Much ink has been poured over the fact that 51% of tax filers paid no federal income taxes in 2009.  There is less attention directed towards the more outrageous statistic; 30% of tax filers had a negative tax liability that year.  In other words, they made money off the tax system.

Those who won the jackpot on tax day benefited primarily from refundable tax credits; the Earned Income Tax Credit (EITC), Additional Child Tax Credit (ACTC, the refundable portion of child tax credit), and the now-expired Making Work Pay Credit.  In 2011, refundable credits cost the treasury about $94.4 billion.   Keep in mind that this is just one small portion of the burgeoning welfare empire, approaching $1 trillion in total federal, state, and local expenditures.   While it would be nice to get rid of these redistributive “tax expenditures” for everyone, we could start with illegal aliens.

Last July, the Treasury Inspector General for Tax Collection released a shocking report detailing how illegal aliens are able to utilize a filing loophole to obtain billions in ACTC funds.  While EITC appropriations are protected from illegals (those who don’t engage in identity theft) because they are only awarded to those who provide a valid Social Security number, the same cannot be said for the ACTC.  Illegals can receive the ACTC by merely providing an Individual Taxpayer Identification Number (ITIN) on their 1040 form, which is blithely issued by the IRS.  In 2010, according to the report, illegals received $4.2 billion in ACTC payouts.  That accounts for roughly 15% of all outlays for that refundable credit.

During the December imbroglio over the payroll tax cut, the House inserted a provision to require a valid Social Security number in order to collect the ACTC.  Republicans planned to use the savings as part of the offset package.  Now that the bill, HR 3630, is pending before the conference committee, we must ensure that the ACTC provision is part of a legitimate proposal to offset the cost of the extenders package.

Originally, the Joint Committee on Taxation scored the savings as $2.6 billion for 1 year and $9.4 billion over 10 years.  However, as Politico noted earlier this month, that estimate assumes the Bush tax cuts – along with the expansion of the child tax credit – will expire.  If you assume a baseline in which the tax cut is extended ($1,000 per child, instead of $500), the ten year savings can be as much as $24 billion.

Now, obviously $24 billion over 10 years is not enough to offset even the unemployment and doc fix components of the package for just 1 year (a cost of up to $70 billion for the Senate version).  Nonetheless, it is a legitimate offset, and should serve as part of a broader package of spending offsets for the bill.  If we can’t force the issue on refundable tax credits for illegals, we will never be able to cut one inch from the welfare empire for the broad populace.

Cross-posted from The Madison Project