On June 30, the Senate Finance Subcommittee on Taxation and IRS Oversight held a hearing entitled, “Encouraging Savings and Investment: Stay the Course or Change Directions?” The hearing focused on three tax provisions: a provision pertaining to the amount of property a small business can expense; the 15 percent individual tax rate for dividends on capital gains; and the Retirement Contributions Savings Credit, a tax credit of up to 50 percent for contributions to certain retirement plans.
Chair Jon Kyl (R-AZ) noted that “in the coming years, Congress will be faced with an avalanche of expiring tax provisions; we must begin the process of deciding which provisions to keep and which should be allowed to expire.”
Stating that the personal savings rate in the U.S. is “now close to zero,” Ranking Member Jim Jeffords (I-VT) said that many “are living paycheck-to-paycheck, only one layoff or illness away from financial disaster. We all want to encourage people to save and invest. But we also want to be able to help those people who lack the means to do so, and give them the foundation for success.”
One witness addressed the Retirement Contributions Savings Credit, or the “Saver’s Credit.” Vice President of H&R Block Robert Weinberger said that the credit has been successful in encouraging savings, although its coverage is limited. The credit, available to taxpayers with incomes up to $50,000, provides a tax credit of up to 50 percent for contributions to 401(k), IRAs, and similar retirement plans. Mr. Weinberger cited five reasons why the credit has been successful: it relies on personal responsibility; it uses tax time to promote savings; it supports the existing private retirement system; it provides an incentive for savings; and it targets those most in need. “We have facilitated 1.2 million Saver’s Credits yearly, about a quarter of the national total. Over the last three years, our clients who used the credit received more than $603 million to help them save, an average of $167 each per year,” stated Mr. Weinberger, adding, “While most used the Saver’s Credit to match contributions to an existing 401(k), IRA or other retirement plan, over 243,000 opened a new IRA through us. Among these tax clients, a majority are first-time retirement savers, average income is $27,000, half have no bank account, and about two-thirds are Earned Income Tax Credit recipients.”
Speaking to the credit’s limitations, Mr. Weinberger said, “First, it is somewhat complex, partly because Congress created three different credit rates and they, in turn, have different effective match rates. This can make the credit difficult to understand and claim. Second, the benefits fall in steep cliffs as income rises, which substantially reduces the power of the incentive as a result of very small changes in income. Third, the credit is unavailable to many income-eligible taxpayers because it is not refundable: at a 50% credit rate, for example, five out of six taxpayers who would otherwise be eligible based on income cannot use the credit because they do not have income tax liability. Families of four with incomes as high as $41,000 may be shut out. Finally, families who use the credit to save may be penalized when their savings go over about $2,000, since that can trigger denial of many Government benefits that have asset tests.” He encouraged Congress to extend and expand the Saver’s Credit and asked that Congress consider making the credit refundable.
