The comprehensive tax reform plan introduced Wednesday by House Ways and Means Committee Chairman Dave Camp could push taxpayers into higher tax brackets by changing the way earning thresholds are indexed.
It’s a move that incorporates “chained CPI, “ a controversial way of measuring inflation that tends to yield lower estimates, and lawmakers have been increasingly eyeing it as a major revenue raiser.
Both Republicans and President Obama have in the past proposed using chained CPI to bring money into the Treasury. Obama included it in his 2013 budget, both for indexing tax brackets and to lower the cost-of-living increases for Social Security beneficiaries.
House Budget Committee Chairman Paul Ryan, R-Wis., incorporated chained CPI to reduce the cost of Social Security in his spending plan. But both Ryan and Obama received major pushback from critics who said it would shrink Social Security checks and raise taxes.
Chained CPI is now playing a major role in raising money in Camp’s tax reform plan and would over a decade bring in up to $100 million, but more likely around half that, according to a GOP aide familiar with the plan.
Camp has not provided a specific calculation for what using the formula would mean for taxpayers. But generally, using the chained CPI formula would speed up taxpayers mobililty to higher brackets and thus higher taxes. Those increases, however, could easily be offset by rate reductions that are part of the Camp plan, which shrinks the number of tax brackets from seven to three and significantly reduces rates.
“People will be pushed into higher brackets faster,” said Roberton Williams, a senior fellow at the Tax Policy Center.
According to a 2011 estimate by the Tax Policy Center, using chained CPI to index taxes could eventually add $300 annually to the tax bill of someone earning $100,000 or more, and a $600 tax increase for those earning more than $200,000 annually.
Someone earning in the $40,000 range would pay an extra $135 on average.
Proponents of the Camp plan believe taxpayers will not see their overall taxes increase under chained CPI because of the reduced rates and other added tax benefits.
Curtis Dubay, a senior tax analyst at the Heritage Foundation, told the Washington Examiner that the impact would be far less than the Tax Policy Institute’s 2011 calculation because the Camp plan uses fewer tax brackets, so there would be less mobility.
“In the context of bigger reform, this is a small issue,” Dubay said.
But some tax watchdog groups disagree.
“Over time, people will progress through the three brackets faster than they would under current inflation measures,” said Ryan Ellis, tax policy director for Americans for Tax Reform. “If a taxpayer is in the 35 percent bracket when, under the old inflation measure, he would have been at 25 percent, that costs plenty. It’s bracket creep.”
Camp has garnered cautious praise from GOP leaders for his extensive plan to overhaul the tax code, though there is no plan for action on his measure any time soon, or even this year.
But Camp’s proposal has started the debate over how to remodel the nation’s complicated tax system. It includes the increasingly popular idea of getting rid of the seven-bracket structure.
Camp’s plan also eliminates tax loopholes and other reductions to pay for the rate reductions. He included chained CPI to help make up the difference.
“What he needed to do is figure out how to balance rate cuts with ways to recoup that loss.” Williams said. “You have to make it up some way in order for the plan to be revenue-neutral.”
Chained CPI tends to project a lower rate of inflation -- by about 0.25 percent -- than traditional CPI. The Congressional Budget Office considers chained CPI “a more accurate estimate of changes in the cost of living,” than the method used currently, but said it can inaccurately measure the impact of inflation on some groups.
Overall, Williams said the Camp plan, in spite of the chained CPI indexing provision, leaves taxpayers giving Uncle Sam roughly the same amount of money each year.
“There will be tradeoffs,” he said. “Overall, it’s lowering tax rates, but the way you pay for that is taking away some of the goodies.”