do,” he added.

There were no such problems in pushing through tax cuts in Republican-controlled Arkansas. On Feb. 6, the state’s new Republican Governor Asa Hutchinson signed a $100 million tax cut into law, after the bill sailed through the Legislature, garnering huge bipartisan support along the way.

“This is an encouraging first step in making Arkansas’s income tax rates more competitive with surrounding states,” Hutchinson said in a statement after the bill passed. “Arkansas has been an island of high taxation for too long, and I’m pleased that we are doing something about that.”

The cut amounts to a 1 percent reduction in income tax rates for middle-income earners. In recent years, Minnesota has enacted across-the-board income tax cuts and cuts in taxes on manufacturers that some saw as too heavily weighted toward the wealthy.

This time, lawmakers were able to find common ground on offering relief specifically for the middle class.

“Democrats wanted to say on the lower side, and a lot of the Republicans wanted to stay on the higher side,” said state Rep. Joe Jett, a Democrat who helped usher the bill through the Legislature. Eventually the two parties settled on a cut that will reach a half-million taxpayers. Finding the right approach to specifically help middle-class taxpayers in the state, he added, was the key in getting the plan passed with such ease.

“It was the sweet spot,” he said. “This is just one of those things that the stars kind of lined up.”

In New York, Democratic Governor Andrew Cuomo last month unveiled an “Opportunity Agenda” he said would produce economic benefits throughout the state. To offer specific help to low- and middle-income New Yorkers, the governor made a stab at relieving pressure from the state’s notoriously heavy property taxes.

Cuomo’s plan would provide $1.7 billion in property tax relief for households earning less than $250,000 a year, saving 1.3 million New Yorkers an average of $1,000 per year, according to the governor. That would be paired with an income tax credit for renters earning up to $150,000 each year. The renters’ credit would be worth an average of $400 annually.

The plan may face opposition in the Republican Senate. The state GOP wasted no time blasting the plan as not doing enough to relieve local governments of burdensome state mandates, which they called the source of high property taxes. The credit, Republicans said, was the same as “putting a Band-Aid on a bullet hole.”

In Minnesota, another Democratic governor’s proposal is receiving a warmer bipartisan welcome. Governor Mark Dayton has proposed spending $100 million of his state’s $1 billion-plus surplus on a child care tax credit, which his office said could help 130,000 families save more than $400 a year.

But Republicans took over control of the Minnesota House in January, so there is some skepticism about whether Dayton’s expensive credit plan will pass. Democratic Senator Ann Rest, chair of a tax reform panel, said she expected the proposal would figure into broader discussions about what to do with the state’s surplus as the session wore on, but she wasn’t sure what form it might eventually take.

Nevertheless, Dayton’s proposal got a notably warm reception from the Republican chairman of the House Tax Committee.

“I’m all about giving it back to the folks, and that meets my criteria,” state Rep. Greg Davids said. “My goal is to work with the (Democratic) Senate and the governor’s office. And so far, so good.”

Photo: Pat Arnow via Flickr

State Lawmakers Respond To Income Inequality

State Lawmakers Respond To Income Inequality

By Jake Grovum, Stateline.org

WASHINGTON — The two U.S. counties with the worst income inequality couldn’t be more different. No. 1 is Manhattan. The second is a rural Native American reservation in North Dakota.

The two illustrate how widely inequality is spread around the country, and how the issue presents itself in different ways. The far-reaching problem was a driving force behind a raft of proposals in the states this year, as lawmakers looked to address persistent wealth gaps exacerbated by the Great Recession and the subsequent years of halting economic growth.

Polls show inequality to be a growing public concern. A Pew Research Center survey this year found 65 percent of all Americans believed inequality was growing, and Gallup found similar results. Partisan differences abound: 90 percent of Democrats in the Pew poll thought there was “a lot” or “some” actions government could take about inequality. Half of Republicans said there was “not much” or “nothing” government could do.

Those differences carried over to the states, where responses in blue versus red states seemed at times as vast as research has shown the wealth gap itself to be. This year, lawmakers sought to do something about inequality, from giving tax breaks to individuals and businesses to bolstering safety net programs and clamping down on corporate pay.

“Our economic divide has become so stark, inequality is so off the historical wall, it’s almost forced itself on the country’s attention,” said Sam Pizzigati of the Institute for Policy Studies, a Washington-based progressive think tank. “It’s become so stark that it can’t be ignored anymore.”

Others worry the focus on inequality can lead to proposals — targeting executive pay, for example — that won’t directly help those who have less.

“Inequality has distracted attention from the bottom, where it needs to be,” said Alan Reynolds, a senior fellow at the libertarian Cato Institute who has questioned some of the research showing an increasing wealth gap. “Dealing with poverty is much harder.”

Inequality cuts across state lines and pervades every corner of the U.S. It also dovetails with a decline in economic mobility: A Pew Charitable Trusts report last year found 43 percent of Americans raised in the bottom of the income scale remain there as adults. Almost 3 in 4 never reach the middle. (Pew funds Stateline.)

The areas with the worst inequality show how the problem presents different challenges in different places.

New York County, which comprises Manhattan, for example, had the worst income inequality of all U.S. counties, according to U.S. Census Bureau data showing the average inequality from 2008-2012.

The second most unequal was Sioux County, N.D., within the Standing Rock Indian Reservation, which straddles the Dakotas. President Barack Obama visited the area on Friday.

Some patterns emerge from the inequality data:

    • Among the top 10 most unequal counties, six are in the South, including two in Georgia.
    • Eighteen of the most unequal 25 counties are in the South.
    • Three are in the area around New York City, while the city itself has the most billionaires in the world.

This year Democrats in two coastal states floated a pair of novel proposals that sought to tie state power of the purse to inequality. Experts and the bill authors said it was the first time such measures had been introduced to address inequality.

In California, two Senate Democrats proposed tying the state’s corporate income tax to CEO-worker pay equity, setting up a sliding scale whereby a company’s tax bill would decrease if the gap between executive and worker pay was smaller.

The bill would have reduced the corporate tax rate for any company where the CEO makes less than 100 times the earnings of the median worker at the company (with bigger discounts for greater parity). Last year, a Bloomberg survey found the average CEO compensation to be more than 200 times that of rank-and-file workers, an increase of 20 percent since 2009.

The bill eventually failed its first floor vote, but its authors, Sens. Mark DeSaulnier and Loni Hancock, have moved it keep it alive.

“My belief is the public is behind it, and will become more behind it,” DeSaulnier said this week. He said he plans to lobby his colleagues to back the bill, but acknowledges that “it can be intimidating taking on multibillionaires. We’ve got a lot of plutocrats in this country now.”

Opposition has been fierce: A handful of Democrats joined Republicans in opposing the bill, and the business community has come out in force to label it a “job killer.” Opponents range from the Chamber of Commerce to the state’s retailers and restaurants associations. The Tax Foundation, which advocates for “fairer, flatter” taxes, has been skeptical as well.

A bill in Rhode Island was more successful. The bill would give companies a preference in state procurement if they don’t pay their executives 32 times or more than the lowest-paid worker in the company.

Democratic Sen. Catherine Cool Rumsey said the focus on inequality led to her think about different ways to address the issue, and she decided to use state contracts as a tool.

“We can, as legislators, as keepers of the purse, help drive those incentives,” she said. “You don’t want to be anti-business, but at the same token we have to change the conversation to the impact as a taxpayer.”

The bill was approved in the Senate last week and sent to the House, where no companion legislation has yet been introduced.

Minimum wage hikes — often framed in terms of income inequality — were a popular issue in states and cities this year. Seattle set a historic high-water mark with its $15-an-hour rate, set to be fully implemented by 2017.

Several other states have moved to increase their rates, even while Obama’s call for Congress to do the same has gone nowhere.

The debate around the minimum wage is likely to continue through the rest of the year, as several states have placed minimum wage hikes on their fall ballots.

In some states, Democrats and Republicans alike have gotten behind a wage increase. In Michigan, for example, Republican legislators approved an increase to $9.25 per hour by 2018, even though some Democrats saw the GOP’s support as a back-handed attempt to short-circuit a bigger increase that had been headed for the November ballot. Republican-leaning states such as Arkansas, Alaska and South Dakota also will have wage hikes on the ballot this fall.

Advocates for the working poor have also looked to boost paid sick and paid family leave, arguing that raising the wages of the lowest-paid workers and giving them more flexible hours — so they can keep their jobs — go hand in hand.

“More and more, people see these in tandem,” said Ellen Bravo, executive director of Family Values @ Work, which advocates for family-friendly work policies. “This is exactly what the economy needs: People need to keep their jobs and keep their income.”

Yet those efforts haven’t paid off in the same way. Attempts to start paid family leave programs state by state have hit a wall recently. Cities such as the District of Columbia, New York City and Portland, Ore., have created or expanded paid sick leave requirements, but opposition from businesses and some lawmakers on both sides of the aisle has halted efforts elsewhere.

Much of the debate this year on inequality has taken place in the context of an economy ever-so-slowly recovering from the Great Recession. Lawmakers in some states have trimmed the safety net in response, saying if government assistance is too generous, workers will have less incentive to re-enter the workforce. Creating good jobs, they say, is the best way to address inequality.

The dynamic played out most prominently with regard to unemployment insurance, both at the state and federal level. Lawmakers considered changes to reduce the number of weeks available and trim benefits, with an eye toward boosting workforce participation.

In Congress, lawmakers allowed federal jobless benefits, which were expanded during the recession, to expire at the end of 2013. Efforts to revive the program this year have failed.

Likewise, some states have cut back their own regular unemployment programs, reducing the number of weeks available to levels not seen in decades. At least eight states have reduced the number of weeks available below the usual 26 weeks, often on a sliding scale that reduced availability as the jobless rate declines. The Missouri legislature approved a similar bill, but Democratic Gov. Jay Nixon hasn’t acted on it yet.

The familiar argument about not letting the safety net become a hammock, as articulated by Republican U.S. Rep. Paul Ryan of Wisconsin, also spawned cuts to other parts of the safety net this year.

“Rather than focusing on inequality, it’s how do we actually help the poor and help individuals in need?” said Rachel Sheffield of the conservative Heritage Foundation. “If we look at our policies from our welfare system, they don’t promote that, they don’t promote work and self-sufficiency. Our welfare system has failed to do that.”

In a subtle but significant change, many states opted recently not to continue waivers from the federal government that let their residents collect food stamps without meeting certain work requirements. The moves were cast as welfare reform, to push people back into the workforce.

Pro-growth, business-friendly tax proposals have carried over into the fiscal realm in states this year as well. At the same time, other states wielded the tax code to boost workers’ income.

Efforts to boost business through taxes took the form of cuts to personal and corporate tax rates. Lawmakers in Missouri overrode a gubernatorial veto of a cut in income taxes for top earners. Indiana also cut the state’s corporate income tax rate.

Advocates for the working poor turned to the tax code to boost the earned income tax credit (EITC), a benefit that offsets payroll and income taxes for low-income workers, mostly parents. Obama’s proposal to expand the federal credit hasn’t gained traction in Congress.

The credit is unique in that it generally enjoys support from Republicans and Democrats. The federal credit directs billions in benefits to taxpayers across the country, and 25 states plus D.C. have their own versions.

2014 was a year of expansion, in part thanks to recovered state budgets. Minnesota, Maryland, District of Columbia and Republican-controlled Ohio all approved expansions of their EITCs.

“That’s a really great policy, along with the minimum wage, for making sure that state economies are recovering and that working families get to recover too,” said Erica Williams of the left-leaning Center on Budget and Policy Priorities.

Photo: brad_crooks via Flickr