Federal Policy Analyst
55 Million Children Would Benefit; Millions Would Be Lifted Out of Poverty
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In his latest budget proposal, President Biden proposes enhancing the Child Tax Credit (CTC) based on the temporary credit that was in effect for 2021 as part of the American Rescue Plan Act. The temporary enhancement was an enormous success, cutting child poverty nearly in half. The President and many members of Congress sought to carry that success forward, including it in the House-passed Build Back Better Act. Unfortunately, that bill stalled in the Senate and CTC provisions were not included in the Inflation Reduction Act which passed last summer. As a result, millions of children slipped back into poverty in 2022.
ITEP has previously explored the effects of extending the CTC enhancement into 2023. The expansion would benefit 55 million children, and, unlike current law, no children would face a reduced credit because their families earn too little.
How the President’s Budget would Improve the Child Tax Credit
The President proposes enhancing the CTC in several major ways. First, the maximum credit amount would increase from $2,000 per child to $3,600 for children aged 5 and younger and to $3,000 for children aged 6 and older—also allowing parents to claim the credit for 17-year-olds. The increase in the maximum credit would phase out starting at $150,000 for married couples and $112,500 for most single parents.
Second, the credit would be available to the majority of children in low-income families. (Qualifying children would still be required to have a Social Security Number for CTC eligibility.) Under current law, many children receive a reduced credit or no credit at all because their families are too poor. This includes children raised by grandparents, parents with disabilities, or parents working as full-time caregivers. As seen in Figure 1, the current law credit phases in for families with more than $2,500 of earnings. The phase-in structure leaves out one in three children and disproportionately excludes Black and Hispanic children, as well as rural children, young children, children in large families, and children of single parents.
There is an obvious illogic to denying a credit designed to benefit children to the children who most need the help. But opponents of the credit claim that eliminating earnings requirements would discourage parents from working. The data does not support these claims. Researchers at Columbia University’s Center on Poverty and Social Policy studied real-world household data before and after the 2021 credit enhancement and found no statistically significant effect on employment.
Furthermore, economists and social policy researchers have consistently found that reductions in child poverty lead to better long-term outcomes for the entire economy, including increased employment and higher lifetime earnings.
The budget would also improve the credit by making it available to parents each month, as it was under the temporary rules in 2021. Currently, the credit is provided as a lump sum payment on a family’s tax refund when they file their annual taxes. Issuing the credit monthly allows it to more closely match families’ household budgets where bills are due throughout the year. Census data collected during 2021 found that low-income households receiving the monthly CTC mostly spent the credit on basic necessities like food, utilities, rent, clothing, and education costs.
Finally, the budget proposes several changes to ensure the credit is claimed by a child’s primary caregiver in cases where multiple households might seek to claim the same child. The changes would also allow families to claim a CTC for the entire year for a child born during that year. These changes are not included in ITEP’s estimates of the President’s budget proposal.
The 2021 credit expansion was a tremendous success for working families, slashing poverty for millions and providing financial security for millions more. The fact that this could be achieved during the economic and labor market disruptions of the COVID-19 pandemic speaks to the power of targeted family assistance. Lawmakers should not let that success become a distant memory. The President’s proposal would permanently orient the tax code to work for children and families.