One of major elements of the American Rescue Plan (ARP), signed into law on March 11, was a one-year expansion of the Child Tax Credit (CTC). The law broadened the CTC along several dimensions: it raised the value of the credit from $2,000 to $3,600 for children under six and $3,000 for children over 6; raised the age of eligible children to 17 (from 16); and made the credit fully refundable, meaning Americans who may owe little or no federal tax, including many low-income households, may now receive the full amount. The expansion will cover an estimated 88% of American children and lift more than 5 million children above the poverty line. Out of all the substantial poverty reduction policies in the ARP, the expanded CTC by itself is estimated to cut child poverty by more than 40 percent. President Biden has proposed extending the expansion beyond the first year.
Several scholars in Brookings’s Economic Studies program have focused on the CTC, from its long and often bipartisan history to its current implementation and uncertain future. Follow the links below to explore these different facets of the expanded Child Tax Credit.
What is the Child Tax Credit? And how much of it is refundable?
Since being enacted nearly 25 years ago, the Child Tax Credit has been a significant component of the federal government’s effort to aid families with children, writes David Wessel, director of the Hutchins Center on Fiscal and Monetary Policy. His explainer of the CTC traces changes to the benefit from a 1991 bipartisan report by the National Commission on Children through the ARP of 2021.
Chart reflects changes in the Child Tax Credit’s total value prior to the American Rescue Plan
New child tax credit could slash poverty now and boost social mobility later
Richard Reeves and Christopher Pulliam
“A direct cash transfer, then, can be both a powerful anti-poverty policy, and likely to be a pro-mobility policy, too: the policy equivalent of a two-fer.”
Although analysts largely agree that the expanded CTC’s poverty reduction benefits will be substantial, there are criticisms that they may disincentivize work for parents and ultimately hurt prospects for long term social mobility. Richard Reeves and Christopher Pulliam of the Future of the Middle Class Initiative say this is a false choice. Their analysis, which likens the expanded CTC’s monthly payments to a “child allowance” policy, looks at similar policies and suggests that benefits aren’t limited to short-term poverty reduction. While the authors caution that existing studies don’t offer a one-to-one comparison, they find evidence that direct cash transfers could also yield improvements to long-term social mobility.
Universal bank accounts necessary for families to bank on Child Tax Credit
Aaron Klein and Myrto Karaflos
COVID-19 stimulus payments exposed major problems with direct government payments to families, problems that have not been fixed in anticipation of new monthly CTC benefit payments set to begin in July. Aaron Klein and Myrto Karaflos write that low-income individuals had to wait longer for COVID stimulus and were less likely to have it direct-deposited into their accounts – delays with real costs, including overdraft fees, minimum balance fees, and check cashing fees: “$66 million of the first round of COVID relief payments ended up in the hands of check cashers,” they write. Their op-ed from April argues that for the full benefit of the expanded CTC to reach those who need it most, Congress or federal regulators should require banks and credit unions to offer universal, low-cost bank accounts and implementation of a federal government real-time payment system should be expedited.
Designing a universal child allowance: Who can claim which kids?
Jacob Goldin and Ariel Jurow Kleiman
“The current (child-claiming) rules arbitrarily exclude certain children from the credit and create headaches for taxpayers and the IRS alike.”
The rules that determine which taxpayer may claim which child for the Child Tax Credit are an important but often-overlooked element of the CTC’s design, write Jacob Goldin and Ariel Jurow Kleiman. These “child claiming” rules rely on relationship and residency tests, which, as designed currently, “prevent certain children from being claimed by anyone, effectively excluding them from the CTC’s benefits.” Replacing these tests with a flexible household connection test administered quarterly – rather than annually, as current tests are – would help prevent children from falling between the cracks of current tests and reduce mistakes in filing that are the most common source of refundable credit disallowances.
The American Families Plan: Too many tax credits for children?
Isabel Sawhill and Morgan Welch
The expansion of the Child Tax Credit wasn’t the only major reform to family tax benefits in the ARP. The sweeping bill also included significant expansions of the Earned Income Tax Credit (EITC) and the Child and Dependent Care Tax Credit (CDCTC). In their analysis from May, Isabel Sawhill and Morgan Welch evaluate each of these reforms in turn and argue that, while these changes were commendable as short-term response to a crisis, there are several issues with their permanent adoption. Together, the three different tax credits are too complicated for families to navigate and are incredibly expensive, argue the authors, and the CTC expansion in particular may be too expensive to be sustainable. While the expanded CTC is expected to reduce child poverty by almost half, it is not well targeted, say the authors, as it still provides extensive tax benefits to families at the top of the income distribution. In exploring how this money may be more effectively spent, the analysis goes on to offer proposals to benefit workers and families including a focused expansion of the EITC, reducing income taxes, and evaluating other ways to alleviate poverty and improve economic mobility.
Strengthening the Child Tax Credit: What comes next?
Making the Child Tax Credit fully refundable “fundamentally alters the restrictive rules that until now have partly or entirely shut out low-income families,” writes Robert Greenstein, visiting fellow with the Hamilton Project. Greenstein explains that the dramatic reduction in child poverty that would result from the American Rescue Plan’s CTC expansion makes a strong case for making the expansion permanent, especially the full refundability provisions, and for doing so in the months ahead rather than pushing it down the road. His analysis from May evaluates the political landscape and the Biden administration’s American Families Plan proposal, which would build on the expansion of the CTC. He notes that one barrier to making the CTC expansion permanent is cost, which could be reduced by lowering the now quite-high income levels at which the credit phases out, although, he observes, lowering the income thresholds doesn’t seen politically feasible at the present time