Congress is considering increasing the value of the Child Tax Credit (CTC) as part of the budget reconciliation bill. The 2017 tax law raised the CTC from $1,000 per child to $2,000 through 2025. While the reconciliation bill is expected to extend this increase, a number of congressional tax writers have expressed a desire to expand the CTC further. Depending on how such changes are crafted, they could either help children in lower-income working families or bypass them while favoring children in families higher on the income scale, with incomes of up to half a million dollars a year. The preliminary legislative text for its new tax proposals that the House Ways and Means Committee released on May 9 suggests Congress is much more likely to do the latter.
Depending on how such changes are crafted, they could either help children in lower-income working families or bypass them while favoring children in families higher on the income scale, with incomes of up to half a million dollars a year.
Today, 17 million children in low-income families—the vast majority of whom are in low-income working families—receive no CTC or only a partial CTC because of the CTC’s structure. A family with two children must earn a little more than $29,000—the equivalent of working 40 hours a week for 52 weeks of the year at $14 an hour, nearly twice the federal minimum wage—before it can receive the full CTC of $2,000 per child. Meanwhile, married families making as much as $400,000 a year receive the full credit for all their children.
The CTC fails to reach low-income children or provides them only a partial credit for several reasons. Children in families with annual earnings of $2,500 or less are ineligible. The credit then phases in slowly as a family’s earnings rise above $2,500, at a rate of $15 in the CTC for each $100 in a family’s earnings above the $2,500 threshold until a family qualifies for the full $2,000 for each of its children. In addition, the phase-in is done on a per-family basis rather than a per-child basis. As a result, a mother with two young children who works 20 hours a week throughout the year at the federal minimum wage currently receives a CTC of a little more than $7501—about $375 per child—even as a family with two children that makes $400,000 a year gets a CTC of $4,000 ($2,000 for each of its children).
Without addressing these CTC parameters, an increase in the value of the CTC will exclude millions of lower-income families with children, many of whose living conditions may be made significantly harsher by cuts in SNAP, Medicaid, and other programs that the reconciliation bill likely also will include.
A new Tax Policy Center analysis by Margot Crandall-Hollick, Elaine Maag, and Muskan Jha examines nine options for expanding the CTC. It finds that increasing the value of the CTC above its current $2,000 per child without making changes to other CTC parameters would largely leave low-income children out. Increasing the full credit amount to $2,500 per child, for example (as the new Ways and Means proposals would do), would result in no increase in the credit at all for millions of children in low-income working families, and the poorest 20 percent of families with children overall would receive just 2 percent of the new CTC benefits. The top 20 percent of families with children, by contrast, would get nearly 10 times as much in new CTC benefits, with a family with two children not losing eligibility for the CTC until its income reached $500,000.2 And the top two-fifths of families with children would get twice as much in new CTC benefits as the bottom two-fifths.
Despite evidence of the effectiveness of a more inclusive CTC in reducing child poverty and improving child well-being, there is no chance that the forthcoming reconciliation bill will make the credit available to children in families with no earnings, as was done for one year in 2021. But policymakers could strengthen the CTC substantially for millions of children in lower-income working families and do so at modest cost. The TPC analysis shows that starting the phase-in of the CTC with a family’s first dollar of earnings (rather than its $2,501st dollar) and phasing in the credit at a 15 percent rate per child (rather than per family) would cost $48.5 billion over 10 years.3 Changes such as these and similar proposals would raise substantial numbers of children in working-poor families out of poverty or make them less poor.
Tax writers also could consider providing the full credit to newborn children without regard to whether their families have earnings. No program outside the tax code in which the federal government sets the rules imposes work requirements on mothers of infants,4 and research indicates that providing such benefits to infants provides impressive long-term gains for them. TPC estimates such a provision for newborns would cost a modest $7.5 billion over 10 years.
By contrast, raising the credit from $2,000 to $2,500 per child without making changes to the parameters that heavily restrict the CTC for low-income children would cost $229.5 billion over 10 years, TPC estimates—more than four times as much as the above two options combined—while doing little for the children who need the support most.5 This is essentially the course the new Ways and Means Committee proposals follow. They raise the credit amount per child to $2,500 for the four years from 2025 through 2028 without making improvements in the CTC’s treatment of low-income children. (To help keep the cost of its tax cuts within the cost limit it must meet, the Ways and Means proposal sunsets the increase to $2,500 after 2028, at which point the credit would return to its $2,000-per-child level, with the $2,000 amount being indexed for inflation. The Ways and Means text also makes permanent several other CTC provisions enacted in 2017, including a doubling from $200,000 to $400,000 in the income level up to which married filers receive the full CTC, a small reduction from $3,000 to $2,500 in the earnings level at which the CTC begins phasing in for working-poor families, and a modest increase in the cap on the amount of the credit a family can receive on a refundable basis.6)
In addition, the Ways and Means proposal would deny the CTC to children who are U.S. citizens or legal permanent residents if either of the parents claiming them on their tax return lacks a Social Security number. A recent analysis found such a change would cause 4.5 million children to lose eligibility for the CTC.
To be sure, policymakers could both increase the CTC amount per child and make the credit’s parameters for children in low-income working families less restrictive. One option TPC examined would combine an increase in the credit to $2,500 per child with a phase-in of the credit on a per-child basis, starting with a family’s first dollar of earnings, and a measure to provide the full credit to newborn infants without regard to a family’s earnings. That option would cost $342 billion over 10 years, however, making its adoption quite unlikely.7
In the weeks ahead, congressional tax writers face a choice. Do they seek lower-cost CTC revisions that would benefit millions of children in lower-income working families and newborn infants? Or do they adopt CTC changes that largely exclude these children—and disqualify 4.5 million citizen and permanent-legal-resident children—while adding much more in cost?
[1] This mother would receive the same $750 if she had more than two children or if she had only one child.
[2] Today, the CTC goes in full to married families with children with incomes up to $400,000 a year and phases out at a 5 percent rate for earnings above that level, with the result that a family with two children receives some CTC until its income reaches $480,000. If the full credit amount were raised from $2,000 per child to $2,500, the point at which the credit phased out entirely for a family with two children would rise to $500,000.
[3] This option also eliminates the CTC’s “refundability cap,” which limits the amount of the CTC that a low-income working family can receive on a refundable basis.
[4] Some states may have requirements of this nature in their Temporary Assistance for Needy Families (TANF) programs.
[5] Raising the credit even more, to $5,000 per child, without making other CTC changes would be still more regressive. It would provide the top quintile of families with children with more than twice as much in new CTC benefits as the bottom two quintiles combined, while costing $1.1 trillion.
[6] The preliminary Ways and Means Committee text also requires married individuals to file a joint return to receive the CTC.
[7] The various TPC cost and distribution estimates cited here reflect the costs and distributional impacts of expanding the CTC beyond its current parameters, including its current full-credit amount of $2,000 per child.
Acknowledgments
I would like to thank Margot Crandall-Hollick and Elaine Maag both for their Tax Policy Center paper on which much of this piece is based and for reviewing and commenting on this piece. I would also like to thank Lauren Bauer and Aviva Aron-Dine for very helpful comments and Noadia Steinmetz-Silber for both research assistance and insightful comments.
