What’s Ahead for a Bipartisan Child Tax Credit? A Refresher
As Congress is back in session and mostly focused on yet again avoiding a government shutdown, the current Child Tax Credit (CTC) expiration still looms for 2025. While anything could happen before these provisions expire at the end of next year, it’s helpful to understand what’s at stake for this controversial credit aimed at helping lift children out of poverty, and what the potential pathways are for a bipartisan bill.
A Brief History
Since 1997, some form of a federal CTC has been in place to help working families offset the cost of raising kids. Initially a nonrefundable credit of $400 for each child aimed at the middle class, the CTC has since expanded in both size and scope. Now, the rules that the 2017 Tax Cuts and Jobs Act (TCJA) put into place mean a credit of up to $2,000 per child, a refundable portion of up to $1,600, and a wider range of income eligibility (on both ends) than before. Zero earners don’t receive the CTC, and neither do very high earners. This is not the highest CTC that’s ever been offered—the American Rescue Plan Act in 2021 tried to address COVID-19-era financial worries by temporarily providing up to $3,600 per child under six years old, and $3,000 for kids between seven and 17. However, the TCJA rules currently stand and, if Congress doesn’t act, will expire at the end of 2025.
The CTC has enjoyed bipartisan support throughout its history—something that is increasingly rare. While social programs are typically the darlings of the left, the right has two vested interests that align well with the CTC: maintaining a strong, pro-family platform and using the tax code to alleviate the cost of government for taxpayers. Thus, the CTC has remained in relatively good graces with both sides of the aisle. Until now.
Where Congress Stands Now
While the overarching goal of the CTC sits well with both Republicans and Democrats, the devil is always in the details. A bicameral, bipartisan bill introduced in early 2024 would have secured the CTC for the next few years, but ultimately failed in the Senate. This most recent iteration would have ensured the CTC for the following three tax years (starting with 2023) and slightly increased the refundable portion of the credit by $100 each year, beginning at $1,800 for 2023. Most notably would have been the change in allowing filers to apply the previous year’s income to receive a higher credit. In essence, if a family made more money last year than this year, they could apply that previous year’s higher income so that they would receive a higher tax credit. Ultimately, this means that zero earners could qualify for some of the credit if there was no work requirement attached.
This is where the Senate failed to reach a consensus. If we calculate a family’s CTC based on their earned income, the more they earn, the more of a credit they receive. But if we allow the prior year’s income to apply, would that disincentivize people from working to obtain a higher income, and thus a higher CTC? In short: depends on who you ask.
The Work Incentive Over the Years
Recall that the initial CTC of the 90s was aimed at working families. This meant that, at the outset, the CTC was designed to offer more tax relief the more a family made in income (up to a ceiling) and only offered the credit if a family did, in fact, have some income to report. This remained true over the years, with one exception: In an attempt to offer additional relief for families during the pandemic, the American Rescue Plan Act of 2021 temporarily suspended the work requirement under the CTC. Suddenly, families with no income to report for 2021 were eligible to receive a refundable portion of the CTC. When that temporary allowance expired, the income floor reverted back to $2,500, meaning families with no income could no longer claim the CTC.
Debate Over Work Incentive Effects
What currently divides the Senate is whether a work requirement has a significant effect on labor force participation and earned income. The 2024 bipartisan bill that would have expanded the CTC failed because of this disagreement. Some research indicates that temporarily eliminating the work requirement during the pandemic lifted many more families out of poverty for a time and that permanently eliminating work requirements better achieves the CTC’s goal of alleviating childhood poverty. However, skeptics say that this research doesn’t take into account that nixing the work requirement would lead some to choose to stop working altogether if they can receive the credit regardless, in turn shrinking labor force participation. Further, they argue that a tax credit isn’t a meaningful way of addressing long-term, systemic poverty. With studies supporting the Democrats’ claim that the CTC went a long way in reducing poverty temporarily during the pandemic, and Republicans’ claim that labor force participation will drop in light of fewer incentives to work, what’s Congress’s next move? The answer lies in maintaining a bipartisan approach to a well-liked credit overall, while hedging on the controversial parts of the CTC.
Key Considerations
Instead of implementing an income floor (currently $2,500) in order for families to receive any CTC, Congress can eliminate the income floor but attach a modest CTC for zero earners. In line with what’s already done, the amount of CTC a family receives can continue to scale up alongside their income, which still safeguards the incentive to work: the more you earn, the more you get from Uncle Sam. But to address abject poverty, introducing a small amount of the CTC for zero earners goes toward alleviating that burden. Similarly, the phase-in rate at which the CTC accrues based on income could be increased to incentivize work. This could also likely minimize labor force decline, as those more likely to want to get more from the CTC will work more to accommodate that.
While there may be disagreement on what an optimal CTC looks like, the fact remains that Congress will have to come together to pass something in 2025 to preserve this long-utilized tool to help families. Completely eliminating a work requirement will forestall most Republicans from getting on board, while leaving out the poorest among us from receiving any tax benefit for having children leaves Democrats in a bind. The most likely way forward is scaling up the CTC for earners to maintain the incentive to work by increasing the phase-in rate, while offering a smaller CTC for those not working in order to better target real poverty.