THE CLINTON-GORE ADMINISTRATION:
FISCALLY RESPONSIBLE, TARGETED TAX CUTS
TO PROMOTE SAVINGS, CHILD CARE, FAMILY, AND PHILANTHROPY

January 27, 2000

Overview

Today in His State of the Union Address, President Clinton Will Announce Four Major Elements of His Targeted Tax Package Aimed At Promoting Savings, Child Care, Family, and Philanthropy. These targeted tax cuts are part of a budget framework that maintains our fiscal discipline, makes investments in key priorities, strengthens Social Security and Medicare, and pays down the debt by 2013.

• Retirement Savings Accounts To Help Families Save and Invest And Expand Pension Coverage for Small Businesses. The President's Retirement Savings Accounts (RSAs) proposal will give 76 million Americans the opportunity to build wealth and save for their retirement through a progressive tax cut. The President's proposal builds on the successful model of Individual Development Accounts (IDAs), extending generous matches to all low- and moderate-income families to encourage them to develop savings and assets. A person who participated for 40 years in this savings program could accumulate over $266,000 – enough to produce $24,000 a year of income in retirement. This proposal would cost $54 billion over 10 years.
  • In an effort to encourage more small businesses to offer pensions for their employees, the President will also announce a proposal to provide a 50 percent tax credit for qualified contributions to employees' pensions. This provision would cost $17 billion over 10 years.

• Reducing the Marriage Penalty for Married, Two-Earner Couples By Increasing the Standard Deduction by More Than $2,000. The President will propose to increase the standard deduction for two-income married couples to twice that of single filers, providing substantial tax relief for 9.1 million married couples. When fully phased in, this change would result in a $2,150 increase in the standard deduction. The President's proposal would also increase the standard deduction by $500 for single-earner married couples and by $250 for single filers. Both elements of the President's plan would cost $45 billion over 10 years and benefit 42.1 million families.

• Helping Families Afford Child Care. President Clinton will include in his FY 2001 budget tax relief for families struggling to pay for child care. As part of a comprehensive child care initiative that includes subsidy assistance and new investments in child care quality, the President will propose to 1) make the Child and Dependent Care Tax Credit refundable for the first time; 2) increase the level of the credit; and 3) extend the credit to parents who stay at home with their children. The President will also propose tax incentives to encourage businesses to provide child care for employees. The child care package would benefit an estimated 8.1 million families and would cost $30 billion over 10 years.

• Encouraging Philanthropy. President Clinton today will unveil a package of new tax proposals to encourage philanthropy. First, he will propose allowing non-itemizers to take a tax deduction for charitable giving. Second, he will propose new rules to make it easier for charitable foundations to make gifts in times of need. And third, he will propose making it easier for individuals to donate appreciated assets like securities and real property. These proposals would cost $14 billion over 10 years.

The President Has Previously Announced Several Other New Proposals to Expand Opportunity For Americans Through Tax Relief. The Previously Announced Tax Cuts Include:

• College Opportunity Tax Cut: The President will propose a College Opportunity Tax Cut costing $30 billion over 10 years to, for the first time, make tax deductible up to $10,000 of tuition and fees for any post-secondary education (includes training and grad school). Families would also have the option to take a 28 percent credit. In general, the proposal would provide up to $2,800 annually in tax relief per family.

• Expanding the Earned Income Tax Credit (EITC): The President will propose a $21 billion plan to expand the EITC. According to estimates by the Department of the Treasury, the President's proposed EITC expansion would deliver tax relief for 6.4 million families, providing up to $1,200 in additional tax relief. The President's proposal builds on the 1993 expansion signed into law by the President, which provided a tax cut for 15 million families.

• Long-Term Care Credit: As part of a 10-year, $27 billion initiative that helps address the nation's multifaceted long-term care challenge, the President will propose a $3,000 tax credit to compensate people with long-term care needs or their caregivers for the cost of care ( tax credit costs $26.6 billion over 10 years).

• Expanding Health Coverage Through Targeted Tax Credits: As part of his initiative to dramatically improve the affordability of and access to health insurance for at least 5 million uninsured Americans, the President will propose $12 billion in targeted tax cuts to expand health insurance options for Americans facing unique barriers to coverage.

• Tax Credits For School Construction and Modernization: To address this critical need, President Clinton is renewing his commitment to provide $24.8 billion in tax credit School Modernization Bond bonds over two years to modernize up to 6,000 schools. The cost would be $8 billion over ten years.

• A Major Expansion of the New Markets and Empowerment Zone Tax Credits:As part of the President's New Markets initiative, which will spur at least $20 billion in new capital investment in businesses in economically-distressed areas, the President has proposed more than double his proposed the New Markets tax credit at a cost of about $5 billion over 10 years and Expanding Empowerment Zone Tax Incentivesat a cost of $4 billion.

• Alternative Minimum Tax Relief: The President will propose in his budget a $33 billion proposal over 10 years to correct serious design flaws in the individual Alternative Minimum Tax (AMT) that increasingly hurt middle-income families who play by the rules. It complicates their tax preparation and raises their tax bills. The President's proposal will take over 9 million families per year off the AMT when fully phased in.

Retirement Savings Accounts:

President Clinton's Plan to Create a Nation of Savers

Summary

Today in His State of the Union Address, President Clinton Will Announce His Plan to Establish Retirement Savings Accounts for American Families and to Expand Pension Coverage. Retirement Savings Accounts (RSAs) will give 76 million Americans the opportunity to build wealth and save for their retirement through a progressive tax cut. The President's proposal builds on the successful model of Individual Development Accounts (IDAs), extending generous matches to all low- and moderate-income families to encourage them to develop savings and assets. A person who participated in this savings program for 40 years could accumulate over $266,000 enough to produce $24,000 a year of income in retirement. The 10-year cost of this proposal is $54 billion. The President will also announce a plan to expand pension coverage for small businesses costing $17 billion over 10 years.

Too Few Americans Are Saving for Retirement. Over two-thirds of Americans rely on Social Security as their principal source of retirement income, and 18 percent rely on Social Security as their only source of income. Seventy-three million American workers and their spouses are not covered by any employer-sponsored retirement plan. Existing tax incentives to save do little for hard-pressed working American families Americans with incomes in the bottom sixty percent get only 12 percent of the tax benefits for pensions.

Retirement Savings Accounts Are Designed To Encourage and Reward Savings, Bring New People Into the Culture of Saving. Here's how they would work:

• Married Couples Could Contribute $2,000 to an RSA. When fully phased in after 2004, a single filer could contribute up to $1,000 into an RSA. For married couples, both spouses could make a $1,000 contribution for a total of $2,000. These could be held in employer-sponsored retirement plans or placed in private financial institutions. Individuals would have a broad range of investment options.

• Hard-pressed Working Families Would Get a 2:1 Match on the First $200 Invested. To encourage working families to start saving for retirement, the President's plan would provide a two-to-one match for the first $100 contributed by each person. For a couple, they could contribute $200 to their RSAs and the government would match with another $400, bringing the total account to $600. The match rate would phase out for incomes between $25,000 and $80,000. Single filers earning up to $12,500 would be eligible for a two-to-one match on up to $100, with the match rate phasing out from $12,500 to $40,000.
• Additional Incentives for the Next $1,800 Invested. For the next $1,800 contributed by a couple to an RSA, the government would provide a one-to-one match for families earning up to $25,000. This match phases down for families earning between $25,000 and $80,000. Individuals would qualify for a match on the next $900 invested.
• Withdrawal Rules. Certain withdrawals would be allowed, but only after 5 years and only for qualified purposes like paying for medical care, buying a house, or paying for college.
• Government Match. Families that do not have tax liability, like a typical family of four earning $25,000, do not benefit from any of the tax incentives to promote savings. In order to ensure that these families also have an incentive to save, the government match will come in the form of a tax credit to the employer or the financial institution for 100 percent of the matching contribution. This ensures that low- and moderate-income families will benefit from the match.
• Contributing Refunds and EITC Refunds. The President will ask the Department of the Treasury to study feasible options that would potentially simplify saving for millions of families by allowing them to have their tax refund, including EITC refunds, deposited directly into their RSA.

What RSAs Would Mean for Families:

• A couple earning $25,000. If the couple contributed $200 to their RSA, they would get a $400 match for a total account of $600. The couple could contribute up to $2,000 to the account and be eligible for a government match of $2,200, bringing their total savings to $4,400.
• A single person earning $35,000. If the person invested $1,000 in their RSA, then the government would provide a match of $200. This could more than double the tax benefits that this person would get from making contributions to deductible IRAs.
• A couple earning $40,000. If the couple contributed $2,000 to their RSA, they would get a government match of $1,120. As a result, they would have $3,120 in their savings account.
• A couple earning $60,000. If the couple invested $2,000 in their RSA, then the government would provide a match of $400. This could more than double the tax benefits these employees currently get from making contributions to deductible IRAs.

Accumulating Savings Over a Lifetime. Contributions to RSAs would accumulate tax-free. If a family consistently took advantage of RSAs, they could accumulate substantial assets to help maintain a healthy income in retirement. For example:

• A 25-year-old worker making $1,000 annual voluntary contributions and eligible for the maximum match every year would be saving $2,100 per year. As a result, he or she could accumulate over $266,000 by age 65 over a quarter of a million dollars in retirement savings.

• This accumulation could be enough to provide an annuity of over $24,000 per year an extra $2,000 per month in retirement income.

• A married couple fitting this description could accumulate over half a million dollars in retirement savings.

The President Will Also Propose $17 Billion in Tax Incentives to Encourage Small Businesses to Offer Pensions to Their Employees. Currently only 18 percent of workers employed at organizations employing fewer than 25 workers have access to pensions through their current job. In an effort to expand pension coverage, the President will offer businesses with up to 100 employees a tax credit that will pay for 50 percent of the qualified contributions made by small businesses to the pension plans 401(k)-type or defined benefit of non highly-compensated employees for three years. Those plan would have to provide pension benefits equivalent at least 1 percent of pay for non-highly compensated employees who work at least halftime. Small employers would receive an additional credit for the administrative costs of starting a new plan and educating employees about retirement.

Retirement Savings Accounts

The Need

Currently, Too Few Americans Have Enough Savings for a Secure Retirement. Because Americans are living longer it is more important than ever for them to build the wealth necessary for a secure retirement. But there are gaps in the system that leave too many American families behind.

• Social Security Provides a Core Foundation For Retirement, but It is Only One Leg of the Retirement Stool. While providing economic security for older Americans, Social Security was never meant to provide enough to maintain the standard of living individuals enjoyed during their working years. Social Security replaces just one-half of pre-retirement income for an individual who earned $17,000, and less than one-quarter of the income of an individual who earned $72,600. Yet Social Security is the only source of income for 18 percent of elderly Americans, and the principal source of income for 66 percent of elderly Americans.
• Pension Coverage Provides Additional Support, But Many American Workers Are Not Covered.
• Half of all American workers have no pension coverage at all through their current job. The situation is worse for lower and moderate-income workers and for workers in small businesses, where only 18 percent of people who work for organizations employing fewer than 25 workers have access to pensions through their current job.
• Fewer than 20 percent of workers have their own IRAs, and many do not contribute regularly.
• Fewer than one half of all workers are covered by 401(k) plans in their current job. While two-thirds of people with earnings of $75,000 and over participate in 401(k)s, just 43 percent of those with earnings between $35,000 and $39,000 save for retirement through 401(k)s. (Data if from 1993.)
• While 91 percent of all families have some financial holdings, the median value of these holdings is just $13,000. The median value of financial assets of families headed by someone over age 65 is just $20,000.

The Tax Incentives For Retirement Savings Help Many American Families, But the Tax Benefits are Skewed to the Better Off.

• Two-thirds of existing pension tax subsidies go to families with incomes in the top quintile, while just 12 percent go to families with incomes in the bottom sixty percent of the income distribution.

Individual Development Accounts (IDAs) Have Been a Successful Model to Encourage Low-Income People to Save for Retirement.

• In 1992, Bill Clinton proposed establishing Individual Development Accounts (IDAs) to help low-income Americans save. President Clinton included IDAs in his 1994 Welfare Reform proposal. The 1996 welfare reform allowed states to use their block grants to set up IDAs and the FY 1998 budget established a five-year, $125 million demonstration program to create Individual Development Accounts for more than 50,000 people.

• For each $1 a low-income family deposits into an IDA, the administering agency provides a match of between $1 and $8. Households that are eligible either for Temporary Assistance for Needy Families (TANF) or the EITC are eligible to participate in IDA demonstration projects.

Retirement Savings Accounts Proposal

Background

Who is Eligible for Retirement Savings Accounts? Workers between the ages of 25 and 60 with family earnings of at least $5,000 are eligible to receive matching contributions. When fully phased in, eligibility for matching contributions extends to couples with incomes of up to $80,000 and single filers with incomes up to $40,000.

How Does the Government Match Workers' Contributions? The match rate on the first $100 contributed begins at 200 percent and phases down to 20 percent for married taxpayers with incomes of $50,000 ($25,000 for single filers). Married couples with incomes between $50,000 and $80,000 ($25,000 to $40,000 for single filers) would receive the 20 percent match. The match rate on the next $900 begins at 100 percent and phases down to 20 percent over the same range.

How Are the Accounts Invested? RSAs would be held in employer plans like 401(k)s or by individuals in private financial institutions, similar to IRAs. Individuals would have a similarly broad choice of investments.

What is the Tax Treatment of the Accounts? Similar to traditional IRAs and 401(k)-type plans, voluntary RSA contributions would be tax deductible, accounts would grow tax-free, and withdrawals would be taxable.

When Could the Funds be Withdrawn? Certain withdrawals would be allowed, but only after 5 years and only for qualified purposes like paying for medical care, buying a house, or paying for college.

How Would Spouses Be Treated? The design of RSAs recognizes that women are more likely to spend time out of the labor force than men and have lower average earnings than men. First, it ensures that spouses are eligible to make contributions to RSAs with full government matches. Second, the progressive credit formula targets the tax benefits to low- and moderate-income working families.

Who Would Benefit? When the program is fully phased in after 2004, about 76 million workers will be eligible for matching contributions.

President Clinton's Proposal to Provide Marriage Penalty Relief by Increasing the Standard Deduction For Married, Two-Income Couples by Over $2,000

Summary

Today as Part of His State of the Union Address, President Clinton Will Announce His Plan To Reduce the Marriage Penalty for Married, Two-Income Couples By Increasing the Standard Deduction by More Than $2,000. The President will propose to increase the standard deduction for two-income married couples to twice that of single filers, providing substantial tax relief for 9.1 million married couples. The President's proposal would also provide an additional $500 increase in the standard deduction for single-income married couples that do not face a marriage penalty. He would also increase the standard deduction for single filers by $250. The President's plan would cost $45 billion over 10 years and benefit 42.1 million families.

• Raise the Standard Deduction By More Than $2,000 to Provide Tax Relief for 9.1 Million Married, Two-Income Couples. The President's proposal would increase the standard deduction for two-income couples to double the amount of the standard deduction for single filers. The increase would be phased in evenly over five years. In 2005, when it is fully phased in and in combination with the President's other proposals, this change would increase the standard deduction for married, two-income couples by $2,150. As a result, when two working people get married they would no longer see their combined standard deduction go down.

• Raise the Standard Deduction by $500 For Couples Not Facing Marriage Penalties. In order to ensure that his middle-class tax relief is spread as broadly as possible, the President's proposal would increase the standard deduction by $500 for married, single-income couples (these couples do not face a marriage penalty under the tax code). The President's proposal would also increase the standard deduction for single filers by $250. These changes would take effect in 2005.

President Clinton's Child Care Tax Relief for America's Families

Summary

Today, in His State of the Union, President Clinton will Include Tax Relief for Families Struggling to Pay for Child Care. These expenses are often the second or third largest item in a low-income working family's household budget. As part of a comprehensive child care initiative that includes subsidy assistance and new investments in child care quality, the President will propose to 1) make the Child and Dependent Care Tax Credit refundable for the first time; 2) increase the level of the credit; and 3) extend the credit to parents who stay at home with their children. The President will also unveil tax incentives to encourage businesses to provide child care for employees.

Helping Over 8 Million Families Pay Child Care Expenses. The Child and Dependent Care Tax Credit (CDCTC) provides tax relief to those who, in order to work, pay for the care of a child under 13 or for a disabled dependent or spouse. The President's proposal, which costs $30 billion over 10 years, broadens this tax relief and will help over 8 million families pay their child care expenses:

• Making the Credit Refundable for Nearly Two Million Working Parents. Under current law, a typical family of four with an income under $25,000 is ineligible for credits for child care expenses because it has no income tax liability. Many such families earn too little to claim the credit but too much to get the full benefit of child care subsidies. To help these families, the President proposes to make the CDCTC refundable for the first time -- so that families with no tax liability can receive up to $2,400 to help offset the cost of child care. This proposal will assist nearly two million families.

• Increasing the Child Care Tax Credit. For families earning up to $60,000, the President proposes to increase the maximum level of the CDCTC from 30 percent to 50 percent. This will provide an average additional tax cut of $249 for these families and eliminate tax liability for nearly all families with incomes below 200 percent of poverty that claim the maximum allowable child care expenses. Under this proposal, a family of four with an annual salary of $35,000, and child care expenses of $3,100, would receive a tax credit of $1,395 -- an increase of $775 over current law. This expansion proposal will help over four million working families pay for child care.

• Providing Tax Relief to Parents Who Stay at Home. The President will also propose enabling parents who stay at home with children under age one to take advantage of the Child and Dependent Care Tax Credit by claiming assumed child care expenses of $500. This proposal will provide an average tax cut of $154, benefiting almost two million parents.

Creating New Child Care Tax Incentives for Businesses. In his budget, President Clinton will also propose a new tax credit for businesses that provide child care services for their employees. These services could include: building or expanding child care facilities, operating existing facilities, training child care workers, or providing child care resource and referral services. The credit covers 25 percent of qualified costs (and 10 percent of resource and referral service expenses), but may not exceed $150,000 per year per business. This tax credit would cost $1.4 billion over 10 years.

President Clinton's New Tax Incentives To Promote Philanthropy for All Americans

Summary

Today, in His State of the Union Address, President Clinton Will Unveil a Package of New Tax Proposals to Encourage Philanthropy. First, he will propose allowing nonitemizers to take a tax deduction for charitable giving. Second, he will propose new rules to make it easier for charitable foundations to make gifts in times of need. Third, he will propose making it easier for individuals to donate appreciated assets like securities and real property. Last October, the President and First Lady convened the first-ever White House Conference on Philanthropy. The conference highlighted the unique American tradition of charitable giving, and emphasized that at a moment of great prosperity, we must preserve and expand this tradition. Today's proposals, which cost $14 billion over 10 years, will help do just that.

Enabling Nonitemizers to Take a Tax Deduction for Charitable Contributions. Currently, 70 percent of taxpayers do not itemize and as a result, they cannot get the tax incentive for charitable giving that higher-income itemizers can claim. The President's budget will allow these taxpayers to claim a 50 percent deduction for charitable contributions above $500 a year when fully phased in. This proposal will boost contributions to charitable organizations, particularly community and faith-based groups, and improve tax fairness by giving nonitemizers the same opportunity to deduct contributions as itemizers.

Making it Easier for Foundations to Give in Times of Need. The President's budget will allow more funds to reach those in need by simplifying and reducing the excise tax on foundations. Foundations currently face a two-tier excise tax: first, a 1 percent tax on investment income; second, an additional 1 percent tax for foundations that do not maintain their rate of giving over a five-year average. This mechanism is unduly complicated and can reduce giving in certain cases, since boosting gifts in times of need exposes foundations to higher taxes if, after the need has passed, their rate of giving drops back to earlier levels. The President's new proposal will eliminate the two-tier system and set the excise tax rate at 1.25 percent. The result of this simplification will be to remove a disincentive to foundation giving and to make available more gifts to community organizations in times of need.

Allow Greater Contributions of Appreciated Property to Charities. The President's budget will also make it easier for individuals to donate appreciated assets like stocks, art and real estate. Under existing law, individuals donating appreciated assets can take a tax deduction that is limited to 30 percent of adjusted gross income (AGI); for gifts made to private foundations, the deduction is capped at an even more stringent 20 percent AGI. These multiple limitations are complex and can place burdens on individuals who choose to give substantial portions of their incomes to charity. The President's budget simplifies and eases these limitations by increasing the AGI limit on appreciated property from 30 to 50 percent, and the limit for donations of appreciated property to private foundations from 20 to 30 percent. This change will create greater incentives for such gifts.

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