Lost in the midst of fractious negotiations over the border and immigration bill has been the relative success of a tax relief bill. While it lacks the same political drama, the Tax Relief for American Families and Workers Act (TRAFWA) lacks little more than a better acronym.
TRAFWA combines smart, targeted incentives for economic growth with tax relief for working families. Taken together, it’s an unusually positive tax package to come out of bipartisan negotiations.
The first element of this tax deal involves improving the child tax credit (CTC). Under the 2017 Tax Cuts and Jobs Act, the value of the credit was doubled from $1,000 to $2,000 per child, then was further boosted temporarily to up to $3,600 for tax year 2022 under the 2021 American Rescue Plan Act (ARPA). It has since fallen back to $2,000 per child. Of course, $2,000 in 2017 is not the same as $2,000 in 2024, so TRAFWA would index the maximum credit per child to inflation.
The CTC is also structured to incentivize work, as the credit a taxpayer is eligible for increases with their income up to a certain level. TRAFWA would adjust this slightly, allowing the phase-in to be calculated per-child rather than per taxpayer, making it slightly easier for working parents with more children to earn a larger credit.
When compared with the myriad other forms of social spending by the federal government, the CTC is one of the best tools available to policymakers. It is far cheaper to administer than the often byzantine and inefficient welfare programs, and effectively balances the twin priorities of encouraging work while providing assistance to working families in need.
The other most important element of TRAFWA extends one of the most important tax provisions for boosting economic growth: full and immediate expensing of capital investments. Full expensing may not be as high-profile in debates about economic growth as other things like tax rates, but it is no less important.
In recognition of how investments drive economic growth, our tax code allows businesses to deduct the full value of their capital investments. But prior to the 2017 tax reform law, these businesses could not deduct the full value of these investments in year one — instead, they had to deduct a portion of their investment every year over a period of time that can span anywhere from three to fifty years (a process known as “depreciation.”) The rules underlying this system are enormously confusing and complicated.
The 2017 tax reform law changed that, instead allowing businesses to deduct the full value of their investment on that year’s tax return. This ability to immediately deduct the full value of investments, known as “full expensing,” offers a far more effective tax incentive for investment.
Not only is full expensing much more straightforward, it’s more beneficial to businesses and the economy at large. While the total size of the tax incentive is the same under depreciation or full expensing, full expensing puts cash back in the pockets of growing businesses immediately, enabling them to put that money to good use. Under depreciation, the value of the investment is only returned to businesses in a slow trickle, minimizing their ability to put it to productive use in the meantime.
The only real downside to full expensing is how it interacts with the arcane budget math used by Congress. Depreciation spreads out the fiscal impact often beyond the ten-year budget window, making full expensing appear to “cost” the government more revenue. In reality, it’s just a matter of timing.
Unfortunately, in order to comply with budgetary rules, this change was only temporary and has begun phasing out. While TRAFWA would not make full expensing permanent, it would extend it.
In sum, TRAFWA represents an unusually positive bipartisan tax package to come out of the Congressional sausage-making process. Taxpayers should be happy to take a rare win.
