Analysis of the Working Families Tax Cut Act

How the proposal to increase the standard deduction would affect households and society.

On Tuesday, Representatives Nicole Malliotakis (R-NY-11) and Michelle Steel (R-CA-45) introduced the Working Families Tax Cut Act (WFTCA) in the House, proposing a broad tax cut through increasing the federal standard deduction.

The standard deduction (which the bill renames to “Guaranteed Deduction”) reduces taxable income for taxpayers who choose not to itemize their deductions. The proposals would increase it by between $2,000 and $4,000 depending on filing status in 2024 and 2025.

The bill reduces this additional standard deduction by 5% of adjusted gross income exceeding:

• $200,000 for single and separate filers

• $300,000 for head of household filers

• $400,000 for married and widowed filers

See how the Working Families Tax Credit Act would affect you.

Consider a single filer in New York with no itemized deductions other than state income tax. The WFTCA would provide benefits if they earn between $13,851 ($1 above the current standard deduction) and $240,000, with the maximum dollar benefit of $640 at around $200,000 earnings.

The WFTCA would reduce the filer’s marginal tax rates by up to -10% in specific earnings ranges, around $15,000 and $60,000. The phase-out then raises marginal tax rates by about 1.7% when earning between $200,000 and $240,000.

The WFTCA would affect other filers differently, depending on the marital status, children, and itemized deductions like charitable contributions.

We project that the WFTCA would cost $50 billion in 2023. As comparison, the Urban-Brookings Tax Policy Center estimated that the bill would cost $95 billion for 2024/25, or an average of $47.5 billion in each year (they also provided distributional analysis). The American Enterprise Institute, using the open-source Tax-Calculator microsimulation model, estimates that the bill would cost $43 billion in 2024.

Both TPC and AEI use the IRS public use file (PUF) rather than the Current Population Survey March Supplement (CPS), as PolicyEngine does. They also project the microdata into future years, while we use the 2021 CPS as-is, overwriting taxes and benefits with 2023 policy rules. We will integrate the PUF into the CPS and project it to future years in the coming months.

In New York and California, the states the authors represent, the bill would reduce tax liabilities by $3 billion and $6 billion, respectively.

On average, the proposal would raise net incomes by $382 per household; this increases with income, except for the 10th decile due to the phase-out.

On a relative basis, the bill would raise incomes a similar amount for deciles four through nine.

We estimate that the WFTCA would benefit 75% of the population, disproportionately those in deciles five through nine. As context, Representative Steel claimed in her announcement that the bill would benefit 82% of tax filers in her district.

The WFTCA would lower poverty by 0.4%, disproportionately for working-age adults and Hispanics.

The proposal would lower income inequality according to the three measures we estimate. It reduces the broadest measure, the Gini index, the least, and the narrowest, the share held by the top 1%, the most.

As a result of lowering marginal tax rates for low-income households, the WFTCA would make cliffs about 1 percent less prevalent.

See more details on the Working Families Tax Credit, including in your state or for your household, at PolicyEngine.

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