Outcomes-based financing: Possibility and promise in global health


Outcomes-based financing: Possibility and promise in global health



Blue (and Red) over Tax Cuts

Alan Berube
Alan Berube Interim Vice President and Director - Brookings Metro

April 15, 2004

Suppose President Bush proposed a new spending program with massive benefits for neighborhoods like Manhattan’s Upper West Side, Chicago’s Lincoln Park, and San Francisco’s Pacific Heights. Suppose also that rural counties across the South, from Virginia to Texas, would get next to nothing from the program. Would a Republican-controlled Congress swallow that political poison pill?

Apparently so, if early indications are correct. In the bizarre realm of tax policy in Washington today, politics takes little notice of demographic reality.

The Bush administration has again proposed large tax cuts this year in the form of new tax-exempt vehicles for savings, and permanent extension of the income tax cuts enacted in 2001 and 2003 (which are currently scheduled to expire by 2010). Republican members of tax-writing committees in the House and Senate have offered warm reviews of the proposals. In fact, the plan approved by the House Budget Committee last month carves out an additional $138 billion to make nearly all of the 2001 and 2003 changes permanent.

But what if, as in most other areas of domestic policy—agriculture, transportation, defense, the environment—members asked themselves a simple question about these proposals: What’s in it for my district?

To answer that question, consider that analysts from the Urban Institute and the Brookings Institution find roughly half to two-thirds of the benefits of these proposed tax cuts would go to the highest-income 10 percent of taxpayers—those making about $100,000 or more annually. So where do these top 10-percenters live?

Judging by Republican support for the cuts, not where you might think. IRS data show that only 41 percent of taxpayers making at least $100,000 live in the 30 “red” states that President Bush carried in the last election, compared with 51 percent of the U.S. population generally. GOP-leaning districts are not without their high earners, but the largest concentrations of the $100,000-and-over club live in “blue” Democratic areas like Seattle, Boston, and Washington, D.C. So while more than one in four constituents in Democrat Anna Eshoo’s Northern California district would reap substantial benefits, the same goes for only one in 33 constituents in Republican Harold Rogers’ rural Kentucky district.

Compare where the highest-income Americans live with the location of low-income working families with children, who would benefit very little from the proposed tax cuts. In a recent report, we find that the places with the highest concentrations of these families are rural areas in the South. Out-of-the-way counties like Noxubee, MS; Bullock, AL; and Red River Parish, LA, contain barely any taxpayers in the top 10 percent, but one-third to one half of their populations claim the Earned Income Tax Credit (EITC), a tax program for families who work but earn under $30,000.

In fact, significant numbers of taxpayers receive the EITC in a wide corridor of counties that spans the rural South. Given the prominence of Republican legislators in this part of the U.S., it’s no surprise that the nation’s working poor families split fairly evenly between Democratic (9.8 million) and Republican (9.0 million) congressional districts.

Yet when it was revealed that last year’s tax cut had excluded these same lower-income taxpayers from an accelerated increase in the child tax credit, attempts to broaden that benefit failed along the usual partisan lines. In fact, President Bush and Republican lawmakers have backed new IRS procedures that could ultimately impose substantial burdens on four to five million low-income families who apply for the EITC.

And there’s the rub: tax cuts are no run-of-the-mill appropriation. What a tax cut does for the people who actually live in a member’s district often takes a back seat to other considerations—for instance, whether it is portrayed as benefiting politically exalted groups like the middle class, small businesses, married couples, or (more cynically) contributors.

All of this is not to suggest that Republicans should sweeten these latest tax proposals with small tax benefits for lower-income families, or that Democrats should back the proposals in order to “bring home the bacon” for their wealthy constituents. The size of our current budget deficit, the impending retirement of the baby boomers, and continued demand for vital public services all suggest that the federal government probably needs tax increases, not tax cuts, to restore fiscal discipline over the long term.

But as tax negotiations proceed this year, might members of Congress consider what their decisions mean for the folks back home? If they did, chances are they’d find some common ground on policies—tax and otherwise—that support the nation’s low-income working families. And perhaps they’d think twice about providing more breaks for those Upper West Siders.