Biden’s spending plan has big income tax changes. Here’s who benefits in Washington state
Middle-class Washington residents with children 17 and under will see some income tax breaks from the Democrats’ latest plan. Most people without children won’t. And the wealthy, children or not, will pay a lot more.
Those are the findings of different independent analyses as Congress seriously considers President Joe Biden’s massive tax and spending package.
While the plan is still very much a work in progress, the tax parts so far have remained largely intact. Congressional leaders are aiming to pass the big plan by the end of this month.
Biden and congressional Democrats have long agreed they want to reverse the impact of the 2017 tax cuts pushed by former President Donald Trump, cuts that provided big benefits to higher-income taxpayers by slashing individual and corporate tax rates.
About 2% of Washington taxpayers would see individual income tax increases under the plan approved by the Democratic-run House Ways and Means Committee, the plan now being seriously considered in Congress.
Virtually all of those facing income tax hikes earn more than $400,000, according to a study by the Washington, D.C.-based Institute on Taxation and Economic Policy.
Increases in income taxes paid by individuals would be entirely confined to the richest 5% of the state’s residents and nearly all of those increases would be paid by the richest 1%. Most people among the poorest 20% of the state’s residents would receive an income tax cut.
In most other income groups, between around a quarter and a third of state residents would get a tax cut, mainly parents who would receive the Child Tax Credit. But of those among the best-off 20% of Washington’s residents, who will make more than $153,400, fewer would receive tax cuts.
Other studies agreed.
“Effectively no households making less than $200,000 would pay higher taxes. And 99.4 percent of those making between $200,000 and $500,000 would avoid a tax increase,” said a national analysis from the nonpartisan Tax Policy Center.
Democrats’ tax breaks
That’s because the Democratic plan would raise the top income tax rate, now 37%, to 39.6%. The bill has other increases as well designed to apply only to those earning at least $400,000 or more.
Chief beneficiaries of tax cuts would be parents and very low-income workers without children who are among the lowest 20% of income earners, which means those making less than $31,100 in Washington. That’s because increases in the Child Tax Credit and the Earned Income Tax Credit help people in their income bracket.
“This is going to have a more dramatic effect on lower-income families than anyone else,” said Steve Wamhoff, Institute on Taxation and Economic Policy director of federal tax policy.
The Child Tax Credit was increased this year only to a maximum of $3,600 per child under 6 and $3,000 per child 6 through 17. The Democrats’ plan extends those levels through 2025.
“Because so many of the Ways & Means tax cuts are focused on low- and moderate-income families with children, those parents would get much bigger tax cuts,” the Tax Policy Center found.
In Washington, qualifying families earning $31,100 to $153,400 would see a tax break of $410 to $650 from the child and earned income tax credits. Those with incomes of less than $31,100 would see an average tax cut of $1,070.
There is an asterisk in all this. The experts note that the plan increases corporate taxes and tobacco taxes, which can indirectly fall to many of these taxpayers.
Congress’ Joint Committee on Taxation figures that eventually, workers would be hit with some impact of the higher corporate tax because businesses could keep wages lower in order to cut costs, thus diluting somewhat the benefit of lower individual taxes.
The Institute on Taxation and Economic Policy concluded that “The bill’s tax increase on tobacco and nicotine affects people at all income levels and the corporate tax increases can indirectly affect people at all income levels.”
But, it notes, if the Democrats’ plan is adopted, “no one who is not extremely well-off will calculate a tax increase on their 1040 for tax year 2022.”
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