Vice President Harris’s Tax Policy Ideas: Details and Analysis

On Friday, Vice President Kamala Harris began to sketch out details of her economic agenda as part of a fast-moving 2024 presidential campaign. On taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy, Harris carries forward many elements of President Biden’s tax vision while further expanding tax credits and incentives to lower costs for families.

Among the major tax policy ideas, she proposes restoring and increasing an expansion of the child tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. (CTC), expanding the earned income tax credit (EITC), and creating tax incentives for homebuyers. Like candidate Donald Trump, Harris has supported the idea of no tax on tips. She also proposes many other regulatory changes, including price controls, that we do not model.

Harris’s tax agenda is problematic for three major reasons: it would further entrench social policy and spending into the tax code, it would subsidize home buyers rather than address supply constraints, and it does not specify sufficient offsets to pay for the subsidies, worsening an unsustainable debt trajectory.

Details of Harris’s Tax and Regulatory Proposals

Harris would restore the CTC expansion under the 2021 American Rescue Plan Act (ARPA), which increased the credit from $2,000 under current law to $3,000 for older children and $3,600 for younger children for 2021 only. The ARPA expansion also removed work and income requirements to claim the credit, providing the maximum credit to qualifying individuals regardless of whether they had earned income.

On top of this expansion, Harris would provide $6,000 for newborns in their first year of life, resulting in a CTC that provides $6,000 for children under one year old, $3,600 for children two through five, and $3,000 for children six and older.

Tax Foundation estimates Harris’ CTC expansion would cost about $1.6 trillion over 10 years on a conventional basis. The expansion would shrink long-run economic output by about 0.1 percent by removing the credit’s phase-in and lengthening the credit’s phaseout, thus raising marginal tax rates for workers along both ranges.

Harris would extend or make permanent the expansion of health insurance premium tax credit (PTC) subsidies enacted under ARPA, which are set to expire at the end of 2025, and expand the EITC for single and joint filers who do not claim children on their tax returns. If both proposals match the ARPA expansions, over 10 years, permanence for the PTCs would cost about $238 billion, and the EITC expansion about $160 billion.

While the details are unclear, Harris has announced she would end taxes on tips for service and hospitality workers and work with Congress to establish guardrails on the policy. But even with safeguards, a tip exemption would be poorly targeted at low- and middle-income earners, given the relatively small share of the population working in tipped occupations. Worse, the exemption itself, and any safeguards added, would add to the complexity of the tax code overall. Depending on the design, an exemption could cost around $100 billion over the 10-year budget window.

Harris also proposes a wide array of new housing tax incentives and penalties. For housing construction, she includes an expansion of the existing low-income housing tax credit (a similar proposal in the FY 2025 Biden-Harris budget would cost $37 billion over a decade), as well as a new tax credit for the construction of starter homes. However, Harris would limit deductions for interest and depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. for large property investors.

The package would establish a $25,000 down payment assistance program for first-time homebuyers. Previously, the Biden-Harris administration had proposed a combination of credits and direct support to support similar groups, but the new proposal is focused entirely on downpayment assistance. The Harris campaign proposal would provide an average of $25,000 for all eligible first-time homebuyers, with additional support for first-generation homebuyers. Depending on how the subsidy is structured and limited, the fiscal cost would be about $100 billion over four years, based on the plan’s aim of reaching 4 million first-time homebuyers.

Many, but not all, of Harris’s housing policy proposals flow through the tax code. In terms of non-fiscal policy levers, the Harris plan includes regulatory streamlining to make construction easier, a crackdown on certain pricing tools in rental property management, and a new fund for public housing.

Harris’s reliance on subsidies for supply-constrained housing would be economically harmful for families, as it would mainly boost demand and lead to higher housing prices. While some of her policies do target supply, like the expanded low-income housing tax credit and the credit for starter homes, these boutique tax breaks have not been effective historically.

Subsidies for different niches of the housing market are a poor substitute for better tax treatment of housing investment broadly. Multifamily housing construction still has not recovered to 1986 levels, as the Tax Reform Act of 1986 reduced the deductibility of investment.

Instead of reversing that poor tax treatment, the Harris package would further penalize rental housing construction by peeling back depreciation and interest deductions for certain large property investors, reducing investment incentives. These penalties would be in addition to a Biden-Harris administration proposal aimed at capping rent increases by disallowing certain deductions for depreciation.

Harris would deploy economically ruinous price controls in several other ways. Harris would cap the cost of insulin at $35 and out-of-pocket expenses for prescription drugs at $2,000 for all households, accelerate the speed of Medicare negotiations for prescription drug prices as part of the InflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. Reduction Act, and ban certain price increases for food and groceries.

Price controls harm consumers by reducing incentives to produce price-controlled goods. For example, the price controls on prescription drugs are likely deterring new drug development, resulting in up to 135 fewer drugs brought to market through 2039. Harris’s proposed price controls for groceries poorly address a problem that does not exist, as grocery profit margins are much lower than average across industries.

Finally, Harris’s agenda is missing details on how her proposed tax subsidies and expansions in federal programs would be paid for, risking a worsening debt trajectory. The combined cost of the proposals would likely exceed $2 trillion over 10 years, putting upward pressure on inflation to the extent they are deficit-financed and leading to a further prolonging of the Federal Reserve’s high-interest-rate stance.

Continued high interest rates make the federal debt more unsustainable, as interest on the debt is already on track to reach an unprecedented 3.4 percent of GDP next year. Further strain on the budget also complicates the task of protecting taxpayers from economically damaging tax hikes at the end of 2025 when the Tax Cuts and Jobs Act (TCJA) individual provisions are scheduled to expire.

Harris may rely on sharp tax hikes on high earners and corporations like President Biden proposed, with most or all the revenue gained going toward new proposals and resolving the TCJA expirations. Doing so would weaken the economy and fail to address the main driver of the debt—the unsustainable growth rates in the mandatory entitlement programs—keeping the debt trajectory on a dangerous course.

Share