TANF-ACF-PI-2001-01 (Treatment of Tax Credits for Federal TANF and State "Maintenance of Effort" (MOE))
State agencies administering the Temporary Assistance for Needy Families (TANF) program and other interested parties.
Treatment of Tax Credits for Federal TANF and State "Maintenance of Effort" (MOE)
45 CFR 260.30 and 260.33
This Program Instruction restates the principles and clarifies the conditions under which States may use TANF dollars or claim MOE expenditures for a variety of State tax credits.
In the final TANF rules (45 CFR 260.30 and 260.33), we outlined the basic framework under which States could support tax provisions with TANF funds or count expenditures related to tax credits toward the State MOE requirement:
- All TANF expenditures and MOE claims must meet the definition of an expenditure -- any amount of Federal TANF or State MOE funds that a State expends, spends, pays out, or disburses consistent with the rules;
- Expenditures do not (with emphasis) include any amounts that merely represent avoided costs or foregone revenue. Thus, they do not include waivers, rebates, deductions, exemptions, or nonrefundable tax credits -- that reduce a State's tax revenue. Tax relief provisions that only reduce a family’s tax liability are considered foregone revenue, not an expenditure, and thus are not allowable as a use of TANF or MOE funds;
- Expenditures include only the refundable portions of State or local tax credits. The refundable portion is the amount of the credit that exceeds the taxpayer's tax liability (the amount owed prior to any adjustments for credits). Only the portion of the credit that the State refunds to the taxpayer that exceeds the taxpayers tax bill may be claimed; and
- Any expenditure must be reasonably calculated to accomplish a TANF purpose.
Since we issued the final rules, we have received a number of questions about the application of these principles. These questions raised inter-related issues that are quite complex and required us to review our policy. As a result of these deliberations, we have decided it is necessary to provide policy clarification about how these regulatory principles apply in different situations. This clarification also modifies previous answers we have provided to a couple of States. Specifically, in the second question we clarify that property and sales tax credits are refundable only if they exceed a family's liability relative to the underlying tax. The third question clarifies that these regulatory principles apply to the State as a whole, regardless of whether the State or a local level of government derives the benefit of the tax revenue or the cost of a credit.
Questions and Answers
- May a State claim expenditures for which it has separately appropriated funds to cover the costs of the credit or rebate?
No, not unless the relief provided is refundable. That is, the particular credit must exceed the amount of the eligible family's liability for that tax and also be paid to the family.
This question arises from the fact that some tax relief provisions appear as expenditures in State budget documents, even though the relief does not exceed the particular tax liability of recipient families. Some States appropriate funds to provide a tax rebate to families after the particular tax has been paid. Permitting the claiming of an expenditure simply because it appears so in a State’s budget would lead to arbitrary results. For example, a State that reduced the sales tax rate could not treat the foregone revenue as an allowable use of TANF or MOE funds. Likewise, a State that achieved the same effect as a rate cut by collecting the sales tax and instead appropriating rebate payments should not be able to fund the rebate in part with TANF or MOE funds. Thus, an appropriated tax credit (or rebate) that is not refundable is not an expenditure that can be claimed. While the method of administering and budgeting the tax relief varies in these circumstances, the net effect on families in each circumstance would be the same: each family’s tax burden would be reduced, but it would not receive a refund in excess of its tax liability. The net effect on the State's budget would also be the same in each circumstance.
So the standard is not how the foregone revenues and expenditures appear in State budgets, but the actual result with respect to the particular revenue stream and the consequence for families. Regardless of how a tax relief provision is presented in a State’s budget, any provision that offsets a portion of the tax burden families otherwise face represents a choice to forgo the tax revenue that the family would pay in the absence of the relief. Tax relief measures that solely provide a family with relief from various taxes are not expenditures, but foregone revenue. States may count as an expenditure only the portion of the excess credit or payment that exceeds the family's liability under the corresponding tax.
Questions and Answers
- When can property and sales tax credits be considered an allowable expenditure of TANF and MOE funds?
Tax provisions can be supported with TANF or MOE funds to the extent that they are refundable with respect to the original, underlying tax liability; that is, to the extent they exceed the particular tax liability of eligible families. Two criteria apply in considering whether sales and property tax credits are an allowable expenditure.
- First, the fact that sales or property tax rebates appear as refundable credits on a State’s income tax form does not mean that they are allowable. Sales or property tax rebates are considered allowable only if they exceed a family's sales or property tax liability. Stated as a principle, TANF or MOE funds may only be used for refundable credits or rebates in excess of the family's real or assumed liability relative to the underlying tax -- property tax credit to property tax, sales tax rebate to the sales tax. Only the amount of the credit that exceeds the particular tax liability of the family and is refunded to the family is allowable.
- Second, if the sales or property tax credit is derived from an assumed rather than actual liability under the relevant tax, the credit is an allowable expenditure only to the extent that it exceeds the family’s assumed tax liability under that tax. In developing sales tax credits, States recognize that it is often hard to determine the actual tax amount paid by families, because purchasing patterns vary and records are generally unavailable. So, States normally provide flat amounts of tax relief based on income or family size.
A similar problem arises with respect to property tax relief provided to renters. Such relief acknowledges that landlords typically pass on some of their property tax burden to tenants. So, some States use a portion of the rent as if it were the property tax to determine an assumed property tax liability. Generally, the State then calculates the credit amount as a proportion of the assumed liability.
As far as we know, all existing State property tax rebates provide payments that are less than the homeowner's property tax and less than the assumed property tax paid by renters. Existing sales tax credits rarely provide more relief than a reasonable estimate of the sales taxes paid by needy families. Thus, they are not refundable under this criterion. States may only claim the portion of their property or sales tax credits that exceed liability under the corresponding tax and are paid to families.
- How do the rules apply in a split tax system where the locality collects and derives primary benefit from the tax (such as a property tax), but the tax credit or rebate (such as a homestead tax credit) is appropriated for and administered by the State?
We have concluded that, with respect to these regulatory principles, the State is treated as one entity. We would make no distinction between State or local taxes, assessments and levies. With respect to foregone revenue (or foregone revenue avoided) we would also make no distinction between State and local levels of government -- the State is treated as a whole for this purpose. Thus, in a situation where a locality collects revenue from a tax and the State provides relief from that local tax, such relief can be claimed only to the extent that it exceeds the liability for that local tax for eligible families.
We reached this decision for three primary reasons. First, the State has overall responsibility for funding within its jurisdiction, including collecting and distributing taxes. Permitting the claiming of an expenditure based on consideration of who derives the benefit of the revenue stream and shares the costs of credits or rebates could lead to the same arbitrary results as outlined under the first question. Second, both TANF and the prior AFDC program have generally applied similar rules to local and State expenditures. For example, the "new spending" test of the MOE requirements does not distinguish between "expenditures under any State or local program." Expenditures under a split tax system raise similar issues and should be treated similarly under the statute. Third, the impact on a particular family's tax liability should be determinative, not the administrative or financing mechanism adopted.
- Do these principles apply if the payment to the family is not called a tax rebate or credit?
The name or form of the payment is not material in deciding whether the principles outlined in the final rules apply. The principles apply to any payment, credit, or rebate if the payment for a family is derived from or calculated from or limited to the tax, assessment or other levy specific to that family. If a credit or payment is a rebate of a State or local tax, assessment or other levy, only the portion that exceeds the family's liability for that particular tax and is paid to the family is an allowable use of Federal TANF funds or can be counted toward the MOE requirement.
If a payment is not related to, derived from, calculated from or limited to any tax, levy or assessment for a particular family, a State may count the full amount of the payment toward MOE or fund it with Federal TANF dollars. For example, a State could reduce the high cost of housing by providing an annual check to all low-income families or vary the size of the subsidy based on income up to specified level, or based on housing costs. Since such a payment is not related to any tax for that family and meets a TANF purpose, it is an allowable use of funds.
This instruction clarifies how to determine if State and local tax credits are refundable under 45 CFR 260.33(b)(3). A particular credit is not refundable if it does not exceed the amount of the family's liability for that tax, regardless of how the State or locale chooses to administer the tax. In deciding if the relief is refundable, the comparison is made separately for each tax initiative to determine whether the rebate exceeds the family's corresponding tax liability. For example, income tax credits are compared to income tax liability, and property tax credits to property tax liability, etc. And to be an allowable expenditure, only the portion of the refundable credit that is actually paid to the family may be claimed.
The principles in this program instruction are effective immediately, with one exception.
As we have typically done in the past, we believe that if States have taken action based on specific policy advice from us that is changed by a policy clarification, they should have the opportunity to make necessary legislative or policy changes before the clarification is effective. In this case, we recognize that we have provided two States (Michigan and Wisconsin) policy advice permitting the payment of homestead tax credits with Federal TANF dollars or to use these expenditures to meet the State's maintenance of effort (MOE) requirement in ways that do not conform to this policy. To give these States the time and opportunity to make necessary legislative changes, modify their procedures and implement this policy, these States may continue their practice for the current (2001) tax year.
If other States are similarly situated -- already using TANF or MOE dollars to pay for homestead tax credits or sales tax credits that do not conform to the policies outlined above -- please notify your appropriate Regional Office within 30 days. We will determine whether you might also qualify for a deferral of this policy until tax year 2002.
Inquiries and comments should be directed to the appropriate Administration for Children and Families (ACF) Regional Administrator.
Alvin C. Collins, Director
Office of Family Assistance