The U.S. tax code has long been a tool of the federal government to help lift children out of poverty. And child advocates are finding some bipartisan support for tweaking existing features like the child tax credit and the earned income tax credit to further benefit struggling families.
Policymakers are learning, perhaps predictably, that the devil — and duel — is in the details.
While President Joe Biden has expressed support for expanding the child tax credit, by how much is far from the only debate. Experts argue about its delivery: Would children in poverty be helped more if their families received the money monthly based on guesstimates of parental earnings instead of once a year after tax forms have been filed? Some are floating the idea of a monthly child benefit or “allowance” instead, but arguing about where and if household income levels should be capped.
There are also arguments about making the existing child tax credit fully refundable. Right now, it doesn’t fully help the lowest-income families, who must earn enough to owe enough taxes to get the whole $2,000. Only $1,400 is refundable, leaving them out.
Decisions could have wide impact on a lot of children and their families.
The Annie E. Casey Foundation said nearly 1 in 5 American children in 2018 lived in poverty, a number that may have increased amid the economic fallout from the pandemic. Growing up in poverty can stunt brain development and “lead to poor academic, cognitive and health outcomes,” the organization said.
Brookings Institution recently reported that more than 48 million households are expected to claim the credit this year when they file taxes. “This will amount to $117.5 billion for qualifying families — twice the amount provided by the Earned Income Tax Credit, a program which supplements the wages of low-paid workers,” its report said.
The details have changed over the child tax credit’s 25-year life. Right now, eligible families can get a credit of up to $2,000 per child for children under age 17. The credit reduces the income tax owed for eligible families. Once a family’s adjusted gross income hits $200,000 for single parents and $400,000 for married couples, the credit starts to drop until it’s gone.
Dependents who are 17, 18 or full-time college students ages 18 to 24 are eligible for a nonrefundable credit up to $500.
The Brookings report by David Wessel said while the credit is promoted as a measure to raise kids out of poverty, 40% is credited to households with incomes over $100,000. Just 15% reaches households earning less than $30,000.
Wessel cites a 2020 working paper that found the “vast majority of children living in households in the bottom decile of the national income distribution are completely ineligible and the majority of tax-return filers in the bottom 30% are eligible only for a partial credit.” He notes race disparity in the tax benefit, too, with far fewer Black or Hispanic children eligible, compared to white and Asian children.
Biden’s support for increasing the child tax credit is expected to be in or at least similar to the proposed The American Family Act, which would raise the credit to $3,600 for children under 6 and $3,000 for children under 18. The president would like to make it fully refundable to help even children whose parents don’t owe income tax. The act would cap income eligibility at about half its current level so more of the money helps poor and lower- middle-income earners.
That would raise 10 million children out of poverty and help an additional 17 million children, according to Chuck Marr of the Center on Budget and Policy Priorities, who suggests the poverty rate could drop to fewer than 1 in 12 children.
Despite some variation in details, increasing the amount of a child tax credit has found diverse supporters.
“In another indication of the credit’s bipartisan appeal, Sen. Mitt Romney, R-Utah, joined Sen. (Michael ) Bennet, (D-Colo.), in December 2019 in proposing a compromise that, among other things, would create a new Young Child Credit of $2,500 for children up to age 6, of which $1,500 would be refundable,” Wessel wrote. “It would also expand the refundability of the current credit for older children.”
Monthly or not?
Biden favors the tax credit delivered as a monthly payment — expected to be around $300 a month for children under 6 and $250 for those older, with a cap on income eligibility somewhere below $200,000 for couples. The Washington Post reported the hope is the monthly payments would become a permanent fixture, not a one-year trial as Biden suggests. But proponents think political pressure will keep it in place.
Republicans in Congress are expected to oppose the measure, although the article noted that “similar plans have garnered pockets of Republican support, however, with Sens. Marco Rubio, R-Fla., and Mike Lee, R-Utah, among the GOP lawmakers who have pushed for dramatically increasing the Child Tax Credit.”
Experts see pluses and minuses. “The benefit could prove costly, increasing the federal deficit by as much as $120 billion for one year, according to estimates by the Committee for a Responsible Federal Budget, a nonpartisan group,” wrote the Post’s Jeff Stein. “But it could curb child poverty in the United States by more than 50%, researchers at Columbia University have found.”
Matt Bruenig, founder of the crowd-funded, left-leaning People’s Policy Project, opposes efforts to pay the child tax credit out monthly, a concept he calls a “train wreck.”
He’s not opposed to lifting children out of poverty but sees the funding mechanism and structure too complicated phasing it out for high-income families and demanding that people guess upfront what their income will be, he told the Deseret News.
If families guess wrong, the government would have to “claw back” the money that was overpaid — and some might be hard-pressed to return it. He thinks vulnerable families could wind up owing hundreds or thousands of dollars at tax time.
Bruenig said the advanced earned income tax credit program had little popularity when the government experimented with letting people claim the credit monthly instead of as a yearly lump sum. Other experts counter the problem was not the payment schedule, but how hard it was for people to navigate complicated paperwork and figure it out.
The Niskanen Center said the advanced earned income tax credit option was killed by a combination of the phase-in and phase-out rates as well as the complexity for families with incomes below $51,000, “whose incomes tend to be more volatile.”
Niskanen senior fellow Josh McCabe, an assistant professor of sociology and assistant dean for social sciences at Endicott College, believes the income levels proposed by Biden for a child tax credit would eliminate that complexity, since there’s no phase-in and it’s a simple matter of do you get it or not below the income threshold. A very small share of those receiving it might have to reconcile at tax time — and they are higher-income households, he wrote.
McCabe also figures the IRS has learned a lot about distributing fully refundable tax credits, given recent experience with the pandemic-prompted stimulus checks. Plus, he wrote, other countries have been doing this for years.
“Many are quick to point out that the U.S. is the only rich country without a family allowance while simultaneously overlooking the fact that administering family allowances as refundable tax credits with some amount of income testing at the top is very common across rich democracies, especially among Anglo welfare regimes like the U.S.”
Benefit, not tax credit
Andrew Cherlin, Griswold professor of sociology and public policy at Johns Hopkins University, recently told the Deseret News that a child allowance could help families in a meaningful way. He noted a report by The Committee on Building an Agenda to Reduce the Number of Children Living in Poverty by Half in 10 Years that said child poverty in the U.S. could be decreased by 50% by a combination of work-oriented and income support programs.
“A child allowance would put more money into the hands of low-income and middle-income parents more effectively than most other programs,” he said.
Lyman Stone, a research fellow at the right-leaning Institute for Family Studies, likes a child allowance, too. He recommends an allowance of $1,000 per month per child, capped at three children for single filers or six children for married filers.
By email, he told the Deseret News that would “dramatically reduce child poverty, increasing equality of opportunity for kids. It would ease family budgets, giving families more choices about how to arrange work and family life. It would directly support childbearing and childrearing, and thus facilitate people having the number of births they want to have.”
That approach would limit costs a bit and counter worries about “having kids for the money,” he said, among other benefits, including providing “generous support” for most kids.
Bruenig believes the child tax credit should be replaced by a child allowance, the payment made regardless of household income. That would simplify the structure and help all families, he said, while boosting the economy.
The tax code could be used to reclaim the benefit for high income families, he added. They could be taxed the equivalent so they didn’t get a benefit they didn’t need or the government didn’t want to provide. That would keep the administration simple, he noted, since everyone would get the same benefit and the existing tax collection could effectively collect owed taxes on the high end.
“Instead of essentially creating a totally second alternative tax system in which we are looking at your income to decide how much we want to cut your allowance, take care of it on the tax side,” said Bruenig.