By Benjamin Glasner
The Child Tax Credit (CTC) has long been the product of a give and take between two competing visions. Some believe its fundamental purpose should be as a tool to fight child poverty. Others see it as a means of delivering tax relief to working parents. As the Tax Relief for American Families and Workers Act of 2024 heads to the Senate for consideration, it is important to put the history, goals, and trade-offs of the CTC in perspective.
Central to the debate over the CTC is the idea of work disincentives. Policymakers worry that, if delivered the wrong way, efforts to reduce child poverty could lead parents to stop working. Earning an income is the surest path out of poverty, so by disincentivizing work, policymakers could wind up deepening the very problem they are seeking to remedy. There is another reason for this tension: attaching portions of the social safety net to work is popular with American voters – with some division along party lines. This has remained the case even amid research raising questions as to the effect of programmatic work requirements on household labor market decisions. The CTC provision included in the Wyden-Smith proposal is the latest attempt to enhance the CTC while balancing the tensions between fighting child poverty and maintaining the incentive for work.
The dual goals of alleviating hardship and strengthening the rewards from work are the right ones. But it’s worth stepping back and asking whether engineering these goals into each program is the right approach. Would a more thoughtfully crafted and better integrated social safety net narrow objectives to specific programs, freeing each to do what it does best? Are we asking too much of the CTC and leaving too many children in poverty by making a credit for kids about their parents’ work?
How did we get here? A legislative history
Riding on the wave of bipartisan welfare reform in the late 1990s, the 1997 Taxpayer Relief Act created the original CTC benefit. The non-refundable $400 credit for each child under the age of 17 reduced the federal income tax burden of families with children and a tax liability. The credit rose to $500 in 1998.
During welfare reform’s reauthorization in 2001, Senator Charles Schumer of New York and Representative Pete Stark of California argued to “make the reduction of child poverty a stated goal of federal welfare policy.” This ambition was tempered by the simultaneous desire to encourage two-parent families and to keep single mothers engaged in the labor force. The sides settled on a $10,000 earnings requirement for the refundable portion of the CTC in 2001, later reduced to $8,500 in 2008 and $3,000 in 2009.
In 2012, the American Taxpayer Relief Act (ATRA), passed under President Barack Obama, doubled the maximum CTC from $500 to $1,000 per child. This was temporarily doubled again by the Tax Cuts and Jobs Act (TCJA), passed under President Donald Trump, in 2017, with a planned expiration in 2025. Families could receive a maximum CTC of $2,000 per child per year, $1,400 of which was refundable. The CTC was phased in based on earnings greater than $2,500, and phased out for single filers with income over $200,000 and $400,000 for joint filers. Those with annual incomes less than $2,500, or who did not file a tax return, were unable to access the credit.
The CTC now stands as the single largest federal program directed toward children. In 2019, the federal government spent $118 billion dollars on the CTC. The CTC exceeded spending on children via the Supplemental Nutrition Assistance Program ($28B), Temporary Assistance for Needy Families ($13B), the Children’s Health Insurance Program ($17B), and Title I funding, special education, and related services ($29B). In fact, the combined refundable tax credits and tax reductions of the CTC were nearly twice the total spending on the Earned Income Tax Credit (EITC) in 2019 ($64.5B).
The American Rescue Plan Act (ARPA) in 2021 included a set of significant one-year reforms to the way the CTC was administered in light of the COVID-19 pandemic, including:
- Removing the earnings requirement and becoming fully refundable, ensuring even the lowest income–and no income–families received the credit;
- Raising the maximum annual credit amount to $3,000 for children ages 6–17 and $3,600 for children under the age of six; and
- Delivering the credit in monthly installments of up to $250 per older child or up to $300 per child under six years of age for 6 months. This was followed up by a lump sum of the remaining credit.
The Expanded Child Tax Credit’s Impact
These reforms lifted 2.9 million children out of poverty, cutting the child poverty rate by 43 percent. It also cost $187 billion, a roughly $69 billion increase from 2019. When the expanded CTC expired, each of these changes expired with it, reverting the CTC back to its TCJA structure. This reversion resulted in a 4.9 percentage point (41 percent) increase in child poverty.
What’s Next for the Child Tax Credit
Since the expiration of ARPA’s CTC, it has been a priority of many, across both parties, to boost the program, even in a fiscally constrained environment. The Wyden-Smith proposal may represent the best possible outcome in a contentious and closely divided Congress. It would temporarily:
- Increase the refundable portion of the CTC to $1,800 in tax year 2023, $1,900 in tax year 2024, and $2,000 in 2025;
- Introduce a “per-child” phase-in, allowing families with multiple children to receive the same tax credit for each of their eligible kids;
- Introduce a one-year lookback period for calculating income – reducing the risk of income volatility impacting CTC payments; and
- Adjust for inflation starting in the 2024 tax year.
Combined, these changes would lift an estimated half-a-million children out of poverty after the policy is fully implemented. While the Wyden-Smith proposal fails to reach the levels of poverty alleviation set by ARPA, it is a significant relief for families in need. Unsurprisingly though, estimates of the effect of the proposal have been hotly debated.
A continuation of give and take
As evidenced in the Wyden-Smith compromise, concerns about how the CTC may impact families’ work incentives dictate the options Congress is willing to consider. A bipartisan and bicameral agreement to reinstate the ARPA’s CTC is off the table. The primary hurdle, even in a world unconstrained by fiscal limitations, are the work incentives. Were work less of a concern, the elimination of the earnings requirement, full refundability, and other reforms could ensure that the CTC reached the poorest children and in the most effective ways (monthly, rather than annually in a lump sum, for example).
Tellingly, the country’s flagship return-to-work program, the EITC, faces a number of criticisms that mirror those levied at the CTC. The EITC is a pro-work policy that tries to moonlight as a pro-family one, too. It is far more generous for families with children than it is for single-filers. As designed, the EITC primarily impacts the labor force participation of single mothers, drawing them into the labor force but having little impact on the amount they work once in it. Meanwhile, the EITC does not significantly impact participation in, or the amount of, work among childless adults. This is because the generosity of the EITC depends on a household’s income, whether they are filing as married or unmarried, and the number/age of children. Those criteria should sound familiar.
Towards that playground on a hill
In the world as it is and the safety net as we’ve constructed it, Congress does need to be concerned with parental work incentives, and it does need the EITC to support families by encouraging labor force participation. But as Wyden-Smith confronts uncertain prospects in the Senate, it is worth envisioning how a more purely pro-work program like a modified EITC or a wage subsidy could play with a more purely pro-family version of the CTC.
We’ve learned two vital lessons since the onset of the pandemic. First, there is no substitute for a tight labor market in improving outcomes for workers. Tight labor markets have led to rising wages, declining wage inequality, historically low levels of unemployment across the country, and all-time highs in the labor force participation rate for prime-age women. Second, the expanded CTC under ARPA represents a high water mark in the effort to reduce the incidence, depth, and duration of child poverty. Both lessons should serve as the foundation for improvements to the social safety net in the future.
If passed, the Wyden-Smith proposal will be a meaningful improvement over the CTC status quo, even if it is only temporary. Congress should use those reforms as a bridge to reimagining a better safety net: One that is not composed of patchwork policies and instead wholistically designed around distinct programs that encourage more work and better supports those families most in need. If Congress embraces this challenge, it will clear the path to building that playground on a hill for America’s children.