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In a Divided Congress, Expand the Child Tax Credit

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On March 11, 2021, President Biden signed the American Rescue Plan into law, delivering $1.9 trillion to help the country recover from the Covid-19 pandemic. This package included a record expansion of the Child Tax Credit, increasing the monetary value of the benefit to $250 per month for children between the ages of six and 17 and $300 per month for children under the age of six. The American Rescue Plan also made the credit fully refundable, meaning that families who do not have reportable income or pay income taxes could still receive the benefit. Under the previous income threshold, over a third of children were ineligible for the Child Tax Credit since their parents did not make enough money to qualify, including over half of Black and Hispanic children and 70 percent of children raised by single mothers. These two reforms—increasing the overall monetary value and expanding the eligibility threshold—made the program dramatically more effective, contributing to the record reduction of the child poverty rate by over 40 percent from 2020 to 2021. Despite this success, Congress declined to renew the expanded Child Tax Credit in 2022 due to political gridlock and concerns about inflation. This decision was misguided. The expanded Child Tax Credit is a simple and effective way to reduce child poverty with positive outcomes for all stakeholders. Further, in a sharply divided Congress, reducing child poverty and supporting families is one of the few policy areas that has a real chance of garnering bipartisan support. Congress should work to reinstate the expanded Child Tax Credit next term. 

The structure of the Child Tax Credit—providing direct cash payments to families—provides an effective, albeit controversial, way to alleviate child poverty. When the Child Tax Credit was first created through the 1997 Taxpayer Relief Act, taxpayers would subtract the credit from their federal income taxes, decreasing the amount of money they owed the government. Subsequent reforms made the Child Tax Credit refundable, meaning that the government pays taxpayers the benefit regardless of how much they contribute in tax revenue. This payment system more closely resembles traditional welfare programs and has been criticized on the grounds that it disincentivizes people from working, contributes to runaway government spending, and benefits only a small proportion of the population. These fears are likely unfounded. For example, the US Census Bureau found that 91 percent of families spent the tax credit on basic needs such as food, clothing, school supplies, utility bills, and rent. Researchers also found little to no statistically significant impact of the expanded 2021 Child Tax Credit on employment rates for low-income families. The credit was, however, tremendously effective at reducing child poverty. In fact, the expanded Child Tax Credit was the single most effective government program aimed at reducing child poverty in 2021, lifting almost three million children out of poverty compared to the 891,000 children impacted by SNAP and 595,000 children impacted by housing subsidies. This evidence suggests that giving parents money and letting them decide how best to support their families is more effective than most traditional government programs that limit how funds can be spent. Other countries have caught on to this idea too: Direct cash transfers to families have long been a fixture of the social safety net in Germany and Canada. By embracing the mechanism of direct cash payments, the United States could realize tremendous societal benefits. 

Further, growing evidence suggests that reducing child poverty through programs like the Child Tax Credit can produce long-term economic benefits for the United States far beyond individual improvement in living standards. Child poverty in the United States currently costs the government over $1.0298 trillion—or 5.4 percent of GDP—per year due to “loss of economic productivity, increased health and crime costs, and increased costs as a result of child homelessness and maltreatment.” The same study found that for every dollar spent on alleviating child poverty, the government could save seven dollars currently lost due to the economic cost of poverty. 

Take education, for instance. The National Assessment of Educational Progress recently found that only 26 percent of eighth graders are proficient in math and 31 percent are proficient in reading. While most education policy debates center around curriculum and school reform, recent research suggests that child poverty may be a greater driver of these dismal numbers, with one study finding that “Putting money directly into the pockets of low-income families […] produces substantially larger gains in children’s school achievement per dollar of expenditure than does a year of preschool or participation in Head Start.” When children lack adequate access to food, are home insecure, or face other financial pressures at home, they struggle to succeed both in and out of school. For example, boys who grow up in families in the bottom 10 percent of the income distribution are 20 times more likely to be incarcerated than their peers from wealthier backgrounds. Similar patterns emerge when looking at variables like teenage pregnancy. When people do not complete high school or receive a quality education, they cannot contribute to the economy to their full potential. When people are incarcerated or have teenage pregnancies, they cost the government money. By reducing child poverty through the Child Tax Credit, the government can realize significant economic benefits by increasing future government revenue while simultaneously decreasing reliance on social services.

In a divided Congress, expanding the Child Tax Credit could also garner enough bipartisan support to ensure its passage in the Republican-controlled House and overcome a filibuster in the Senate. For the Democrats and the Biden Administration, the Child Tax Credit represents the core of the Build Back Better agenda that aimed to dramatically expand government support for child care and caregiving. A permanently expanded Child Tax Credit could serve as a signature accomplishment for President Biden in the same way the Affordable Care Act defined the Obama presidency. However, despite being endorsed by notable progressive Representative Alexandria Ocasio-Cortez (D-NY), expanding the Child Tax Credit would also fulfill many conservative policy goals. After the Dobbs decision struck down Roe v. Wade, some pro-life advocates have suggested that lawmakers should expand the social safety net for mothers to make carrying a pregnancy to term more widely financially feasible. Expanding the Child Tax Credit could accomplish that goal. Additionally, conservatives have recently intensified calls to strengthen parents’ control of their children’s education. From this perspective, direct cash payments to families through the Child Tax Credit mirrors the strategy proposed by many school choice and voucher advocates within the Republican Party. The Child Tax Credit will not fulfill the policy goals of many factions within the Democratic and Republican Parties, but its design contains attractive features for each party’s agenda going forward.

With that said, significant compromise would likely be required to pass a bipartisan version of the Child Tax Credit that adequately addresses disagreement about work restrictions, overall cost, and inflation fears. Reinstating the expanded Child Tax Credit would come at a considerable cost, with expansion in line with the American Rescue Plan estimated to cost $105 billion per year on top of the current $118 billion baseline cost. While the initial expansion of the Child Tax Credit was part of the stimulus effort that contributed to current inflation levels, blocking the $100 billion Child Tax Credit expansion due to inflation concerns ignores the fact that it was a relatively minor component of a much larger $1.9 trillion spending bill that followed record levels of spending in the early stages of the Covid-19 pandemic. Especially considering the profound poverty-reducing effects the Child Tax Credit would provide, blocking the Child Tax Credit on inflation grounds would set a precedent where no policy can be passed if it costs the government additional money in the short term—regardless of the potential benefits. Giving money to parents who do not work is a more ideologically divisive issue tied to ideas about who deserves government benefits, but even this issue might not be insurmountable. For example, some Republican senators have already started to work on a compromise. Senator Mitt Romney has unveiled a proposal designed to continue the benefits found in the American Rescue Plan while scaling them back based on parental income. Senators Marco Rubio (R-FL) and Mike Lee (R-UT) unveiled another proposal designed to create a “pro-family tax code” that incorporates an expanded Child Tax Credit. President Biden and Democratic leaders should work with these Republican senators to create a compromise bill.

In a bipartisan expansion of the Child Tax Credit, Congress could lift millions of children out of poverty, deliver substantial economic and societal benefits, and deliver measurable progress in an era characterized by political gridlock. They must not squander this opportunity.