Refundable tax credits, which already cost the federal government more than it spends to fund the Department of Education, are set to double to more than $200 billion a year once all of the Obamacare subsidies kick in, according to a new report from the independent Tax Foundation.
The report provided to Secrets found that the IRS “paid out” $99.1 billion in refundable tax credits in 2011. That should grow to more than $200 billion by 2017 when an additional $100 billion in Obamacare subsidies to lower-income users takes effect.
“The primary purpose of the Internal Revenue Service is to collect revenue,” said Tax Foundation economist Alan Cole. “Refundable tax credits represent a form of mission creep, in which the IRS dispenses revenue instead of collecting it.”
Most tax credits go to low-income Americans. Two are huge. The report said the Earned Income Tax Credit costs $65 billion annually, and the Additional Child Tax Credit $30 billion annually.
Although Americans can use tax credits to offset their annual tax bill, refundable tax credits can result in a federal tax refund higher than what the taxpayer paid in taxes, explained the Tax Foundation.
Key findings from the report:
Paul Bedard, the Washington Examiner's "Washington Secrets" columnist, can be contacted at firstname.lastname@example.org.
– For the year 2011, the IRS paid out $99.1 billion in refundable tax credits, down from a peak of over $120 billion in 2009.
– For comparison, the federal government spends more on refundable tax credits than it spends on the Department of Veterans Affairs ($63.5 billion) or the Department of Education ($71.2 billion).
– The largest refundable credits currently are the Earned Income Tax Credit, at $65 billion annually, and the Additional Child Tax Credit, at $30 billion annually.
– In the coming years, the dollar amount of refundable tax credits is projected to double due to the insurance subsidies in the Patient Protection and Affordable Care Act, which both the CBO and the JCT projects to cost about $100 billion annually by 2017.
– As the ACA subsidies come online, the total expenditures associated with refundable tax credits are projected to surpass $200 billion annually.
– The phaseout of refundable tax credits as income increases creates high implicit marginal tax rates, and, in some cases, can create infinite marginal tax rates.