Has the Child Tax Credit finally come of age?
In 1992, the year Bill Clinton was elected President, the U.S. was struggling to emerge from the worst recession in a decade. Clinton, whose unofficial campaign mantra was “It’s the economy, stupid!” was a somewhat unlikely victor over incumbent President George H.W. Bush – in the past 80 years of presidential elections, only three incumbents have lost (in addition to 1992, it happened in 1980 and, as readers know, in 2020).
But even before Clinton was a blip on any political pundit’s radar screen, something significant happened, the ramifications of which are about to be experienced – and in a very good way.
In 1991, according to Renu Zaretsky, a tax expert and newsletter editor at the Urban-Brookings Tax Policy Center, the bipartisan National Commission on Children recommended a $1,000 annual tax credit for every child through age 18 in response to slow wage growth, higher costs of living, and a growing tax burden for average households. Even families that earned too little to owe federal income taxes would get the refundable credit.
Back in the early 1990s, the proposal never went anywhere – Zaretsky says it was “too ambitious for its time.”
But the idea was born –and sometimes, being born is all an idea needs. That, and time.
The first-ever Child Tax Credit in the U.S. was passed in 1997. It was much more conservative than what the National Commission on Children had envisioned. It consisted of a $400-per-child nonrefundable credit for working families for children under age 17. According to Zaretsky, the credit phased out starting with couples filing jointly making $110,000 and for single parents making $75,000. The problem was that because the credit was nonrefundable (it could only be used to offset taxes), it excluded very low-income families – in other words, the folks that could have used it the most.
Over the next two decades, Zaretsky writes, Congress altered the Child Tax Credit through 11 bills, gradually making it more generous, but not fully refundable. But that was small potatoes compared with what Congress passed this year and President Biden signed as part of the American Rescue Plan (ARP).
Under the ARP, families with children under age 6 can claim a credit of up to $3,600 for each child that age and $3,000 for older children until they turn 18. And the credit is now fully refundable and available to parents who do not work and therefore do not owe federal income taxes. Zaretsky writes that the Child Tax Credit expansion included in the ARP is more progressive and goes farther than what the bipartisan National Commission on Children had originally envisioned back in 1991.
Elaine Maag, Principal Research Associate for the Tax Policy Center, and Nikhita Airi, Research Assistant, recently wrote an article in which they laid out the changes and benefits of the new Child Tax Credit.
They say that more than 90 percent of all families with children will receive an average benefit of $4,380. And the lowest income families will receive average benefits on par with middle- and high-income families, a departure from how the credit used to work.
They explain that the ARP changes the way the CTC is calculated in three important ways:
- “The maximum credit increases from $2,000 for each child under age 17 to $3,000 for those ages 6 to 17 and $3,600 for younger children.”
- “The CTC will be fully refundable. Low-income parents will qualify for the full benefit even if they do not work. This piece is key for the lowest income children.”
- “Children age 17 will be eligible for the refundable benefit. Previously they were allowed no more than $500—the same amount that is still available for families with older children. And it was nonrefundable– it could only be used to offset taxes.”
Citing research produced by the Urban Institute, the two authors say that when coupled with other major pieces of the American Rescue Plan, child poverty in the U.S. will fall to 6.5 percent – less than half of today’s child poverty rate of 13.7 percent.
David Wessel, director of The Hutchins Center on Fiscal and Monetary Policy at the Brookings Institution, told CBS Evening News that the new Child Tax Credit “is a big deal. It’s one of the most significant steps we’ve taken to lift children out of poverty. In many other countries, the government subsidizes families with children because they are the ultimate investment in the future.”
Experts expect that the Child Tax Credit will be partially paid out on a monthly basis, rather than claimed once per year when people file their tax returns. A family with two children under 6 would qualify for $7,200 in CTC payments, or $600 per month.
But there’s a hitch, CBS Evening News reports. The monthly payments will run only from July through December, with the other half of the CTC paid when people file their tax returns. In other words, households would receive six months of monthly income, and then would receive the rest of the CTC through their tax refund.
And after that, the CTC expansion, which is temporary, will end altogether unless Congress acts, and the CTC will regress to the younger, less mature version of itself – the way it was before the American Rescue Plan was passed.
Which leads to the question:
Has the Child Tax Credit finally come of age? Perhaps. But only if Congress agrees to make the new expansions permanent – and keeps millions of children from falling back into poverty.