Center on Budget and Policy Priorities

10/21/2019 | Press release | Distributed by Public on 10/21/2019 09:15

Tax Fix for Restaurant, Retail Owners Shouldn’t Leave Out Millions of Their and Other Workers

Policymakers will likely add a bipartisan package of tax provisions to end-of-year budget legislation. The restaurant and retail sectors continue to lobby for a 'technical correction' of the 2017 tax law to be included in the package, and there are growing signs that Senate Republicans plan to include it. Policymakers, however, should accompany any provision to aid restaurant and retail owners with provisions to help millions of people who work hard for low pay in restaurants, retail stores, and elsewhere by expanding the Earned Income Tax Credit (EITC) and the low-income part of the Child Tax Credit.

Restaurants and retailers are seeking a technical correction that would give them 'full expensing,' under which they can deduct the full cost of investments in qualified improvement property immediately rather than over many years. The 2017 law's authors intended to include it in their bill but mistakenly left it out of the hastily drafted legislation.

Yet the 2017 law is deeply flawed in far more fundamental ways: it gave large tax cuts to wealthy shareholders and other affluent business owners while largely ignoring low-wage workers, whose wages have essentially stagnated in recent decades. Lawmakers shouldn't repeat that policy mistake this year. The Economic Mobility Act, which the House Ways and Means Committee passed a few months ago, includes provisions to make the Child Tax Credit fully refundable - so that recipients can receive its full value even if it exceeds the income taxes that they owe - and provide a meaningful EITC for workers who aren't raising children at home. (They would be in effect temporarily, like other provisions in the bill.) This bill shows how to strengthen these tax credits to boost the incomes of people on the lower rungs of the economic ladder.

The Child Tax Credit. The 2017 law included a highly touted $1,000-per-child increase in the Child Tax Credit (from $1,000 to $2,000 per child). But, under it, millions of low-wage working parents receive far less:

  • Low-income working families with 11.4 million children are receiving a token Child Tax Credit increase of $75 or less. Three million of those children have parents who work in restaurants or retail (see Table 1 for state-by-state figures).
  • Modest-income working families with another 15 million children are receiving a Child Tax Credit increase that, while more than $75, is substantially less than the full $1,000-per-child increase that higher-income families are getting. Some 3.3 million of these 15 million children have parents who work in restaurants or retail (see Table 1 for state-by-state figures).

Under the 2017 law, the Child Tax Credit doesn't start to phase in until a tax filer has more than $2,500 in earnings, and it then phases in slowly. And if a family's Child Tax Credit would exceed the federal income tax it owes, the family cannot (under the 2017 law) receive more than $1,400 per child as a tax refund. Policymakers should, as the Economic Mobility Act proposes, make the Child Tax Credit fully refundable, to enable children in lower-income households to benefit fully from it.

The EITC for low-wage workers who aren't raising children in their home. This credit is too small even to offset the income and payroll taxes that these workers must pay. That's the main reason why the federal tax code taxes more than 5 million such workers aged 19-65 - including 1.8 million who work in restaurants or retail - into or deeper into poverty (see Table 2 for state-by-state figures).

Despite longstanding bipartisan support to boost the EITC for these workers (including from former Republican House Speaker Paul Ryan), the 2017 tax-cut law failed to include it. (Indeed, the 2017 law reduced the inflation-adjusted value of the EITC over time, including the small EITC for childless workers, by adopting a different measure for adjusting tax brackets and various tax provisions each year to account for inflation.) The Economic Mobility Act's provision to strengthen the EITC for these workers would not only benefit the 1.8 million childless workers employed in restaurants or elsewhere in retail who now are taxed into, or deeper into, poverty, but it would provide a boost to millions of low-paid workers in other sectors as well.

The authors of the 2017 tax law omitted full expensing for restaurant and retail business owners inadvertently, but they left out these Child Tax Credit and EITC improvements for low-wage workers by design. Ignoring these workers in 2017 reflected unbalanced policy; ignoring them again now would compound the inequity.

TABLE 1
Left Out of the 2017 Tax Law: Children Not Receiving the Full Child Tax Credit Increase Who Have Parents Working in the Restaurant or Retail Industries, by State
State Receive a Token Increase of $75 or Less Under 2017 Law Receive More Than $75 But Less Than the Full $1,000-per-Child Increase Under 2017 Law
Total U.S. 3,002,000 3,338,000
Alabama 58,200 50,700
Alaska 6,100 8,700
Arizona 67,600 82,800
Arkansas 39,100 38,000
California 337,600 426,400
Colorado 33,900 51,300
Connecticut 20,200 24,800
Delaware 9,700 7,300
Dist. of Columbia 6,400 4,000
Florida 177,000 216,600
Georgia 127,300 125,400
Hawaii 9,200 13,400
Idaho 12,800 16,700
Illinois 117,200 130,400
Indiana 68,500 66,300
Iowa 25,300 27,100
Kansas 22,800 32,200
Kentucky 60,600 49,700
Louisiana 66,600 53,100
Maine 7,800 9,300
Maryland 39,800 45,600
Massachusetts 48,400 42,200
Michigan 103,000 91,200
Minnesota 30,600 49,100
Mississippi 47,100 37,000
Missouri 57,600 61,800
Montana 7,400 12,600
Nebraska 13,800 20,800
Nevada 28,400 42,600
New Hampshire 7,000 9,000
New Jersey 54,700 71,800
New Mexico 29,300 26,000
New York 166,900 196,300
North Carolina 108,400 114,800
North Dakota 3,400 5,200
Ohio 123,600 119,300
Oklahoma 43,900 52,800
Oregon 32,400 39,100
Pennsylvania 115,200 100,100
Rhode Island 6,300 8,900
South Carolina 53,600 55,900
South Dakota 7,500 7,200
Tennessee 77,900 71,100
Texas 319,600 378,900
Utah 20,900 34,600
Vermont 3,900 5,800
Virginia 64,000 72,000
Washington 45,800 62,600
West Virginia 23,300 18,500
Wisconsin 39,100 46,000
Wyoming 4,900 5,300
TABLE 2
Left Out of the 2017 Tax Law: Childless Adults Currently Taxed Into or Deeper Into Poverty Who Work in the Restaurant or Retail Industries, by State
State Childless Workers
Total U.S. 1,835,000
Alabama 31,200
Alaska 3,100
Arizona 43,300
Arkansas 18,500
California 190,900
Colorado 32,900
Connecticut 14,100
Delaware 4,200
Dist. of Columbia 2,600
Florida 134,900
Georgia 67,900
Hawaii 8,800
Idaho 12,100
Illinois 64,800
Indiana 42,400
Iowa 18,900
Kansas 19,100
Kentucky 29,500
Louisiana 34,300
Maine 9,500
Maryland 27,500
Massachusetts 29,700
Michigan 63,000
Minnesota 24,600
Mississippi 16,900
Missouri 38,000
Montana 6,800
Nebraska 11,200
Nevada 20,900
New Hampshire 5,000
New Jersey 36,000
New Mexico 13,900
New York 98,600
North Carolina 65,000
North Dakota 4,000
Ohio 76,200
Oklahoma 26,600
Oregon 28,600
Pennsylvania 62,400
Rhode Island 4,400
South Carolina 32,900
South Dakota 4,600
Tennessee 43,700
Texas 161,300
Utah 14,500
Vermont 3,900
Virginia 47,400
Washington 41,500
West Virginia 10,500
Wisconsin 29,500
Wyoming 3,500