The Future of the Child Tax Credit

After months of negotiations, Sen. Joe Manchin announced he would not support the $1.7 trillion Build Back Better Act — legislation that would make historically unparalleled investments in clean energy, health care, and a wide range of social programs. Effectively preventing its passage in the Senate, Manchin objected to the size of the social spending bill amidst concerns about rising inflation and the economic uncertainty caused by the latest wave of the coronavirus pandemic. Following this, the Build Back Better Act has an uncertain future in its current form.

When it comes to specific provisions, Manchin has repeatedly expressed opposition to the expanded child tax credit. The Build Back Better Act proposes extending the child tax credit expansion –– a key feature of the COVID-19 Stimulus Package, also known as the American Rescue Plan. The law made several changes to the child tax credit that increased its reach and size. For 2021, the law raised the credit from $2,000 per child under 17 to $3,000 for children aged 6 to 17, and $3,600 for children under 6 years old. Other important changes include making the credit fully refundable, meaning families can deduct the full amount of the credit from their tax bill and receive any extra amount in their refund, and eliminating minimum income thresholds. Lastly, Congress changed the payout structure so that households had the option of receiving the credit in monthly installments. If the Senate fails to pass the current Build Back Better Act, the monthly disbursements will not continue through 2022.

Several researchers have attempted to evaluate the effectiveness of the expanded child tax credit. In their working paper, Parolin, Ananat, Collyer, Curran and Wimer explore the immediate effects of the monthly credit on material hardship. Using survey information from the Census Household Pulse Survey, the paper considers three indicators of material hardship: household food insufficiency, difficulty with expenses, and falling behind on rent or mortgage payments. The researchers primarily look at households earning $35,000 or less with children. By comparing survey information collected before and after the disbursements, the researchers determine that the child tax credit has a significant impact on the number of low-income families experiencing food hardship. Among those who claim the credit, there is a 50% decrease in the number of households experiencing food hardship.

The authors do not find a significant reduction in the “difficulty with expenses” and “missed rent or mortgage payments” indicators. This suggests that households receiving child tax credit payments most likely spend the extra income on food rather than on housing expenses. Household income also plays a role in whether the child tax credit has a substantial impact on food insufficiency. When looking at households with incomes higher than $35,000, the effects disappear. Intuitively, this makes sense; higher-income families typically do not struggle with food insufficiency to begin with, so the monthly disbursements would not be expected to have significant effects in this indicator.

While evidence suggests a positive impact of the tax credit on low-income families with children, some studies suggest there may be negative long-term labor supply effects associated with the program. One of Manchin’s objections to the expansion of the child tax credit is its lack of work requirements. His rationale is that without work requirements, the credit will reduce incentives to enter or stay in the workforce and ultimately lead to decreased labor force participation. In a recent paper, researchers at the University of Chicago find that without measuring the impact on the labor market, the expanded child tax credit would cut child poverty by 34% and deep child poverty by 39%. When comparing the Tax Cuts and Jobs Act version of the child tax credit, which includes work incentives, to the latest version of the credit, the researchers find that the policy change would lead to 2.6% of all parents exiting the labor force. When incorporating these effects, child poverty would fall by 22%, but deep child poverty would remain unchanged. On the other hand, there are also positive long-term effects associated with providing a larger credit. The National Academies of Sciences, Engineering, and Medicine assert that growing up in a low-income household is associated with worse health outcomes, lower educational attainment, and higher rates of delinquency. Although quantifying the exact impact of the increased child tax credit is difficult, it’s worth acknowledging that an economic model that accounts for negative impacts on labor supply should also consider the long-term economic benefits provided by lifting families out of poverty.

From a policy perspective, it’s important to situate the child tax credit’s cost in the context of its social purpose. If the purpose of the credit is to lower poverty, policymakers should structure it in a way that makes the greatest impact per dollar spent. If the credit is not cost-effective, it may be worth investing in a different social program rather than expanding it. There are several ways to simultaneously make the tax credit more effective, appease policymakers concerned with work requirements, and retain the critical anti-poverty effects of the program. First, the Senate could focus the benefits on lower-income Americans by lowering the phase-out threshold. This would keep the credit targeted to where it’s most effective, while also making it more amenable to politicians with budgetary concerns.

Second, to address labor supply concerns, the Senate could change the phase-in values on the credit, decreasing the amount that non-income-earning families qualify for while not completely eliminating the benefits. The Bipartisan Policy Center suggests a lower maximum credit in between the Tax Cuts and Jobs Act version and the American Rescue Plan version, which earmarks $2,200 per child. It proposes making the first $1,200 fully refundable regardless of earnings, phasing in the remainder of the credit starting at the first dollar of earnings, and eliminating the cap on refundability. This would keep intact many of the anti-poverty benefits associated with fully refundable credits, helping those with little to no earnings, but it would also incorporate some incentives to employment.

Congress faces tough choices about the future of the child tax credit this year. While the credit has important anti-poverty effects, Congress’ inability to adapt to the political and substantive concerns posed by Senator Joe Manchin has major consequences on the material hardship suffered by low-income households. But if Democrats agree to make adjustments, there may be a path forward for the expansion of the child tax credit — and the guarantee of extra income for people struggling to put food on the table.

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Corinth, Kevin, Bruce Meyer, Matthew Stadnicki, and Derek Wu. “The Anti-Poverty, Targeting, and Labor Supply Effects of the Proposed Child Tax Credit Expansion.” Becker Friedman Institute for Economics, October 7, 2021. https://doi.org/10.3386/w29366.

Parolin, Zachary, Elizabeth Ananat, Sophie Collyer, Megan Curran, and Christopher Wimer. “The Initial Effects of the Expanded Child Tax Credit on Material Hardship.” Poverty and Social Policy Discussion Paper, September 2021. https://doi.org/10.3386/w29285.