Harris Child Tax Credit & Economic agenda: Details and analysis
On Friday, Vice-President Kamala Harris started to sketch out the details of her economic plan as part of an accelerated presidential campaign in 2024. On
taxA Tax is a mandatory payment that is collected by the local, state and national governments to cover costs of government services, goods and activities.
policy, Harris carries forward many elements of President Biden’s tax vision while further expanding tax credits and incentives to lower costs for families.Among the major tax policy ideas, she proposes restoring and increasing an expansion of the child
tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit is different from deductions and exclusions, which lower taxable income rather than the taxpayers’ tax bill directly.
, expanding the earned-income tax credit (EITC), creating tax incentives for homeowners. She also proposes many other regulatory changes, including price controls, that we do not model. She also proposes many other regulatory changes, including price controls, that we do not model.Harris’s tax agenda is problematic for three major reasons: it would further entrench social policy and spending into the tax code, it would subsidize home buyers rather than address supply constraints, and it does not specify sufficient offsets to pay for the subsidies, worsening an unsustainable debt trajectory.
Details of Harris’s Tax and Regulatory Proposals
Harris would restore the CTC expansion under the 2021 American Rescue Plan Act (ARPA), which increased the credit from $2,000 under current law to $3,000 for older children and $3,600 for younger children for 2021 only. The ARPA expansion removed the requirement that individuals have earned income to qualify for the credit. This would allow all qualified individuals to receive the maximum credit. The expansion would shrink long-run economic output by about 0.1 percent by removing the credit’s phase-in and lengthening the credit’s phaseout, thus raising marginal tax rates for workers along both ranges.
Harris would extend or make permanent the expansion of health insurance premium tax credit (PTC) subsidies enacted under ARPA, which are set to expire at the end of 2025, and expand the EITC for single and joint filers who do not claim children on their tax returns. If both proposals match the ARPA expansions, over 10 years, permanence for the PTCs would cost about $238 billion, and the EITC expansion about $160 billion.
While the details are unclear, Harris has announced she would end taxes on tips for service and hospitality workers and work with Congress to establish guardrails on the policy. Even with safeguards, however, a tip exclusion would not be targeted to low- and mid-income earners due to the relatively small percentage of the population that works in tipped jobs. The exemption and any safeguards would only add to the complexity in the tax code. Depending on the design, an exemption could cost around $100 billion over the 10-year budget window.
Harris also proposes a wide array of new housing tax incentives and penalties. She proposes an expansion of the low-income housing credit (a similar proposal from the FY 2025 Biden and Harris budget would cost $37billion over a decade) as well as a tax credit for starter homes. However, Harris would limit deductions for interest and
depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Depreciation is a method of reducing the value of investments over time.
for large property investors.
The package would establish a $25,000 down payment assistance program for first-time homebuyers. The Biden-Harris Administration had previously proposed a combination credit and direct support for similar groups. However, the new proposal focuses solely on downpayment assistance. The Harris campaign would provide $25,000 on average to all first-time buyers, with additional assistance for first-generation homebuyers. Depending on how the subsidy is structured and limited, the fiscal cost would be about $100 billion over four years, based on the plan’s aim of reaching 4 million first-time homebuyers.Many, but not all, of Harris’s housing policy proposals flow through the tax code. The Harris plan also includes non-fiscal levers such as regulatory streamlining for construction, a crackdown of certain pricing tools used in rental property management and a fund for public housing. Harris’s reliance on subsidy for housing with limited supply would be economically damaging for families as it would increase demand and drive up housing prices. While some of her policies do target supply, like the expanded low-income housing tax credit and the credit for starter homes, these boutique tax breaks have not been effective historically.
Subsidies for different niches of the housing market are a poor substitute for better tax treatment of housing investment broadly. Multifamily housing construction still has not recovered to 1986 levels, as the Tax Reform Act of 1986 reduced the deductibility of investment.
Instead of reversing that poor tax treatment, the Harris package would further penalize rental housing construction by peeling back depreciation and interest deductions for certain large property investors, reducing investment incentives. These penalties would be in addition to a Biden-Harris administration proposal aimed at capping rent increases by disallowing certain deductions for depreciation.
Harris would deploy economically ruinous price controls in several other ways. Harris would cap the cost of insulin at $35 and out-of-pocket expenses for prescription drugs at $2,000 for all households, accelerate the speed of Medicare negotiations for prescription drug prices as part of the
InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck will cover less goods, bills, and services. It is sometimes called a “hidden” tax, as it makes taxpayers less wealthy due to increased costs and “bracket-creep”, while increasing government spending power.
Reduction Act, and ban certain price increases for food and groceries.
Price controls harm consumers by reducing incentives to produce price-controlled goods. Price controls on prescription drugs, for example, are likely to deter new drug development and result in up to 135 less drugs being brought to market by 2039. Harris’s proposed price controls for groceries poorly address a problem that does not exist, as grocery profit margins are much lower than average across industries.Finally, Harris’s agenda is missing details on how her proposed tax subsidies and expansions in federal programs would be paid for, risking a worsening debt trajectory. The combined cost of the proposals would likely exceed $2 trillion over 10 years, putting upward pressure on inflation to the extent they are deficit-financed and leading to a further prolonging of the Federal Reserve’s high-interest-rate stance.Continued high interest rates make the federal debt more unsustainable, as interest on the debt is already on track to reach an unprecedented 3.4 percent of GDP next year. Further strain on the budget also complicates the task of protecting taxpayers from economically damaging tax hikes at the end of 2025 when the Tax Cuts and Jobs Act (TCJA) individual provisions are scheduled to expire.
Harris may rely on sharp tax hikes on high earners and corporations like President Biden proposed, with most or all the revenue gained going toward new proposals and resolving the TCJA expirations. Doing so would weaken the economy and fail to address the main driver of the debt–the unsustainable growth rates in the mandatory entitlement programs–keeping the debt trajectory on a dangerous course.
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