The Makings of a Policy Revolution: Expanded Child Tax Credit Promises Relief
“We are a nation of child abusers,” New York Times opinion columnist Nicholas Kristof declared in a headline on February 3. “But Biden has offered a way to reduce child poverty by half.”
Behind Kristof’s jarring headline is a harsh fact: according to data from 2017, the U.S. has one of the highest child poverty rates amongst the 37 countries in the Organization for Economic Co-operation and Development. About 1 in 7 — or 11 million — American children live in households with incomes below the poverty line. In response to the problem and the added strain the COVID-19 pandemic has placed on American families, President Biden’s recently-passed American Rescue Plan includes an expanded tax credit that has been touted as a means of slicing the child poverty rate. Kristof called the policy “transformative.” Read on to understand the context behind Biden’s much-hyped expansion of the Child Tax Credit, the essential features of the legislation, and its potential long-term effects.
What is the Child Tax Credit?
The Child Tax Credit can trace its origins back over two decades, when Congress passed the Taxpayer Relief Act of 1997. The Act, which was signed into law by President Bill Clinton, ushered in numerous changes to the U.S. tax code. It reduced tax rates, created the Roth IRA retirement account option, and established new tax benefits, amongst other provisions.
One such new benefit was the Child Tax Credit (CTC), a $500 per-child credit for families with children under the age of 17 that phased out for taxpayers with joint incomes over $110,000 or individual incomes over $75,000. After the bill passed with broad bipartisan support, eligible families could subtract $500 per child from the amount of income taxes they owed the federal government each year.
The CTC proved to be a popular and durable policy mechanism for helping American families bear the costs of childcare. By 2017, it was $2,000 per child, and Congress also amended the legislation so that if the amount of credit a family received exceeded the amount they owed in income taxes, then they could receive a partial refund of the difference.
Far from benefiting a narrow demographic, the CTC reaches many American families across income levels. The chart below, from a 2020 Congressional Research Service Report, provides an estimate for the share of taxpayers with children per income level that receive the credit:
Interestingly, the above chart indicates that taxpayers in the lowest income bracket have benefited less from the CTC than taxpayers in higher brackets; this is due to the fact that until recently, the CTC was only partially refundable for Americans who pay little to nothing in income taxes each year.
The CTC and Poverty
Given that the CTC has been a staple of American tax policy for over twenty years, questions naturally arise about whether it has achieved its intended purpose. According to research from the Center on Budget and Policy Priorities (CBPP), it largely has, especially when considered in tandem with the Earned Income Tax Credit (EITC). Like the CTC, the EITC reduces the amount of taxes eligible Americans owe the federal government. The amount of the credit is based on an individual’s earned income and is adjusted based on marital status and dependents. Aimed at low to moderate-income workers, the EITC benefits a narrower demographic than the CTC.
The CTC lifted over 2 million children above the poverty line in 2018, and lessened poverty for nearly 6 million children, according to a policy report from the CBPP. For families receiving both the CTC and the EITC, the combined benefits had an even larger anti-poverty effect. See the CBPP’s chart below for the full figures:
Taken together, tax benefits such as the CTC and EITC have positive long-term implications for working class families. Amongst children in eligible families, higher tax credits have been associated with better childhood health outcomes, better school performance, and increased college enrollment.
2021 Update: Features and Implications
The recent buzz about the CTC centers on President Biden’s expansion of the credit through the American Rescue Plan stimulus package. The package promises to “substantially reduce child poverty by supplementing the earnings of families receiving the tax credit.”
Specifically, the American Rescue Plan increased the maximum credit amount per child from $2,000 to $3,600 for children under 6 and $3,000 for children under 18. Significantly, it also made the credit fully refundable for low-income families who owe less in income taxes than the credit is worth. Low-income families who owe little to no income taxes will receive the refund in monthly installments beginning in July. The expanded benefits are set to last for one year, with the potential to be renewed in the future. “The president wants to make the [expanded] Child Tax Credit permanent,” White House press secretary Jen Psaki said on March 16th.
The Biden administration’s expanded CTC could substantially improve conditions for nearly 10 million children, according to Chuck Marr of the CBPP. Researchers at the Columbia University Center on Poverty & Social Policy estimate that the expansion could slice child poverty in half.
“The crystallization of the child tax credit and what it can do to lift children and families out of poverty is extraordinary,” Representative Rosa DeLauro (D-CT), a long-term champion of government aid for families with children, told the New York Times in March. “We’ve been talking about this for years.”
Despite its much-touted potential benefits, the CTC does not enjoy universal support. In a March report titled “The conservative case against child allowances,” Scott Winship of the American Enterprise Institute wrote that “Child allowances run a very real risk of encouraging more single parenthood and more no-worker families, both of which could worsen entrenched poverty in the long run.”
However, the majority of legislators have been largely acquiescent to the expansion of the CTC. Samuel Hammond of the Niskanen Center told the Times that politicians traditionally wary of government welfare programs may be hesitant to vocalize their opposition because the CTC benefits voters from both parties; the overwhelming bipartisan popularity of COVID-era direct payments and stimulus checks may also deter opponents from speaking out.
Whether Biden’s American Rescue Plan delivers on its promises remains to be seen. But in light of its longevity and the numerous reports citing its impacts, the Child Tax Credit is likely to feature in American politics for years to come.