Should All Families Receive the Child Tax Credit?

Last month, my parents received their third round of economic impact payments through the American Rescue Plan (ARP). They decided to turn the proceeds into their own “stimulus payments” for their seven grandchildren, aged 8 to 24.

Our son, happy for a little spending money, wondered if we’d get a check like my parents did. We explained that since the payments are targeted to those with greater financial need as reflected by their incomes, we are not eligible. But we can claim another ARP tax benefit—its expanded Child Tax Credit ( CTC). The enhanced credit lifts millions of children out of poverty, which is fantastic. But it also reduces our tax bill, which to our son, is a little weird.

“Why do we get any of that credit if we’re not eligible for the economic impact payment?” Our son asked. “The credit should go to people who really need it. Otherwise it doesn’t feel fair.”

But my husband countered, “It’s very expensive to raise kids, and that kind of spending is good for an economy. I think all families should get a tax credit for each of their children. Keep it simple.”

I think my husband’s right. And it turns out there is a simple way to make the CTC more equitable—and help our son feel better about it.  

Policymakers initially envisioned a CTC for every child in the country.

The idea of a child credit has been floating around for at least 30 years. In 1991, the bipartisan National Commission on Children recommended a $1,000 tax credit for every child through age 18 in response to slow wage growth, higher costs of living, and a growing tax burden for average households. Even families that earned too little to owe federal income taxes would receive a $1,000 cash payment—a refundable credit. The idea, however, was too ambitious for its time.

Instead, the first CTC was for middle-income working families.

In 1997, a much narrower idea became law. The Taxpayer Relief Act created a $400-per-child nonrefundable credit for working families with children under age 17. The credit phased out starting with couples filing jointly making $110,000 and for single parents making $75,000. But since it was nonrefundable (it could only be used to offset taxes), it excluded very low-income families. 

Over 18 years, the CTC expanded. 

Over the next two decades, through 11 bills, Congress gradually made the CTC more generous, but not fully refundable. Then, in 2017, the Tax Cuts and Jobs Act (TCJA) reconfigured several family benefits, ultimately making many more families eligible for the CTC through 2025.

The TCJA doubled the maximum credit to $2,000 per child and increased the refundable amount from $1,000 to $1,400. It also made the CTC available to families with higher incomes. Couples with two children and incomes as high as $480,000 now get at least some amount of credit

Today’s CTC is bigger and better than the National Commission on Children’s vision.

As the nation’s economy crawls out of a pandemic-driven recession, Congress has modified the CTC again. This time, the ARP expanded the benefit well beyond what the National Commission on Children proposed 30 years ago. As my TPC colleagues Elaine Maag and Nikhita Airi explain, families with very young children can claim a credit of up to $3,600 for each young child and $3,000 for older children. Most important, the credit is now fully refundable and available to parents who do not work. The expanded credit still phases out for higher-income families, but more quickly. 

But is it too big? Maybe it doesn’t have to be.

I informally polled a half dozen parents in my mostly higher-income community about the expanded CTC. None echoed my son’s view that the CTC is undeserved. If anything, they said the expanded credit comes a bit late. Said one friend who will benefit from the expansion, “While I’m thrilled… and it will allow for some college savings, it would have been even more vital when my kids were younger and in child care.”

Our son was not convinced: “She can save money for college? Doesn’t that mean she has extra money?” 

How much income is too much?  

In her TPC Prescription conversation with our colleague Howard Gleckman last month, Elaine acknowledged that it is a tough question. “If you draw the line too low, you’re going to miss people that are hurting. If you draw the line too high, you might include people who don’t need to be included.” One problem is that the line may be different depending on where you live. “In my home state of Kansas,” Elaine said, “the incomes where the CTC phases out seem extraordinary…. But in Arlington, Virginia, they don’t seem that high, especially given extraordinary child care costs.”

Elaine and others, including our TPC colleagues Len Burman and Gene Steuerle, have a better idea. Give the same credit to everybody, regardless of income. But treat the CTC like a cash benefit—and tax it. That is an easy way to make the credit progressive and may also maintain support for a generous benefit by even high-income households. 

I like that idea, and so does our son. Now, to convince my husband….

The Tax Hound, publishing once a month, helps make sense of tax policy for those outside the tax world by connecting tax issues to everyday concerns. Have a question or an idea? Send Renu an email.