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The Growth and Changes in Refundable Tax Credits

Expenditures down from 2011, but primed to double by 2017
Additionally, as subsidies from the Affordable Care Act come on line, refundable credits are primed to double to over $200 billion annually by 2017, according to the latest analysis by the nonpartisan Tax Foundation.

The report examines the impact of recent legislation such as the ARRA and ACA on these credits, and the key findings include:
• Refundable tax credits add complexity to the tax code while favoring certain kinds of economic activity over others.
• 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.
“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.”
Recent acts of Congress, particularly ARRA and the ACA, have dramatically increased the scope and breadth of these credits. As the ACA subsidies come online, the total expenditures associated with refundable tax credits will surpass $200 billion.
“Refundable credits add complexity to the tax code and favor certain kinds of economic activity over others. Both of these characteristics are faults to be avoided,” added Cole. “The IRS should not capriciously dole out payments based on people’s personal decisions. Instead, it would be best to move the functions of refundable tax credits outside the tax code to spending programs.”

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