The Child Tax Credit’s Cloudy Future

With the Child Tax Credit set to be halved at year end and competing aims among those advocating for a boosted credit, it’s unclear where lawmakers will land.

Republicans agreed to a framework for extending the 2017 Tax Cuts and Jobs Act and making other tax reforms before leaving Washington for two weeks. When lawmakers return, congressional committees are expected to nail down the details — that will include both contentious deficit-reducing measures and allocating up to $4.5 trillion for tax cuts.

Among the tax cuts under debate is the CTC under Code Sec. 24. Put into place in 1997, the CTC initially was a non-refundable credit targeted at middle-income families. The credit is not indexed to inflation, but a 2001 reform has gradually increased the then-$500 credit — topping it off at a $1,000-per-child credit.

The TCJA then increased the CTC to $2,000 per qualifying child for the 2018-2025 tax years (other than 2021, where a more generous credit was available). The CTC is set to drop back down to $1,000 per qualifying child after 2025.

The CTC is also partially refundable to the extent of 15% of the taxpayer’s earned income in excess of $2,500 ($3,000 after 2025). Taxpayers with three or more qualifying children may also receive a refund to the extent that their Social Security taxes exceed their earned income credit.

A ‘shape shifter.’

As lawmakers debate what a post-2025 CTC should look like, the apparent goals of the credit become convoluted. The credit “solves a lot of problems, in theory, for a lot of different people,” explained American Enterprise Institute’s Scott Winship. The CTC is “kind of a shape shifter,” according to Joint Committee on Taxation’s David Splinter.

The CTC started off as “basically being tax relief for families,” Winship explained during an April 10 panel hosted by the Tax Foundation, University of North Carolina Tax Center, and Massachusetts Institute of Technology Sloan School of Management. It has evolved, however, into part of the nation’s anti-poverty policy. “It’s not especially well-targeted as anti-poverty policy,” however, Winship said, “because most of the benefits to go to people who are not in poverty.”

The CTC emerged out of the dependent exemption, Splinter explained. But exemptions benefit higher income people more because they’re “proportional to your marginal tax rate” — offering a credit takes on this issue. And subsequent reforms that made the CTC partially refundable created “this kind of anti-poverty twist,” Splinter added.

But the credit also “appeals … to people who want to increase fertility in the United States,” said Winship. It “can encourage more traditional family arrangements, where one parent is at home,” he added. Yale Budget Lab’s Ernie Tedeschi agreed that with a potential “fertility decline because we are cutting off immigration,” the CTC is being brought up more in that context.

And historically, Tedeschi added, the CTC came up in discussions about American family policy generally, and the impacts on female labor force participation.

A post-2025 credit.

These varied goals explain the interest in a boosted CTC across the political spectrum, but the details are still fuzzy. And with lawmakers now focused on a broad tax package, the CTC is “fighting for space among a whole bunch of other important provisions,” Niskanen Center’s Josh McCabe explained during an April 17 Yale Budget Lab webinar.

Social Security numbers. One priority to emerge among Republicans is requiring a Social Security number for both the child for whom the CTC is claimed and their parent, said McCabe. In fact, that is the only CTC reform to appear in a menu of Republican tax reform options circulated earlier this year.

Baby/young child bonus. Another proposal from both sides of the aisle is adding some sort of “baby bonus” and an increased credit for young children.

The Democrat-backed American Family Act, S. 1393/H.R. 2763, calls for an increased credit for children under six and a baby bonus. And Utah Republican Representative Blake Moore’s Family First Act, H.R. 353, likewise would offer an increased credit for children under six as well as a credit for pregnant mothers.

While both proposals also call for expanding the CTC for older children, narrowing the audience of a credit boost is one way to keep down costs but still offer enough of an increase for recipients to see an impact, explained Yale Budget Lab’s John Ricco. “Any credit expansion to younger children … by definition is going to cost less, because young children are a fraction of all children,” Ricco said.

Targeting newborns and young children also makes sense to Megan Curran of Columbia University’s Center on Poverty and Social Policy. Parents having access to additional cash during early childhood years “appears to pay dividends over the long term,” Curran explained.

To McCabe, there’s another reason to offer a baby bonus — the U.S. Supreme Court’s 2022 decision in Dobbs v. Jackson Women’s Health Organization holding that the Constitution does not confer abortion rights. “There’s been a recognition post-Dobbs among a lot of pro-life advocates that we want to put our money where our mouth is,” McCabe explained.

Refundability. Another point of contention is whether — and to what extent — the CTC should be refundable. Tying the CTC to earnings, Curran explained, has resulted in “leaving out this huge chunk of kids with low and moderate incomes who could arguably really benefit from this type of support during childhood.” That’s where refundability comes into play.

And the TCJA’s CTC expansion “actually increased the amount of kids who were left out from the full benefit with lower income,” according to Curran. The reason, she explained, is “an increase in the credit amount and not a corresponding, substantive enough increase in the refundability piece.”

But a dispute over CTC refundability stalled last year’s bipartisan tax package. The 2024 proposal would have increased the refundable portion of the CTC for the 2023-2025 tax years. But Senate Finance Chair Mike Crapo (R-ID) contended that under the proposal, “more than $30 billion of the cost to expand the child tax credit … would go to individuals who pay no federal income tax.”

McCabe elaborated on what he called Crapo’s “trepidation” about last year’s bill. The refundable portion of the CTC was indexed, McCabe explained, “so lower-income families have been slowly keeping more of the credit versus middle-income families.” From that perspective, Crapo’s reaction “make a whole lot of sense,” added McCabe. “We want to make sure we’re including middle-income families in any changes that we make.”

For more on the Child Tax Credit, see Checkpoint’s Federal Tax Coordinator ¶ A-4050.