There’s Still Time to Bring Back Tax Credit Lost in the “Fiscal Cliff” Deal

Shawn Fremstad

As DCA’s Jessica Brill Ortiz recently explained, the “fiscal cliff” deal signed by President Obama earlier this month contained both good news and bad news for direct care workers. Its most immediate effect will be a drop in take-home pay, as payroll taxes take a bigger bite out of workers’ incomes in 2013 than they have for the last four years.

In 2009-2010, workers benefited from the Making Work Pay provision of the Recovery Act, which provided a tax credit of up to $400 for individuals and $800 for married couples filing jointly. Most workers received the benefit of the Making Work Pay Credit through larger paychecks, reflecting reduced federal income tax withholding. Like the earned income tax credit (EITC), the Making Work Pay credit was refundable, meaning that workers could receive it even if they earned too little to pay any federal income tax.

A permanent Making Work Pay credit was a centerpiece of President Obama’s tax reform agenda when he ran for President in 2008. However, after conservatives won control of the House in 2010, they made it clear that they opposed an extension of Making Work Pay. The Administration responded by proposing that payroll taxes be temporarily reduced, from 6.2 percent of earnings to 4.2 percent, for 2011-2012. House conservatives agreed to the reduction, which helped low- and moderate-income workers somewhat but provided less financial help than Making Work Pay did, as Citizens for Tax Justice explained in a recent fact sheet.

The fiscal cliff deal let the temporary payroll tax cut expire without bringing back The Making Work Pay tax credit. For direct care workers, whose paychecks are rarely commensurate with the social value of their work, tax credits are a matter of basic fairness and justice. The Making Work Pay Credit helped narrow some huge gaps in existing tax credits for poorly compensated workers. The EITC, for example, provides only a very small benefit to workers who aren’t parents, limiting eligibility for childless workers to those with extremely low-incomes who are between the ages of 25 and 65. We need to address this problem directly by expanding EITC eligibility for childless workers—which was part of the President’s tax plan the first time he ran for President–but restoring Making Work Pay also would help a great deal.

A new, preferably expanded version of the Making Work Pay tax credit would help direct care and other low-wage workers. It would also help strengthen our still-weak economy, boosting consumer spending by giving those workers more disposable income. It was a mistake not to restore the Making Work Pay credit as part of the fiscal cliff deal, but there’s still time for Congress and the President to rectify that mistake and boost workers’ paychecks today.