Congress Moves Toward Expanding Federal Tax Refunds To Puerto Ricans
There was substantial movement in both houses of the Congress this week toward expanding a federal tax refund for which up to 100,000 low-income Puerto Ricans are already eligible. The expansion would extend the benefit to many more Puerto Ricans.
The refund is an extension of the federal income taxs Child Tax Credit. It sends checks based on the Child Credit to individuals who file a federal tax return and pay Social Security and Medicare taxes but whose income is too low for them to owe income tax.
In the case of low-income workers, it refunds these payroll taxes instead of providing a credit against income taxes. The refund applies to Puerto Ricans with three or more children although it applies to residents of the States with any number of children.
Puerto Ricans pay federal payroll taxes. They are only required to pay federal income taxes on income from outside Puerto Rico. They have to file a federal tax form to obtain the refund even if their income is only from Puerto Rico.
The action in the Congress came this week after Democrats launched a firestorm of criticism because the refund was not expanded in the $330 billion over 10 years tax cut signed into law by President Bush last week.
The law increased the Child Credit from $600 to $1000 per child for this year and next -- and varying amounts in later years -- but a Senate provision to enable low-income workers to obtain a similar refund was dropped from the final bill due to objections from Republican leaders in the House of Representatives. They essentially opposed the concept of the payments to individuals who do not pay income taxes that was already in law.
Current law provides for a refund of payroll taxes up to the Child Credit or refund amount and up to 10 percent of an individuals income over $10,500 per year. The benefit is phased out at the $110,000 income level.
Although the new laws Child Credit increase theoretically applies to low-income individuals and their refunds, it does not provide benefits or equal benefits to most of them. One reason is that the refund is limited to the amount of the payroll taxes paid. Another is because it is also limited to 10 percent of the amount of income over $10,500.
The two factors would prevent the refund amount for most Puerto Ricans eligible for refunds from increasing despite the increase in the Child Credit.
The Senate version of the new tax cut law would have increased the limit of the refund based on income to 15 percent. This would have extended the increase in the credit to refunds to families earning up to $26,625 per year.
The provision would have expanded the number of Puerto Ricans eligible for the refund. In fact, it would have probably benefited Puerto Ricans to a greater degree than workers with similar income in the States. This is because the refunds are also limited to the extent of Earned Income Credit benefits.
Low-income workers in the States qualify for another credit against income taxes due if their earnings are high enough or a payment from the federal government if their earnings are very low. This benefit has not been extended to Puerto Ricans.
A Puerto Rico manager of the tax form assistance company H & R Block has estimated that up to 100,000 Puerto Ricans already qualify for Child Credit refunds. He has also said that the refunds generally range up to $1,500 per family rather than the full amount of the Child Credit ($600 per child in 2002 but $1000 in 2003) because of the existing laws limitations on the refund amounts.
In response to the Democratic criticism, the Senate voted 94-2 Thursday to pass a new bill to increase the limit of the refund to 15 percent of income above $10,500 (although the refund would still also be limited by the amount of payroll taxes paid). Additionally, House leaders who had earlier opposed the idea signaled that they would accept it.
A House leadership staffer said that the House might pass a similar measure next week. Earlier in the week, an aide to President Bush said that the president wanted the increase to pass.
The House staffer said that the House bill could also seek to make the $1000 amount of the Child Credit permanent. Under the new law, it drops to $700 in 2005 and fluctuates higher and lower than that in subsequent years.
This proposal could endanger the increase in the limit of the refund, however, since it would cost over $80 billion. This may be too high for some members of Congress concerned about the exploding federal deficit to accept. The increase in the limit of the refund is estimated to only cost $3.5 billion.
The House aide also thought that the House bill would include an increase in the upper income cutoff in eligibility for the Child Credit that was included in the new Senate bill. That provision increased the cost of the Senate bill to $10 billion.
The Senate bills cost would be paid for by Customs fees on foreign goods imported into the States and Puerto Rico. The federal government grants Puerto Rico the fees collected in the territory after deducting the cost of collection.
Some House Republican conservatives are still reluctant to increase the limit of the Child Credit payroll tax refund, however. Representative Jim McCrery (LA), a senior Republican on the tax law-writing Ways and Means Committee, said he will fight the idea. Majority Whip Roy Blunt (MO) recalled the Child Credit Was intended to be "a tax credit, not a . . . number-of-children benefit program."
But Majority Leader Tom Delay (TX) who started out responding to the Democratic criticism by saying that an increase was not a priority later said he would not be opposed to it.
Curiously, despite all the focus on expanding the refund, Puerto Ricos official representative in the Congress, Resident Commissioner Anibal Acevedo Vila ("commonwealth"/D), has not proposed ending the discrimination against low-income Puerto Ricans in the program by extending it to families with one child or two children. He may be uncomfortable with the program because it requires beneficiaries to file a federal tax form. Acevedo is one of the Puerto Rico "commonwealth" party leaders who inaccurately claim that the territory is exempt from federal taxation (although the federal government has extended some taxes to Puerto Rico).
Medicare Reform Finally Expected To Pass -- Could Close Puerto Rico Gap
Both houses of the Congress are expected to pass legislation to reform Medicare, the health care program for older and disabled individuals, this month. The legislation could include substantial increases in Medicare payments to hospitals in Puerto Rico.
Medicare reform legislation has been debated for three years. Republicans in the Congress blocked a Clinton Administration initiative for it in 2000 but the charge is now being led by Republican leaders in the Congress and by the administration of Republican President George W. Bush.
The primary objective of the legislation has been to pay for medicine for people who are not hospitalized. Medicare currently only pays for medication in hospitals.
Leaders of both political parties have agreed for a few years on the concept of covering prescriptions outside of hospitals but they have disagreed on details of how to do it . . . and leaders of each party have not wanted the other party to get political credit for the new benefit. These factors have delayed passage of the legislation . . . and of a proposal to treat Puerto Rico more equally with the rest of the nation in Medicare.
The biggest difference between the treatment of Puerto Rico and that of the rest of the nation in Medicare is that payments for hospital services are different. The different treatment is made possible by Puerto Ricos territorial status and its consequent lack of voting representation in the federal government.
Medicare pays the same amounts for hospital services everywhere in the nation other than Puerto Rico. The rates are different between urban and rural areas but are the same in all urban areas and are the same in all rural areas. The rates in Puerto Rico are a blend of the national rates and local cost factors, primarily labor costs.
Currently, the blend is 50 percent of the national rates and 50 percent of the local cost factors. In 2000, President Clinton proposed adjusting the formula to 75 percent of the national rates and 25 percent local cost factors.
The proposal followed a 1997 Clinton initiative that adjusted the formula from 25 percent national rates and 75 percent local cost factors to the current 50/50 formula and adjusted the calculation of the local cost factors. That initiative increased payments to Puerto Rico hospitals $44 million in1998 and more annually since then.
Both initiatives responded to lobbying by then Puerto Rico Resident Commissioner Carlos Romero-Barcelo (statehood/D), Governor Pedro Rossello (statehood/D), and the Puerto Rico Hospital Association.
The 2000 proposal won bipartisan support in the Congress. But the increase -- which was estimated to be worth from $10 million to $37.5 million a year for Puerto Rico -- was blocked by then Senate Majority Leader Trent Lott (R-MS). Lott is the main ally in the Senate of Puerto Rico Governor Sila Calderon ("commonwealth/no national party). Their close ties existed in 2000, when Calderon was campaigning for her present post.
Lott has not indicated opposition to the Puerto Rico Medicare equality proposal since Calderon was elected. In fact, Calderons official representative in the Congress, Resident Commissioner Anibal Acevedo Vila, has sought approval of the Clinton-Romero-Rossello-Puerto Rico Hospital Association initiative -- although he has tried to tell Puerto Ricans that he originated it. The proposal has languished, however, as the overall Medicare reform legislation has been stalemated.
Thursday, Senate Finance Committee Chairman Charles Grassley (R-IA) and top ranking Democrat Max Baucus (D-MT) announced a compromise proposal for the overall Medicare reform legislation that will phase in a subsidy for drug prescriptions filled outside of hospitals. It was supported by a broad array of senators from both parties, including Majority Leader Bill Frist (R-TN) although not Minority Leader Tom Daschle (D-SD).
The Finance Committee is expected to consider the proposal next week.
The key issue in the legislation lately has concerned private insurance plan alternatives to Medicare coverage. The Bush Administration proposed using new drug benefits to encourage senior citizens to enroll in private programs, which could reduce Medicare costs. Medicare faces financial problems in the next two decades as the percentage of the elderly in the U.S. population increases.
The compromise would provide equal benefits for individuals who rely on Medicare and individuals who rely on private plans, expanding the role of private plans but not providing the incentive to join such plans that the Bush Administration wanted.
Grassley and Baucus did not indicate whether the compromise would change the special formula for payments to Puerto Rico hospitals but the proposal has continued to have support from members of the Congress who have been active in the effort to reform Medicare. They did say, however that the compromise, which would cost $400 million over 10 years, could not address all issues for cost reasons.
Another issue that the compromise does address, however, is the payment rates for rural hospitals and doctors. Details were not released but the provision could benefit some health care providers in Puerto Rico that are classified as rural.
States Condition Territory-like Medicaid Funding Limits
The Grassley-Baucus Medicare reform compromise included a last-minute change Thursday to address a proposal being developed by the governors of many of the States. The governors proposal called for Medicare to pay the total cost of health care services for Medicare beneficiaries who also qualify for Medicaid, the health insurance program for low-income individuals. Medicaids costs are shared between the federal government and the governments of the States and the territories.
The compromise would provide some additional funding to States for Medicaid for low-income Medicare beneficiaries but not cover all costs.
The governors proposal is a fundamental element of their suggested revisions to a plan by President Bush to reform Medicaid. The plan has major implications for the Medicaid issue of Puerto Rico and the other territories.
There is no dollar limit on the federal share of Medicaid expenses in the States but federal contributions to the program in the territories is "capped" (limited). Eliminating the caps has long been a major objective of territorial officials in Puerto Rico and the other territories. It would provide close to a billion dollars a year more for health care in Puerto Rico.
Bush, however, has proposed giving the States an option of having the program funded more like it is in the territories. His proposal includes several inducements to encourage States to accept capped federal contributions. One is an increase in the funds over the next several years, although the funding would then be cut in later years. Another inducement would enable States to adjust -- including reduce -- benefits.
The governors are proposing that the caps only apply in the case of individuals that State programs add to Medicaid -- and not for individuals that the federal government requires the programs to cover. They also want a commitment that the caps will be reviewed periodically. And the governors made their support of any caps contingent upon the federal government paying all the costs of services to individuals who are eligible for both Medicare and Medicaid.
Although many Democrats are among the governors who have accepted the Bush proposal to this very limited degree, other Democrats oppose the imposition of any caps.
The bottom line for Puerto Rico and the other the territories seems to be that it is unlikely that the federal government will eliminate their caps while the debate on caps in the States rages.
The "Washington Update" appears weekly.