The American Rescue Plan (ARP), which President Biden signed in March, includes a far-reaching Child Tax Credit (CTC) expansion that would cut child poverty by more than 40 percent. But the expansion is in effect only for 2021. What comes next?
The dramatic reduction in child poverty stems mostly from two major CTC changes. One change would make the credit much larger for 2021, boosting it from $2,000 per child to $3,000 for children aged 6-17, and to $3,600 for children under 6. Yet if that were the only CTC change, it would not reduce child poverty because low-income families would see no change in the CTC they received. Under CTC law in place both before the ARP and after its changes expire, families that don’t earn more than $2,500 are ineligible for the CTC, and those who have low earnings receive only a partial credit that can be small; a family’s credit phases in slowly at just 15 cents for each dollar earned above $2,500. In addition, the CTC is capped at $1,400 per child for families that don’t earn enough to owe federal income tax. As a result, raising the per-child credit amounts to $3,000 and $3,600 doesn’t help low-income families unless other changes in the credit also are made.
That’s where the second major temporary CTC change in the American Rescue Plan comes in: it fundamentally alters the restrictive rules that until now have partly or entirely shut out low-income families. For 2021, this change makes the credit fully refundable – that is, fully available to families that have no earnings or don’t earn enough to owe federal income tax. It eliminates for 2021 all three of the CTC’s low-income restrictions: its earnings requirement, slow benefit phase-in, and $1,400 cap. Because of these reforms, the specter of 27 million of the lowest-income children receiving no credit or only a partial credit won’t be part of the landscape in 2021. Indeed, it’s when these reforms in how the credit treats low-income families are combined with the increase in the credit amounts to $3,000 and $3,600 per child that the child-poverty reduction becomes profound.
This dramatic reduction in child poverty makes a strong case for making the CTC expansion permanent. A significant obstacle to that now appears to be its cost. On the one hand, there is a way to lower the cost that wouldn’t sacrifice any of the poverty reduction – by scaling back the CTC for affluent families. On the other hand, that almost certainly isn’t politically viable now.
For most of the CTC’s history, from the tax law enacted in 2001 to the tax law enacted in 2017, the credit phased out fully for married filers with two children when their income reached $150,000 a year. There’s no evidence this did anything to limit the credit’s political popularity; policymakers maintained and expanded the credit over that period. Due to changes enacted as part of the 2017 tax-cut legislation, however, the CTC now goes in full to married filers with incomes up to $400,000 and doesn’t phase out fully for a married filer with two children until income reaches $480,000, a level more than triple the credit’s previous upper limit.
The flagship Congressional CTC expansion proposal of recent years that attracted broad Democratic support and from which nearly all the elements of the American Rescue Plan’s CTC expansion are drawn – the American Family Act introduced by Rep. Rosa DeLauro, Senator Michael Bennet and other lawmakers – sought to lower the cost of its CTC expansion somewhat by scaling back the CTC at the top. Under it, the CTC would begin phasing out for married filers when their incomes topped $180,000 and would phase out entirely for married filers with two children when their income reached $220,000 (rather than when it reached $480,000). But that isn’t on the table now. It would entail raising taxes on some households making less than $400,000, which President Biden has pledged not to do.
The Biden Administration and Congress did design the ARP’s CTC expansion so that the increase in the credit from $2,000 per child to $3,000/$3,600 wouldn’t benefit married families with two children that have incomes above $190,000 to $214,000, depending on the children’s ages. Under the ARP, married filers with incomes between those levels and $400,000 continue to receive $2,000 per child, and married filers with incomes between $400,000 and $480,000 continue receiving a partial credit, as they did before the ARP. This carries costs the American Family Act would have avoided.
Biden’s American Family Plan Proposal
This brings us to the American Family Plan, which President Biden unveiled in late April. It includes a major Child Tax Credit component that many news accounts have described as extending the American Rescue Plan’s CTC expansion through 2025, thereby scheduling it to expire at the same time as various tax-cut measures in the 2017 tax-cut law (and in a year when Congress is likely to consider tax-cut extension legislation). But such a description of the Family Plan’s CTC measures is only partially correct. It misses an important element of the Biden proposal.
In fact, the President’s plan would make permanent the transformative low-income changes in the Rescue Plan’s CTC expansion. The CTC features that the Biden proposal would extend only through 2025 are the large increase in the CTC’s amount per child and a smaller expansion included in the ARP that extends the credit to children aged 17, who previously were ineligible for it.
President Biden has said he favors ultimately making permanent all of the Rescue Plan’s CTC expansion. That the American Family Plan proposal does not do so is clearly due to the aforementioned issue of cost. Permanently raising the per-child credit amounts to $3,000 and $3,600 is much more expensive than removing the CTC restrictions on low-income families. The 2017 tax-cut law raised the credit amount to $2,000 only through 2025. As a result, maintaining the credit at $3,000/$3,600 after 2025 carries both (1) the cost of continuing the increase enacted in 2017 that raised the credit amount per child from $1,000 to $2,000 and doing so in full or in part for married filers with two children with incomes up to $480,000 and (2) the cost of extending the somewhat more targeted Biden increase to $3,000/$3,600 per child.
What Lies Ahead?
The Administration is facing strong calls to make the Rescue Plan’s full CTC expansion permanent. One challenge to doing that is that some of the Administration’s proposed revenue-raising measures appear to be running into opposition in Congress, including among some Democrats, which could result in the Biden Administration’s Jobs and Family plans being scaled back to some extent on Capitol Hill. Policymakers will have difficult decisions to make.
Deliberations over these issues are likely to involve assessments, including for the CTC, of which policies that respond to important ongoing (rather than temporary) needs are expected to be in most danger if they’re not made permanent now. Support for expanding access to the CTC among very low-income families has historically garnered much more support among Democrats than Republicans, while support for increasing the size of the credit has generally attracted support on both sides of the aisle. Indeed, the CTC changes in the American Rescue Plan that overhaul how the credit treats low-income families have already become a focus of attack by a number of Republican Members of Congress. If the provisions making the credit fully refundable are extended now for just a few years, efforts to maintain them after 2025 are likely to encounter strong opposition. Whether that also would be true for the increases in the CTC credit amount per child is less clear. That change has not attracted comparable criticism, and it was Republicans on Capitol Hill who championed raising the credit’s per-child amount from $500 to $1,000 in 2001 and to $2,000 in 2017. Some lawmakers might also have concerns that opposing a continuation of the higher credit amounts in 2025 would open them up to attack for favoring a “middle-class tax increase.”
Yet an assessment limited to these observations would be incomplete. There’s also another factor to take into account. If policymakers make the low-income CTC reforms permanent now while extending the higher credit amounts through 2025 and Democrats don’t have unified control of the federal government at that time, there could well be proposals in 2025 to repeal the low-income CTC reforms and use the savings to help offset the cost of continuing the more generous credit amounts for children with higher family incomes. If that occurred, virtually all of the historic reduction in child poverty would be lost after 2025. That adds to the case for policymakers to try to make the full set of CTC improvements permanent this year.
The author thanks Wendy Edelberg, Sara Estep, Belle Sawhill, and Larry Haas for their comments and assistance.