January 26, 2021

New Analysis: President Biden’s Proposed Child Tax Credit Expansion Would Reduce Poverty, Address Racial Disparities

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The credit would boost after-tax income for the poorest 20 percent by $4,570 or an average 37% of their incomes 

President Biden’s proposed expansion to the Child Tax Credit (CTC) as part of his American Rescue Plan would provide a financial boost to most of the nation’s families with children, but it would be more robust for low-income families and address structural inequities that currently exclude a larger share of Black and Hispanic children from the credit, the Institute on Taxation and Economic Policy (ITEP) said today. 

ITEP’s new study, Child Tax Credit Enhancements Under the American Rescue Plan, is a distributional analysis that shows the financial benefit of expanding the CTC for families across the income spectrum. It also shows the average tax change as a share of income by race. The CTC expansion would provide an average benefit of $2,750 across the board for families with children. For the poorest 20 percent of families who earn $21,300 a year or less, the average benefit would be $4,570, an average 37.4 percent income boost 

“This proposal will be financially meaningful for most families with children, especially the lowest-income families,” said Aidan Davis, an author of the report. “It builds on the best aspects of the credit by putting even more money in the pockets of families with children, and it addresses fundamental flaws that have prevented the poorest children from receiving the benefit.” 

President Biden’s proposal increases the annual CTC from $2,000 to $3,000 per child with an additional $600 for each child under age six. Notably, the proposal allows low- and moderate-income families to claim the credit even if it exceeds their income, and it removes an unjust minimum earnings requirement. In tax speak, this means Biden’s proposal makes the credit fully refundable. In practical speak, this means lowerincome families with children will be eligible for the full value of the credit should the measure pass.  

Thirty-nine percent of children do not qualify for the full credit as it is currently structured, including a third of all white children, about 45 percent of Hispanic children, and nearly half of Black children. Making the credit fully refundable and expanding the credit to children who are currently left behind is a tremendous step toward making this tax credit more racially equitable. Many of the children who do not qualify are in low- and moderate-income households. Longstanding structural inequities in access to education, jobs and wealth building mean Black and Hispanic families are disproportionately represented in these income groups. 

“At ITEP, one key focus of our research is exploring how to build more sustainable tax policies that not only raise the revenue we need to fund critical priorities at the state and federal levels but also mitigate broader inequities,” Ms. Davis said. “President Biden has issued an incredibly bold CTC proposal that will boost economic security for vulnerable children. Children are our greatest asset, and it’s always good policy to invest in them.” 

Key Points: 

President Joe Biden’s American Rescue Plan’s includes a $125 billion Child Tax Credit provision that would: 

  • Double the size of the existing CTC benefitting roughly 83 million children.  
  • Increase the maximum credit from $2,000 per child to $3,000 with an additional $600 for each child under the age of six.   
  • Provide a 37.4 percent income boost to the poorest 20 percent of families with children who make $21,300 or less a year.   
  • Remedy the shortcoming that leaves behind 39 percent of children who live in families too poor to qualify for the credit as it is currently structured, effectively extending benefits to more Black and Hispanic children who are excluded from the current credit.  
  • Boost the average benefit to the poorest 20 percent of families with children from just over $1,000 to $5,590.   

 To view the entire report, visit: https://itep.org/child-tax-credit-enhancements-under-the-american-rescue-plan/ 

ITEP released a separate report last week that shows the combined impact of the tax provision (Child Tax Credit and Earned Income Tax Credit) and cash payment provision ($1,400 for every household) in President Biden’s American Rescue Plan. To view it, go to https://itep.org/new-analysis-cash-and-tax-provisions-in-bidens-economic-recovery-plan/