While wealthier taxpayers pay more in taxes and stand to lose more money if the tax cuts expire, the impact on low-income taxpayers will be far greater because they live on slimmer margins.
Democratic leaders have repeatedly vowed that tax cuts benefiting these taxpayers will be extended beyond their Dec. 31 expiration date. But a similar promise was made last year on the estate tax, and ten months have passed without Democratic leaders following through on that promise.
"The various tax proposals made by the parties in Washington all extend most of these low-income tax cuts," said the report's author, Nick Kasprak, in prepared remarks. "But the current Congress has shown itself to be unusually susceptible to gridlock, so the threat of automatic, full expiration of all these cuts is quite real."
House Majority Leader Steny Hoyer (D-Md.) has often stated that gridlock prevents the Senate from taking up the nearly 400 bills that have passed his chamber. Getting a middle-class tax cut through the upper chamber in the lame-duck could be more difficult if election predictions prove to be accurate.
If Republicans win the Senate races in Illinois and West Virginia, the new members could be sworn in immediately following the elections because the current term for those seats ends after Nov. 2., and not in January.
This means Senate Democrats will have less of a majority in the lame-duck and will likely have a harder time getting the sixty votes needed to pass legislation that extends the middle-class tax cuts while allowing tax breaks for the wealthy to expire on schedule at the end of the year.
The predicament could force liberal leaders to either capitulate and extend all the tax cuts or allow them all to expire.
"When comparing changes in after-tax income, low-income workers benefitted substantially from the Bush-era tax cuts, and so they would pay much higher taxes if political gridlock allows the imminent expirations to occur on schedule," Kasprak said.
Moreover, low-income taxpayers have benefitted from many temporary stimulus measures enacted in 2009 that are also set to expire at the end of this year: a further expansion of the earned income credit for couples, greater refundability of the child tax credit and bigger credits for college education.
The Making Work Pay credit that appears in paychecks and boosts take-home pay up to $400 for individuals and $800 for couples is also slated to expire next year.
The report shows inaction on these tax measures will cost a married couple with two dependents earning $40,000 about $2,643, with after tax-income dropping to $38,870, from $41,513 if the tax cuts are extended and taxpayers continue to take advantage of refundable credits.
The report is available at www.taxfoundation.org/news/show/26766.html.