Tax cut creates losers

President Bush will be in Portland today no doubt talking up his proposed tax cut. He is not likely to mention that one of three Maine families would get no tax cut at all. Altogether, 49,000 Maine families – with 29 percent of the state’s children – would get nothing from the lower income-tax rates, nothing from the changes in the estate tax and nothing from any other feature of the administration’s tax cut plan. An estimated 90,000 children live in these Maine families who would get nothing.

By now most people have heard the statement that the administration’s proposals would reduce income taxes for everyone who pays them. Many families at the lower end of the income scale do not earn enough to owe federal income taxes. But they do pay substantial federal payroll taxes (the Social Security and Medicare taxes). They also pay federal taxes on things like gasoline, not to mention state and local sales, excise and property taxes.

Because they don’t pay federal income taxes, the 49,000 Maine families who are left out won’t benefit even from the part of the plan that would double the child tax credit from $500 to $1,000. That’s because in nearly all cases the child credit isn’t paid to families that don’t owe federal income tax. While leaving out these working poor and near-poor families, the Bush proposal extends the child credit for the first time to families that have incomes between $130,000 and $300,000 and currently don’t qualify because their incomes are this high. Less than 10 percent of all Maine families fall into this favored group.

The president’s tax cut proposals are not limited to lowering personal income tax rates. The package also includes reductions in other taxes, such as corporate income taxes and the tax on large estates. For example, his plan would eliminate the tax on the estates of the wealthiest two percent of Americans, at a cost that ultimately approaches $60 billion per year. In Maine in 1997 only 216 estates were subject to the current estate tax.

In his address to Congress last month, the president said, “I want to help families rear and support their children, so we doubled the child credit to $1,000 per child.” But the low- and moderate-income families that would be left out are the very ones that need this help the most. And while low-income families would receive no tax relief under the plan, the richest 1 percent of families nationwide would receive 39 percent of the tax cut benefits the plan would provide.

Questions of fairness aside, all Maine families should be concerned that the tax cut would consume most or all of the available federal budget surplus and drain resources for other priorities. The tax cut is often described as costing $1.6 trillion over 10 years, but when its full cost and the required additional interest payments are considered, the full cost of the plan is approaching $2.5 trillion.

A tax cut of this magnitude would consume most if not all of the surplus available outside of the Social Security and Medicare trust funds. There would be very little left for improving schools, lifting children out of poverty, helping seniors pay for prescription drugs, or restoring long-term solvency to Social Security and Medicare. The issue is not just fairness, but the loss of our ability to meet crucial public needs as the budget surplus disappear. This is the issue that is perhaps most critical to a state like Maine which currently receives back in Federal spending more than $5 for every $4 collected in Federal taxes here. As our population is older, sicker, and poorer than the national averages, we depend more heavily on such programs as Social Security, Medicare, and Medicaid.

This does not mean the nation should forgo a tax cut. We can provide significant tax relief to the middle class and families working for modest wages for a much smaller cost than the President’s plan entails, if we scale back the oversized tax cuts for those at the top of the income scale. For example, we could provide relief to taxable estates that include a family-owned farm or small business for a modest fraction of the cost of repealing the estate tax entirely, and redirect the savings to critical needs.

Although President Bush has said his policies will ensure “no child is left behind,” his tax proposals offer no benefits to millions of families and their children and leave insufficient resources for education, health care, Social Security and other priorities. If we really seek to leave no child behind, we need a more balanced approach that does not place a tax cut so heavily geared to the affluent ahead of all other national needs, including the needs of 90,000 Maine children.

Christopher St .John is the executive director of the Maine Center for Economic Policy and Lynn Davey is the Kids Count director of the Maine Children’s Alliance.