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Year-End Tax Policy Priority: Expand the Child Tax Credit for the 19 Million Children Who Receive Less Than the Full Credit [1]
['October', 'September', 'August']
Date: 2023-03
The American Rescue Plan’s expansion of the Child Tax Credit, which made the full credit available to children in families with the lowest incomes for the first time, succeeded in driving child poverty sharply downward in 2021, recent Census data showed. But that expansion has expired, once again leaving an estimated 19 million children in the lowest-income families — or more than 1 in 4 children under age 17 — ineligible for the full Child Tax Credit.
The Rescue Plan’s temporary expansion of the credit — which made the full credit available to all children except those with the highest incomes, increased the maximum credit amount, and included 17-year-olds — produced historic results. The expanded credit in combination with other relief efforts drove the child poverty rate to a record low of 5.2 percent. Without the Child Tax Credit expansion (but with other pandemic relief measures in place), the child poverty rate would have been 8.1 percent.
The success of the 2021 expansion showed us that high child poverty rates are a policy choice, not an inevitability.
The success of the 2021 expansion showed us that high child poverty rates are a policy choice, not an inevitability. In the congressional lame duck session, policymakers will have the opportunity once again to expand the Child Tax Credit, so that more families get help they need to afford the basics. Indeed, Congress will likely consider tax legislation during this time, as business interests are pressing for corporate tax breaks that would undo some of the modest business tax increases that were enacted as part of the 2017 tax cuts, which gave extremely large net tax cuts to corporations. Expanding the Child Tax Credit is more important than undoing a few provisions of the 2017 tax law that were used to offset some of the massive corporate tax cuts. At a minimum, policymakers should not enact any year-end corporate tax breaks without expanding the Child Tax Credit.
Policymakers should prioritize expanding the Child Tax Credit for children who receive a partial credit or none at all because their families’ incomes are too low. These families face the greatest challenges in making ends meet and coping with recent high inflation.
The current Child Tax Credit has a major design flaw: millions of children are prevented from receiving the full credit because their families’ incomes are too low. In total, an estimated 19 million children under age 17 receive less than the full $2,000-per-child credit or no credit at all because their families’ earnings are too low or because the adults were out of work that year. For example, a single mom with two children, earning $15,000, receives less than half the credit amount of a similar family where a parent has a higher-paying job, while a family whose parent is unable to work in a year because, for example, they were laid off or an illness kept them from working receives no Child Tax Credit at all.
Making the full $2,000 credit available to these children would substantially lower poverty, reducing the number of children living in a family with income below the poverty line by roughly 16 percent — or about 1.7 million children — in 2022 relative to current law. By contrast, increasing the maximum credit amount without making the credit more available to the lowest-income children would do far less to lift children above the poverty line, and at a higher cost than making the credit fully refundable. To make the greatest impact on child poverty, any future expansion should prioritize expanding the credit to children in families with low incomes.
The estimated 19 million children under 17 who do not receive the full credit are disproportionately Black, Latino, and American Indian or Alaska Native (AIAN). Due to historical and ongoing racial discrimination, many people of color are overrepresented in low-paid work and face more limited economic opportunities. Roughly 45 percent of Black children, 39 percent of Latino children, 38 percent of AIAN children, 17 percent of white children, and 16 percent of Asian children currently cannot receive the full credit because their families’ incomes are too low. Making the credit more available to these children would push back against these long-standing inequities and, by advancing family income security, help ensure that all children can thrive.
The Child Tax Credit is important to families in every part of the U.S. Roughly 1 in 3 children living in rural areas get less than the full credit or no credit at all. And among veteran and active-duty families, roughly 670,000 children get less than the full credit or no credit at all.
Making the full credit available to children in families with the lowest incomes should be the priority in year-end tax legislation because they stand to benefit the most from an expanded credit. Living in a family with income below the poverty line as a child is associated with lower levels of educational attainment, poorer health in adulthood, and lower earnings. But research also finds that providing families with low incomes additional income significantly improves children’s long-term health and school performance, making it more likely they will finish high school and attend college and earn more as adults.
Without an expansion of the Child Tax Credit (and with the expiration of various other relief measures), child poverty is likely to return to about the same level as it was pre-pandemic — pushing millions of children back into poverty.
The stakes are high. Policymakers can expand the Child Tax Credit, or they can fail to act and see the Rescue Plan’s historic gains against child poverty evaporate. During year-end deliberations, they should choose on a bipartisan basis to expand the Child Tax Credit for children in families with low incomes.
19 Million Children Receive Less Than the Full Child Tax Credit
Under current law an estimated 19 million children under 17 receive less than the full credit or no credit at all because their families’ incomes are too low.[1] This is because the credit phases in with earnings at 15 cents per dollar, for earnings above $2,500, and the refundable portion of the credit (the amount a family can receive if their credit exceeds their income tax liability) is capped at $1,500 per child. This slow phase-in rate results in the children whose families most need the credit receiving a smaller credit than children in families with higher incomes, or no credit at all. Furthermore, the credit phases in largely based on income, not the number of children a family has. So, a family with low income often receives the same total credit whether they have one, two, or more children, whereas families with higher incomes receive $2,000 per child.
For example, a single mother with a toddler and a second grader, who earns $15,000 as a home health aide helping older adults meet their basic needs, would receive a total of $1,875 in Child Tax Credit, less than what other families would receive for just one child. In contrast, a family with two children and earnings of $150,000 would receive the full $2,000 per child, or $4,000 in total. In fact, families with much higher incomes — including married couples with incomes of up to $400,000 — get the full credit for each child, while the lowest-income families are partially or completely shut out of the credit. (See Figure 1.)
Black, Latino,[2] and AIAN individuals contribute immensely to every aspect of our nation. But they continue to face racial and ethnic discrimination and other systemic barriers to opportunity that together limit economic opportunities and result in them being overrepresented in low-paid work. Larger shares of Black, Latino, and AIAN children are left out of the full credit than children of other races and ethnicities. The 19 million children who get less than the full credit or no credit at all include, among children under 17, an estimated 45 percent of Black children, 39 percent of Latino children, 38 percent of AIAN children, 17 percent of white children, and 16 percent of Asian children.[3] That’s 4.1 million Black children, 6.8 million Latino children, 5.9 million white children, 570,000 AIAN children, and 539,000 Asian children who are left out of the full credit. (See Appendix Table 1 for state-specific estimates by race/ethnicity.) Making the credit more available to children in families with lower incomes would push back against these long-standing inequities.
The credit’s current structure also disproportionately disadvantages children who live in rural (that is, non-metropolitan) areas.[4] An estimated 32 percent of children under 17 living in rural areas receive less than the full credit or no credit at all because their families’ incomes are too low or because the adults were out of work this year, compared with a still sizable 26 percent living in metro areas, largely because pay is generally lower in rural areas.[5] (See Appendix Table 2 for state-specific estimates by rural or metro residence.)
Rural communities are diverse,[6] and so are the children living in those communities who are currently left out of the full credit: about 56 percent are white, 15 percent are Black, 18 percent are Latino, 7 percent are AIAN, and less than 1 percent are Asian. For each of these groups, higher shares of rural children than metro children are left out of the full credit because their families’ incomes are too low. For example, white children living in rural areas are more likely to be left out of the full credit than white children living in metro areas, just as Black, Latino, AIAN, and Asian children living in rural areas are more likely to be left out of the full credit than Black, Latino, AIAN, and Asian children living in metro areas.[7]
Children in families with veteran or active-duty members are also among those left out of the full credit. An estimated 670,000 children in these families do not get the full credit because their families’ incomes are too low.[8]
Expanding the Credit to Families With the Lowest Incomes Would Not Meaningfully Reduce Employment and Would Advance Equity
As part of any year-end tax bill, Congress should prioritize expanding the Child Tax Credit — in particular for the 19 million children who stand to benefit most from such an investment because they currently receive a partial credit or none at all because their families’ incomes are too low. Research links additional income, like money from the Child Tax Credit, to better outcomes for children in families with low incomes. The added income can significantly improve their long-term health and their school performance, making it more likely they will finish high school and attend college, as well as boost their earnings as adults.[9] (See Figure 2.)
Under current law a family’s Child Tax Credit amount is tied to their earnings and income tax liability, which denies the full credit to children in households with the lowest incomes. This withholds help from the children who need it most, hurting their long-term health, educational, and economic outcomes while doing virtually nothing to boost parental employment:
Most families who are denied the full credit work and would continue to do so under an expanded Child Tax Credit. In more than 95 percent of families who are left out of the full credit, the parent or other caretaker is working, worked in recent years, is ill or disabled or aged 65 or older, or has a child under age 2. [10]
Most estimates suggest around 99 percent of working parents in the U.S. would continue to work under an expanded credit. [11]
Evidence from abroad also suggests that giving the full credit to all children, including those whose families don’t have earnings in a given year, won’t affect adults’ work participation to any large degree. For example, France, Canada, the United Kingdom, and Germany all had higher labor force participation rates than the U.S. before the pandemic, even though all have long had a child allowance.[12] A study of Canada’s implementation of its recent child benefit expansion also found no detectable influence on employment for single mothers, the adults most likely to be affected.[13]
New research on the response to the fully refundable Child Tax Credit in 2021 bolsters earlier evidence and should ease concerns about the risk of substantial downside labor force participation risks. One University of Michigan study noted:
We examined overall employment, full-time employment, part-time employment and general labor force participation and found no significant effects for any outcome… That we find no effects on employment in this population should provide some reassurance to policy makers who are concerned that individuals with very low incomes may leave the labor force, or reduce their labor supply as a result of the [Child Tax Credit].[14]
Similarly, Columbia University researchers recently concluded that “real-world data on employment during the [Child Tax Credit] expansion do not support claims that the elimination of the phase-in portion of the [credit] discouraged work among parents in any meaningful way.”[15] A number of other analyses found no meaningful impact on employment as well.[16]
Census Bureau data show that 2021 was a year of record growth in year-round employment as the economy recovered from the pandemic, and further analysis of those data shows this increase was as large for adults living with children as those not living with children. That is not the pattern one would expect to see if the Child Tax Credit were pushing large numbers of parents out of the workforce.[17]
Policymakers — especially proponents of earnings requirements — should also consider the current policy and economic climate, which highlights the inequity in restricting full participation in the Child Tax Credit to those with greater earnings. The Federal Reserve is aggressively raising interest rates to fight inflation. One possible consequence will be an increase in unemployment, in which people will lose their jobs through no fault of their own. Any increase in the unemployment rate will likely hit hardest among those groups that have historically faced the greatest labor market barriers, including Black and Latino people. Given our nation’s history of racial discrimination, the unemployment rates for Black and Latino people are typically much higher than the overall unemployment rate, even during economic expansions.[18]
A parent who loses a job as a result of rising unemployment should not also lose some or all of their Child Tax Credit because their earnings fall too low to qualify for the full credit, which would further strain their ability to meet their children’s basic needs.
Parents have earnings too low to qualify for the full credit for many reasons, including that they work in jobs that pay low wages and they have periods of joblessness due to a myriad of circumstances, including layoffs that happen in good and bad economic times alike, illness, and the need to care for a new child or sick family member. These families struggle to afford the basics, face significant hardships — including being unable to pay their rent and afford food — and their children face long-term negative consequences as a result.
The vast majority of parents who are denied the full credit work, but their earnings are low enough that they can only get a partial credit, and not the full $2,000-per-child credit that families with higher earnings get. In the example described above of the home health aide with two children, the family receives less than half of the maximum Child Tax Credit under current law. Even a parent working full time as a cashier at a wage of $10 per hour, earning $20,000 per year, would not earn enough to get the full credit for two children.
EITC Expansion Needed for Adults Not Raising Children at Home Policymakers should also expand the Earned Income Tax Credit (EITC) for working adults not raising children at home. The Rescue Plan temporarily expanded the credit by raising the maximum credit amount from roughly $540 to about $1,500, expanding the age range to include adults aged 19-24 (excluding students under 24 who are attending school at least part time) as well as people aged 65 and over, and increasing the income limits for eligibility. These changes were long overdue as prior to the Rescue Plan the EITC for adults without children had not been changed (other than adjusting for inflation) since its creation in 1993. The Rescue Plan expansion expired at the end of 2021 along with the Child Tax Credit expansion. The Rescue Plan expanded the credit for an estimated 17.4 million low-paid adults without children, including roughly 9.7 million white, 3.6 million Latino, 2.7 million Black, 816,000 Asian, and 365,000 AIAN working adults.a These adults work as cashiers, home health aides, child care workers, and in other roles crucial to people’s daily lives. Roughly 11 million of those eligible to benefit were eligible for the credit for the first time.b Those eligible to benefit from the Rescue Plan’s expansions included nearly 6 million working adults aged 19 and older who aren’t caring for children and who will again be taxed into, or deeper into, poverty under current law because their EITC will be zero or paltry. This group includes about 3 million white, 1.3 million Latino, and 1 million Black workers (but excludes full-time students under age 24), many of them young and trying to gain a toehold in the labor market.c These working adults also include some non-custodial parents, many with financial and parenting obligations to their children. An expanded EITC would boost these parents’ incomes and could provide additional support to their children. a See footnote 3 for a description of racial and ethnic category definitions used in this report. The AIAN figure presented here reflects working adults without children who identify as AIAN alone or in combination with other races, regardless of Latino ethnicity. If we apply the non-overlapping categories used for other groups, about 140,000 working adults without children who identify as AIAN alone, not Latino were eligible for the expanded Rescue Plan credit. Chuck Marr et al., “Congress Should Adopt American Families Plan’s Permanent Expansions of Child Tax Credit and EITC, Make Additional Provisions Permanent,” CBPP, May 24, 2021,
https://www.cbpp.org/research/federal-tax/congress-should-adopt-american-families-plans-permanent-expansions-of-child. b Chuck Marr, “Another Tax Day Message for Congress: Time to Expand EITC for Adults Without Children,” CBPP, April 12, 2022,
https://www.cbpp.org/blog/another-tax-day-message-for-congress-time-to-expand-eitc-for-adults-without-children. c Ibid.
The Year-End Choice: Act or See Millions of Children Fall Back Into Poverty
Census Bureau data released in September illustrated what success looks like: the child poverty rate for 2021 fell to a record low of 5.2 percent.[19] Without the Rescue Plan’s fully refundable and expanded Child Tax Credit (but with other pandemic relief measures in place), the child poverty rate would have stood at 8.1 percent. Policymakers prioritized investing in the futures of millions of children — and it worked. But the expanded credit expired at the end of 2021, and by one estimate, 3.7 million more children fell back into poverty in January of this year.[20]
Annual child poverty in 2022 is likely to return to levels closer to those before the pandemic — 13.7 percent in 2018[21] — because of the expiration of the Child Tax Credit expansion and other relief measures. If policymakers fail to expand the Child Tax Credit before year-end, the sharp rise in child poverty will persist.
Making the full $2,000-per-child credit available to the 19 million children under 17 who receive less than the full credit or no credit at all would substantially lower child poverty. It would reduce the number of children in families with incomes below the poverty line by roughly 16 percent — or about 1.7 million children — in 2022 relative to where it would be under current law.[22] This wouldn’t restore all of the poverty-fighting power of the Rescue Plan’s larger Child Tax Credit expansion, but it would reclaim a sizable share.
Increasing the maximum size of the credit, after making it fully available, would further reduce child poverty. But if policymakers increase the maximum credit amount to the Rescue Plan levels without making the credit fully available (or changing other current-law parameters), the number of children in families with incomes below the poverty line would fall by just 2 percent — or just 222,000 children — relative to current law, at more than twice the cost of making the $2,000 credit fully available.[23]
Pairing an increase in the maximum credit to Rescue Plan levels with more modest adjustments to make the credit more available to the lowest-income children — phasing in the credit from the first dollar of earnings and removing the $1,500 refundability cap — would lead to less than half the child poverty reduction and would cost substantially more than leaving the credit at $2,000 and making it fully refundable.[24]
In any future expansion of the Child Tax Credit, the most important feature for ensuring a strong reduction in child poverty is to expand the credit for children in families with the lowest incomes. Full refundability does the most to reduce child poverty.
Why Cutting Child Poverty Is So Important
Poverty and the hardships that come with it — unstable housing, frequent moves, inadequate nutrition, and high levels of stress in the family — can take a heavy toll on children; they are associated with lower levels of educational attainment, poorer health in adulthood, and lower earnings in adulthood, a 2019 National Academies of Science, Engineering, and Medicine report on reducing child poverty found. “[T]he weight of the causal evidence indicates that income poverty itself causes negative child outcomes, especially when it begins in early childhood and/or persists throughout a large share of a child’s life,” the report concluded.[25]
Fortunately, research also finds that shoring up low-income families’ incomes has positive long-term effects on children — that is, providing tax credits and other forms of assistance reduces those hardships and stressors and helps pave a path of more opportunity for children. That’s good for those children and for the nation as a whole.
An expansion of the Child Tax Credit that focuses on the 19 million children who are shut out of the full credit because their families’ incomes are too low would come at a modest cost. For example, making the current law $2,000 credit fully available to these children would cost roughly $12 billion per year in 2022, according to the Joint Tax Committee estimates.[26] Potential arguments that this will exacerbate inflation aren’t credible; the amount is too small in the context of our $26 trillion economy to matter in the global fight to reduce inflation.
The stakes are very high. Policymakers can come together and expand the Child Tax Credit this year, or unnecessarily push more children back into poverty.
APPENDIX TABLE 1 (Permalink) Estimated Children Under 17 Left Out of the Full $2,000 Child Tax Credit, by State and Race/Ethnicity State Total Latino White Black American Indian or Alaska Native Asian Another race or multiple races Total U.S. 18,662,000 6,805,000 5,927,000 4,126,000 570,000 539,000 863,000 (Of all children in race/ethnic group, percent left out) (27%) (39%) (17%) (45%) (38%) (16%) (26%) Alabama 349,000 41,000 130,000 161,000 4,000 2,000 13,000 Alaska 36,000 N/A 10,000 N/A 17,000 N/A N/A Arizona 471,000 278,000 100,000 28,000 61,000 5,000 13,000 Arkansas 223,000 37,000 108,000 62,000 5,000 N/A 10,000 California 2,362,000 1,662,000 298,000 159,000 65,000 143,000 77,000 Colorado 226,000 116,000 76,000 14,000 12,000 5,000 9,000 Connecticut 145,000 69,000 36,000 28,000 3,000 4,000 7,000 Delaware 48,000 12,000 14,000 19,000 N/A N/A N/A District of Columbia 39,000 6,000 N/A 32,000 N/A N/A N/A Florida 1,202,000 458,000 316,000 349,000 12,000 17,000 55,000 Georgia 723,000 159,000 176,000 339,000 13,000 14,000 32,000 Hawai’i 62,000 14,000 6,000 N/A N/A 10,000 31,000 Idaho 98,000 29,000 61,000 N/A 6,000 N/A N/A Illinois 671,000 231,000 200,000 190,000 6,000 19,000 29,000 Indiana 385,000 66,000 210,000 75,000 3,000 8,000 25,000 Iowa 136,000 24,000 78,000 20,000 3,000 N/A N/A Kansas 152,000 45,000 73,000 16,000 5,000 3,000 11,000 Kentucky 296,000 25,000 207,000 40,000 2,000 4,000 18,000 Louisiana 391,000 31,000 117,000 220,000 6,000 4,000 14,000 Maine 49,000 N/A 41,000 N/A 3,000 N/A N/A Maryland 249,000 58,000 55,000 110,000 3,000 10,000 15,000 Massachusetts 251,000 103,000 84,000 34,000 4,000 13,000 14,000 Michigan 554,000 66,000 272,000 161,000 13,000 10,000 33,000 Minnesota 216,000 37,000 82,000 59,000 16,000 14,000 11,000 Mississippi 259,000 13,000 74,000 160,000 3,000 N/A N/A Missouri 345,000 31,000 203,000 79,000 7,000 3,000 23,000 Montana 53,000 N/A 33,000 N/A 15,000 N/A N/A Nebraska 89,000 29,000 40,000 9,000 4,000 N/A N/A Nevada 188,000 96,000 38,000 31,000 6,000 8,000 12,000 New Hampshire 39,000 N/A 30,000 N/A N/A N/A N/A New Jersey 389,000 177,000 94,000 87,000 3,000 15,000 15,000 New Mexico 168,000 114,000 22,000 N/A 35,000 N/A N/A New York 1,074,000 396,000 324,000 224,000 17,000 79,000 41,000 North Carolina 645,000 171,000 201,000 212,000 22,000 12,000 31,000 North Dakota 26,000 N/A 12,000 N/A 8,000 N/A N/A Ohio 678,000 64,000 360,000 181,000 10,000 8,000 58,000 Oklahoma 276,000 68,000 106,000 37,000 57,000 3,000 13,000 Oregon 192,000 64,000 98,000 8,000 10,000 5,000 10,000 Pennsylvania 627,000 144,000 281,000 143,000 10,000 18,000 35,000 Rhode Island 45,000 21,000 14,000 6,000 N/A N/A N/A South Carolina 335,000 45,000 106,000 161,000 4,000 2,000 18,000 South Dakota 44,000 N/A 18,000 N/A 22,000 N/A N/A Tennessee 450,000 67,000 219,000 132,000 5,000 4,000 24,000 Texas 2,155,000 1,422,000 320,000 313,000 22,000 43,000 47,000 Utah 151,000 50,000 80,000 N/A 6,000 2,000 9,000 Vermont 20,000 N/A 18,000 N/A N/A N/A N/A Virginia 368,000 68,000 130,000 130,000 5,000 12,000 25,000 Washington 324,000 117,000 131,000 22,000 21,000 14,000 25,000 West Virginia 119,000 N/A 100,000 7,000 N/A N/A N/A Wisconsin 248,000 52,000 112,000 54,000 11,000 7,000 N/A Wyoming 22,000 5,000 14,000 N/A 2,000 N/A N/A
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