The proposed Tax Relief for American Families and Workers Act (TRAFWA) of 2024 builds on the Tax Cuts and Jobs Act (TCJA) of 2017 in two crucial ways. First, it extends expiring business expensing and R&D deduction provisions that are proven game-changers for investment and job creation. Second, it extends the child tax credit, but in a way that resembles TCJA more than the American Rescue Plan Act (ARPA).
Full business expensing, sometimes called 100 percent bonus depreciation, was the sleeper hit of TCJA when it was enacted. While much of the headlines about TCJA have focused on the State and Local Tax deduction cap or the corporate tax rate reduction, full expensing in one stroke eliminated much of the tax bias against investment and job creation. Under previous depreciation rules, a business could only deduct a fraction of their actual investment outlays in a given year. If a business bought a $100,000 piece of equipment, for instance, they could only deduct $12,500 a year; they would then pay tax on the remaining $87,500 as phantom “profit.” As the Tax Foundation writes, “full expensing fixes a bias in the corporate tax.”
Full expensing became effective at the end of 2017 until the end of 2022, when it began phasing out under TCJA’s temporary provisions. While many other factors are at play, U.S. private net domestic investment also began rising in 2017 and (aside from a pandemic drop) hit a peak in 2022 before declining. States have seen the value, with Oklahoma and Mississippi adopting and Nebraska considering adopting the full expensing policy for state business taxes. The federal government should have those states’ backs now and continue the policy at the national level. TRAFWA would end full expensing’s phaseout and restore it fully (and the R&D deduction’s expiration) until the expiration of all other TCJA provisions after 2025.
The child tax credit, created by a Republican Congress in 1997 to provide tax relief to middle-income families and low-income workers without a welfare state bureaucracy, would be kept at its TCJA $2,000 credit level, plus an inflation adjustment and an increase in the refundable amount. These levels are much below the levels that operated under ARPA in 2021 before lapsing, which were up to $3,600 per child, fully refundable, and paid out monthly automatically. TRAFWA does not include those provisions. The proposal also preserves the link between earning income and receiving the child tax credit but applies the phase-in amounts per child rather than per taxpayer, up to the overall cap. As with the business provisions, all these changes would expire with the rest of TCJA after 2025.
We wrote last year on the child tax credit that it “present[s] benefits to taxpayers, including lower overhead and administrative costs for implementation when compared to often complex and bureaucratic government-run programs with reams of rules for beneficiaries and administrators to follow”. We also recommended that policymakers should not revive the unsustainable ARPA-level provisions but instead build on the TCJA levels to “mak[e] sure that these programs are fiscally sustainable, targeted at the taxpayers who most need support, effectively managed by the federal government, and sensible to the families and workers who must sort through program rules.” TRAFWA does this.
TRAFWA also includes provisions to reduce the deficit impact by ending the now-unnecessary pandemic-era Employee Retention Tax Credit (ERTC), and also adds a needed inflation adjustment beginning in 2024 to independent contractor reporting thresholds. The $600 threshold for the 1099-MISC form - received by every worker in the gig economy - has been set at that level since 1954, which would be the equivalent of $6,842 today.
The Cato Institute last year noted that while “Congress has many important deadlines looming as major components of the 2017 tax cuts begin to expire; none is more immediately important than making full expensing permanent.” And the Heritage Foundation urged Congress to prioritize preventing the expiration of full expensing and the R&D deduction, writing “Congress should work to prevent harmful tax hikes on businesses and individuals, including those resulting from the provisions on expensing for research and development.” Various commentators, including us, urged any future legislation on the child tax credit to pare back from the policies in ARPA to a more reasonable level, which TRAFWA does.
Partisan times in Washington make progress difficult. But combining an essential extension of full expensing with a sustainable child tax credit is a win-win for taxpayers.