What’s the State of Play in Child Tax Credit Negotiations?

Despite a supposedly strong economy, many families remain just one financial shock away from personal financial crisis. A lack of affordable and accessible childcare, wages that haven’t kept up with rising housing costs, and a lack of access to paid family leave are just a few factors contributing to this precarity.

Public policy, however, can make a tremendous difference. During the COVID-19 pandemic, Congress temporarily implemented a child tax credit initiative that in 2021 cut child poverty nearly in half, lifting millions out of poverty, according to a US Census report. The tax credit also reduced food insecurity among families and helped parents afford basic necessities. The expanded child tax credit even helped some parents work more, among many other positive outcomes.

But then the expanded credit expired, and the gains disappeared as quickly as they had arrived. Fortunately, this year, efforts to move back toward a more expansive tax credit have made progress, with a bill even passing the US House of Representatives.

The question to now consider is what the bill that passed the House would do if passed by the Senate and signed into law, what it would not do, and what a long-term vision of public investment in children—which is commonplace outside the United States—could accomplish for US children and their families.

What is the Child Tax Credit?

Lawmakers implemented the child tax credit in 1997 with bipartisan support. The measure provides eligible families with a credit of up to $2,000 per child each tax year. However, in Washington policy-speak, the credit is only “partially refundable.” This means that if a family does not owe at least $2,000 per child in income tax, then the amount of credit received is less than $2,000.

Families with little to no federal income tax liability can only get a maximum credit of $1,600 per child in tax year 2023. In addition, families earning less than $2,500 in income are entirely ineligible for the credit. After reaching that minimum income level, the credit is phased in at 15 cents per $1 earned. As a result, low-income families get less support than high-income families. (Families earning up to $400,000 qualify for the full benefit.)

Under current [child tax credit] law…an estimated 19 million children receive little to no credit due to their families’ earnings being too small.

This changed for one year only in 2021. Under the COVID-era American Rescue Plan Act, the maximum credit increased to $3,600 per child under the age of six and to $3,000 per child ages six through 17. In addition, the act extended credit eligibility to 17-year-old children and made the credit available to families monthly rather than as a one-time tax payout.

The act also made the credit fully refundable, meaning it was available to families with little to no earnings for the first time. This provision allowed the expanded credit to have especially positive impacts in reducing child poverty. Due to many factors, like discrimination in the labor market, Black and Latinx families are likelier to have lower earnings. For this reason, children in Black and Latinx families benefitted disproportionately. The child poverty gap between White and Black children fell by 51 percent in 2021; the gap between White and Latinx children similarly fell by 37 percent—all due primarily to the expansion of the child tax credit.

What Happened to the Child Tax Credit After 2021?

Although the expansion lifted millions out of poverty, Congress let the expansions expire and child poverty rates shot back up. Black and Latinx children were harmed disproportionately in the year after the expansions expired. Other indicators of material hardship also increased, including food insecurity among families with kids.

Sometimes, the oddities of the Congressional process create unusual political opportunities.The bottom line is that under current law, the child tax credit is not reaching low-income families who need it most. An estimated 19 million children receive little to no credit due to their families’ earnings being too small. Black and Latinx kids are likelier to be among these 19 million children because they are more likely to be in households with lower earnings.

Why did lawmakers let the child tax credit expansion expire? Some claimed to be concerned about the expanded credit disincentivizing work—a concern that research refutes and which is rooted in paternalistic false narratives that imagine people living in poverty quitting their jobs just for a couple thousand dollars in tax credits. Lawmakers also raised concerns about the cost, which is somewhat ironic. Yes, a full-throated child tax credit program is not cheap. Still, the costs of childhood poverty in terms of physical and mental health, lifetime earnings, and educational attainment are far higher.

Opportunities to Expand the Child Tax Credit in the Coming Months

For two years, the child tax credit was moribund. What changed in 2024? Sometimes, the oddities of the Congressional process create unusual political opportunities. Take the so-called “scoring” of legislation. When legislation is proposed, its cost is typically estimated (“scored”) over 10 years. Often, to keep the cost numbers from running too high, benefits are clawed back before year 10. Such was the case with the 2017 Tax Cuts and Jobs Act (also known as the Republican tax bill).

The result is that many corporate tax benefits passed by the GOP in 2017 will expire in 2025 unless they are extended. Some corporate provisions have already expired. But extending or restoring these provisions, as Republican legislators want to do, requires Democratic support since, unlike in 2017, Democrats now control the White House and the Senate. This gives Democratic lawmakers leverage to insist that they would only vote to extend those corporate tax breaks if the bill also included expansions to the child tax credit.

Democrats made gains in negotiations, but Republican lawmakers refused to remove the earnings requirement in the child tax credit. Until this occurs, the child tax credit will not be equitable. Instead, it will penalize parents who cannot work in paid employment during the year. Maintaining this earning requirement guarantees that the credit will not reach the families who need it most. The policy also does not recognize the unpaid labor many parents provide, such as caring for a child or an elderly family member.

The Tax Relief for American Families and Workers Act of 2024 (HR 7024) is the compromise bill that passed the US House of Representatives on January 31, 2024, with bipartisan support. This bill included a few modest changes to the child tax credit. While the changes are incremental, the measure does direct the increase in child benefits primarily to families with low incomes.

The Center on Budget and Policy Priorities estimates that 16 million of the 19 million kids who don’t currently receive full credit due to their families’ earnings being too small would benefit—lifting as many as 400,000 children above the poverty line in the first year of implementation. And nearly three million children would be better off in just the first year of implementation. Black, Latinx, American Indian, and Alaska Native kids would especially benefit from the proposed changes. According to the Urban Institute, most of the tax benefits would be directed toward households in the two lowest income quintiles.

Specifically, the bill would make the following temporary changes to the child tax credit:

• The bill would change the phase-in threshold of the credit to be per child rather than per family, ultimately helping families with multiple children get a higher credit with a quicker phase-in rate
• The “refundability cap” of the child tax credit, representing the maximum credit that recipients with low incomes can get, would increase gradually each year through 2025, at which point all qualifying families will be eligible for the $2,000 credit
• The bill would include a lookback provision, allowing families to use their earnings from the prior year to be eligible for the credit. This would help parents whose earnings fluctuate from year to year. For example, if a parent has a baby, they may need to drop out of the workforce to take care of their baby, especially if they are not provided with paid parental leave. Under this proposal, they could use their earnings from the prior year to claim the child tax credit
• The bill also would adjust the credit to inflation beginning in 2024, helping low- and middle-income families, as well as families with higher incomes, receive a credit that keeps up with rising costs of living

The child tax credit is an opportunity to invest in children and families through our tax code. When expanded in 2021, it dramatically reduced child poverty.

To demonstrate how these proposed changes to the credit would impact a hypothetical family, the Center on Budget and Policy Priorities calculated the following example: A single parent with two kids who earns $13,000 per year would have their child tax credit double under the first year of this proposal’s implementation. The household would get an additional $1,575 in their credit because of the changes described above.

To be clear, these changes do not restore many measures that were included in the 2021 legislation: 1) the maximum payment does not increase to $3,600 per child, 2) monthly payments are not restored, and 3) the very poorest children remain excluded. That said, the bill is an improvement from the status quo.

Toward a More Equitable Child Benefit Vision

The child tax credit is an opportunity to invest in children and families through our tax code. When expanded in 2021, it dramatically reduced child poverty and minimized many harmful outcomes for families, like food insecurity and financial hardship. But under current law, the child tax credit doesn’t reach families with the lowest incomes, which minimizes its positive impacts.

For the longer term, an even more ambitious approach to consider would be to develop a child allowance policy similar to those in Canada and many European nations that invests in children and reverses the devastation of child poverty. Many institutions have conducted ample research from 2021’s temporarily expanded child tax credit that demonstrates the credit positively impacted families. Many other nations have similar policies; the United States should follow their lead.

The measure being debated in Congress represents a small, incremental step. For the families that benefit, this step is meaningful. However, our nation’s children deserve far more. The struggle to establish a truly equitable child benefit that reaches all families that need support, no matter their earnings, will continue far beyond 2024.