The Grassroots Corner June 12, 2023

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  • Source: FAIRtax
  • 06/12/2023

A tricky Prebate Question

This Grassroots Corner will help you respond to a question you may get about the prebate. As you know, the prebate is a tax refund that’s given in advance.  It refunds back to all legal households the tax they paid on their spending up to the poverty level.  The net effect is that it makes sure that no one pays taxes on their basic necessities.

An inquirer asked at what age does a child start getting the “adult rate” prebate, and, when a family has adult children living at home, are those adult children treated the same for prebate purposes as if they weren't living at home? This question can easily arise because the prebate table refers to a “two-adult household.”

The short answer is that as far as the prebate is concerned, there is no difference between adult children and minor children living in the same household.  They get the same incremental prebate. The ages of household members is not relevant. 

The federal poverty guidelines, upon which the prebate is based, are less generous. The FAIRtax bill, see Chapter 3, Section 303(a)(1), starts by incorporating the Omnibus Reconciliation Act of 1982. Section 673(2) of the Omnibus Budget Reconciliation Act (OBRA) of 1981 (42 U.S.C. 9902(2)) requires the Secretary of the Department of Health and Human Services to update the poverty guidelines at least annually, adjusting them based on the Consumer Price Index for All Urban Consumers (CPI-U). 

The 2023 federal poverty guidelines for the 48 Contiguous States and the District of Columbia are as follows (See Federal Register, Notice by the Health and Human Services Department on 01/19/2023):

Notably, the federal poverty guidelines don’t consider the ages of the people in a household. Only the number of household members counts. The guidelines assume that the initial expenses for the first person in a household encompass the acquisition cost of a housing unit, a stove, heating, and basic furniture. The same roof, stove and heating bill can serve an additional household member. One needs only to add a bed, chairs, cups, and saucers.

But the FAIRtax improves on the federal guidelines in one significant way. Where the first two members of a household are married, the FAIRtax eliminates the so-called “marriage penalty.” See id, Section 303(b)(1) and (b)(2).  The FAIRtax gives both married partners the same allowance that only the first person in a household gets under the Federal guidelines.

The result is that the FAIRtax Family Consumption Allowance for a married couple is $29,160, while the Federal poverty level for a two person household is just $19,720.

The FAIRtax prebate guideline, or “consumption allowance,” is thus:

The Family Consumption Allowance is the amount that the household can spend tax free.  Since the FAIRtax rate is 23% of every dollar spent, the prebate amount is 23% of the Family Consumption Allowance.  See id., Section 301. Through the prebate, the FAIRtax un-taxes every household up to the poverty level.

One significant qualification for the prebate does not appear in the federal poverty guidelines: all members of a household who count toward the FAIRtax prebate must be members of a “Qualified Family.” See id., Section 302(a). Members of a qualified family include lineal ancestors and descendants of the individual or the individual’s spouse, legally adopted children, and children under legal guardianship. These members must also have bona fide Social Security numbers and be lawful residents of the United States. See id., Section 302(b)(2). 

Qualified Family members must share the same residence, see id., Section 302(a), except students away at school count as long as they are away at least five months of the calendar year, and the student receives at least 50% of their support from members of the "Qualified Family." See id., Section 302(c)(1).

But family members away in prison, unfortunately, do not count. Therefore, they do not qualify for the prebate, see id., Section 302(l), nor can the state or federal government get a prebate by taking inmates as household members or dependents.

The best way to handle the question about an “adult rate” prebate is to refer the inquirer to the federal guidelines and point out that the FAIRtax prebate rate is a bonus for married couples. Neither the FAIRtax bill nor the federal guidelines consider childhood or adulthood.

I would love to hear about any FAIRtax questions you have had to field.
Jim Bennett
AFFT Grassroots Coordinator & Secretary


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