A bill that would end federal taxes on Social Security benefits faces major legislative opportunities this fall, and the prospects for broader rights program reform will depend on the political make-up of Congress next year.
Last month, Rep. Angie Craig, D-Minn., the You Earned It, You Keep it Act, which would abolish taxes on Social Security benefits from 2023. She said the bill is one way to ease inflationary pressures on seniors by allowing them to keep more of the money they receive out of the rights program.
“Abolishing this tax will help move Social Security benefits forward and ensure that American retirees have all the resources they need after a lifetime of hard work,” Craig said in a statement.
The bill, which has no co-sponsors yet, is a long shot this year as the legislative calendar shrinks. Craig is not a member of any House Committee with Social Security jurisdiction.
“The prospects for action this year are nonexistent,” said Bill Arnone, director of the National Academy of Social Insurance.
The way Craig is paying for abolishing the tax on Social Security benefits adds to the political challenge it faces. She proposes levying Social Security taxes on individuals who earn more than $250,000 annually. The tax is currently capped at $147,000.
“That would make it difficult politically to gain wider support,” said Garrett Watson, senior political analyst at the Tax Foundation, a think tank that specializes in tax issues. “I would be surprised if it is considered” [this year] given the nature of the compensation.”
The idea behind Craig’s bill has also been incorporated into the broader Social Security legislation introduced last year by Rep. John Larson, D-Conn. His Social Security bill 2100 has only Democratic backing and also has little chance of passing this year — even as part of an economic package cobbled together during a slack session of Congress after the election.
The November vote will play an important role in determining whether Social Security reform gains momentum in the new Congress beginning in January.
Addressing Social Security is like putting their “hand in a raccoon bag” for lawmakers, said Dean Zerbe, national director at alliantgroup, a tax agency. “It takes a strong majority. It would be an extraordinarily good thing for the Democrats [election] night to make that happen. I can’t see there being a two-pronged “run” on rights reform.
Social insurance programs have once again become a hot political topic, Arnone said. In October, the Social Security cost of living adjustment for 2023 will be announced. The Medicare premium is expected to fall next year. Older voters pay attention to both.
“It’s a one-two punch in politics,” Arnone said. “The Prospects of Social Security [reform] are dependent on the election, and the environment is ready for Congress to take action in the next session.”
In the meantime, there is something to be gained by turning a reform idea into legislative form.
“It makes it more tangible and real than ephemeral,” said Zerbe, a former Republican tax adviser on the Senate Finance Committee. “Having an account advances it in a way.”
Social Security benefits have been taxed since the early 1980s. Reforming those taxes – and the program in general – will be a heavy burden. One challenge is to do it in a way that doesn’t raise concerns about “horizontal equivalence,” Watson said.
That situation arises when some taxpayers benefit more than others from something like the elimination of taxes on Social Security benefits, depending on how important the payments are to their finances. Broader tax reform could be an answer.
“Some might be better off addressing this through a conversation about a more progressive tax code,” Watson said.