Extending The Advance Child Tax Credit

Famously, all children, except one, grow up. The child tax credit’s recent growth spurt highlights the question of what the near-term growing pains might look like as Congress begins to consider extending the advance child tax credit beyond 2021. The major issue for the credit remains whether and for how long the advance credit for 2021 enacted in the American Rescue Plan Act of 2021 (P.L. 117-2) will be extended.

The stakes increased with the distribution of the first round of payments on July 15. President Biden that day suggested that the expansion of the child tax credit “will be one of the things that the vice president and I will be most proud of when our terms are up.”

Positioning the child tax credit changes as a signature achievement was the theme of the week for Democrats in Congress, too. The “CTC Six” — as Senate Finance Committee members Michael F. Bennet, D-Colo., and Sherrod Brown, D-Ohio; Sen. Cory A. Booker, D-N.J.; House Ways and Means Committee member Suzan K. DelBene, D-Wash.; and Reps. Rosa L. DeLauro, D-Conn., and Ritchie Torres, D-N.Y., have deemed themselves — expressed their commitment to an extension the day before the IRS sent out the first installments to 35 million families.

Biden’s American Families Plan proposes 2025 as a potential end date. That timing would set up the renewal discussion to occur at the same time as that for the expiring provisions under the Tax Cuts and Jobs Act.

But there are obstacles to an extension of that length, namely the price tag. The Joint Committee on Taxation estimated that the 2021 advance child tax credit’s expansion would cost $110 billion. The cost of extending it until 2025 has been estimated at around $450 billion. And a permanent expansion could cost $1.6 trillion over the 10-year budget window, according to the Tax Foundation’s estimates.

Still, the expanded credit is likely to enjoy the same broad popularity among taxpayers as its predecessors. As the first installments of the 2021 advance child tax credit went out, Treasury announced that they totaled approximately $15 billion and covered almost 60 million children, more than 26 million of whom would have received less than the full credit amount under the previous rules because of too-low household incomes.

Treasury’s statistics were also broken down by state. The average payment amount across the country was $423, and the states whose families received the largest portion of the almost $15 billion were, in order, California ($1.6 billion for 6.6 million children), Texas ($1.5 billion for 5.9 million children), Florida ($915 million for 3.6 million children), New York ($802 million for 3.2 million children), Pennsylvania ($555 million for 2.2 million children), Ohio ($551 million for 2.2 million children), and Illinois ($547 million for 2.2 million children).

Utah had the highest average payment at $515 per family, and Idaho came in second at $487 per family. Washington, D.C., had the lowest average payment at $376 per family, and Massachusetts had the second lowest at $385. The size of the payments was dependent on the number of children in a family and their ages, with children under 6 receiving an increased credit amount.

Policy Changes

Among the innovations of the Biden administration’s changes to the child tax credit is the expansion of its policy purpose to definitively include reducing childhood poverty. On July 15 Biden explained his conception of the credit as both a middle-class tax cut and “the largest-ever one-year decrease in child poverty in the history of the United States of America.” There was arguably an element of poverty alleviation in the prior versions of the credit, but lawmakers rarely emphasized it. Before ARPA, the earned income tax credit was the largest anti-poverty tax program targeting families with children. For at least 2021 and probably beyond this year, the two programs have essentially switched places.

That’s a historic shift. Toward the end of his presidency, Bill Clinton touted the drop in child poverty attributable to his tax policies as the largest drop in child poverty in over three decades. “The child poverty rate fell from 22.7 percent [in 1993] to 18.9 percent [in 1998] — the lowest child poverty rate since 1980,” the White House announced on January 12, 2000. The Clinton policy that was credited with this achievement was the EITC, however, not the child tax credit. It’s likely to be years before the full effect of this shift is understood.

Measuring the Impact

The effect on families and children will be an important factor to assess in determining whether the credit should be extended. This data is necessarily collected over the long term, and Congress won’t have even an initial indication of how the credit is affecting families’ decision-making by this fall, when legislators must decide whether to extend it into next year or beyond.

The difficulty of assessing the impact of the expanded credit will certainly be a confounding factor if it’s extended only for a year or two because of the lag in data, and it will likely remain so even if the expanded credit is extended until 2025, as Biden has proposed. Most of the key elements that should be analyzed in determining the credit’s effects, such as children’s health, educational attainment, employment status, and financial security, are long-term data points.

The long-term effects of the expansion and advance distribution process are likely to differ depending on the permanency of the expansion. Brown said on July 14 that “now we need to make this permanent so families can make these plans long-term and we can provide the kind of opportunity families deserve in this country.” His point about the effect of certainty on long-term planning is an important one.

Information about the amount of the child tax credit that will be available in subsequent years is valuable to individual taxpayers. Families might have different approaches to how they use the credits depending on their certainty that they will continue to receive them, and that prioritization may have long-term consequences. For example, a family contemplating using the credit payments to defray private school tuition might choose not to enroll their child in a private school if the credit isn’t permanent, or relatively permanent, because they wouldn’t want to have to switch schools should the credit become unavailable. The same logic would apply for other semi-long-term expenses incurred over a number of years. Many families making similar choices could affect the long-term outcomes.

Because the achievement of the ultimate goals of the expanded credit won’t be observable for years, the effect of the increase in the credit on employment and work hours of parents with low incomes will be closely watched, especially by Republican lawmakers, several of whom have argued that making the child tax credit fully refundable might discourage parents with low incomes from taking jobs or increasing their hours. ARPA in its entirety was predicted to lift 5 million children out of poverty.

If parents with very low incomes choose not to work or to work less because of the increased amount and availability of the credit, they could risk forgoing the opportunity to move up the income ladder and into positions of greater financial security for their families, which could unravel some of the positive effects of the expanded credit on poverty elimination.

However, the expansion doesn’t penalize families with low incomes that increase their earnings. The expanded credit doesn’t start to phase out for families earning more until their income reaches a fairly high level, and those thresholds are high enough that a discouragement effect is unlikely. The thresholds in the ARPA are $150,000 for a married couple filing jointly, $112,500 for heads of household, and $75,000 for others. The median household income in the United States is $65,712, according to the Census Bureau.

Changes Ahead?

Beyond the question whether to extend, the credit could be changed in other ways, although these seem less likely. The CTC Six seem not to be entertaining the idea of lowering the income thresholds, even though it would lower costs. On July 14 DeLauro rejected the notion that the credit is overgenerous, and none of the other senators or representatives suggested that changing the thresholds was on the table.

Bennet pointed to an income distribution table showing that 28 percent of the advance child tax credit is going to the poorest families in the country as evidence of the progressivity of the expanded credit. Booker explained that the point of the credit was to “give every family — 90 percent-plus of them — the resources they need to launch their children into not just leadership in our country and our nation as a whole, but to continue global leadership in the generations to come.”

That position is consistent with the role of the child tax credit for the past several decades. It has long been claimed by taxpayers whose household incomes are far above the national average, largely because the policy is designed to recognize the lesser ability to pay taxes of families raising children compared with those that aren’t.

One of the major administrative questions that Congress will need to answer is whether it’s advisable for the advance child tax credit to remain under the auspices of the IRS, or whether it should be reframed as a general benefit and moved to the Social Security Administration. The window for moving it to a different administrative agency is probably closed, at least for now. The IRS has already invested time and money in facilitating the administration of the credit, including setting up new forms of electronic identity verification services on a larger scale. (Prior analysis: Tax Notes Federal, July 12, 2021, p. 197.)

For the expansion of the child tax credit to be “the most transformational investment in families and children in the history of the United States,” as Torres characterized it on July 14, it will have to be made permanent — or at least longer-lived than through 2021. How to thread that needle is the next major legislative question.