The Biden administration and leading Congressional Democrats recently observed Child Tax Credit Awareness Day by touting the new expansion of the Child Tax Credit (CTC) from the American Rescue Plan Act (ARPA), which President Biden signed into law in March. As lawmakers consider permanent expansion of the CTC, NTU is reminding lawmakers to explore legislative options that are fiscally responsible and targeted at the families and children who most need financial support.
NTU has previously written on the new CTC expansion, but for a helpful summary of how the CTC has changed in recent years, see the chart below:
| CTC Before 2018 | CTC 2018-2020 (TCJA) | CTC 2021 (ARPA) |
Standard Credit Amount | $1,000 per child per year | $2,000 per child per year | $3,000 per child per year |
Additional Benefit for Children Ages 0-6? | $0 | $0 | $600 per child per year |
17-Year-Old Children Eligible for Benefit? | No | No | Yes |
Benefit Distributed Annually or Monthly? | Annually | Annually | Monthly |
Credit Begins Phasing Out At Income Threshold Of... | $55,000 for married couples filing separately, $75,000 for single parents, $110,000 for married couples filing jointly | $200,000 for single parents and married couples filing separately, $400,000 for married couples filing jointly | $75,000 for single parents and married couples filing separately, $150,000 for married couples filing jointly |
Refundable? (i.e., taxpayers with less owed in taxes than the value of the credit can receive the credit) | Partially (up to $1,000 per child per year) | Partially (up to $1,400 per child per year) | Fully |
Estimated Annual Cost to Taxpayers | ~$55 billion (five-year average annual cost before TCJA) | ~$118 billion (tax year 2018 estimate) | ~$225 billion (tax year 2018 estimate + JCT estimate for CTC expansion) |
Sources: Congressional Research Service; Joint Committee on Taxation; American Rescue Plan Act | |||
Under current law, the CTC will revert to its 2018-2020 design, from the Tax Cuts and Jobs Act, from 2022-2025. After 2025, the CTC reverts to its pre-2018 design.
The Biden administration along with lawmakers like Sens. Sherrod Brown (D-OH) and Michael Bennet (D-CO) want to either extend the ARPA CTC or make it permanent. Experts in the Biden administration and at a nonpartisan research institution have estimated that even four years of an ARPA CTC extension (2022-2025), as President Biden has proposed, is tremendously expensive: the Biden Treasury Department put the revenue loss at $449 billion, while the University of Pennsylvania Penn-Wharton Budget Model put the revenue loss at a slightly lower $443 billion. That would make the CTC the largest expenditure in the tax code by FY 2022, larger than the employer-sponsored health insurance (ESI) exclusion or than tax exclusions for retirement plans like 401(k) plans.
Policymakers would do well to pause and consider the rollout and implementation of the ARPA CTC before green-lighting an expensive four-year extension. Numerous challenges abound. For example, Bloomberg Government reported that the phase-out thresholds for the expanded CTC may present difficulties for some taxpayers during filing season:
Some tax professionals are urging clients to consider opting out of receiving new monthly payments of the child tax credit because they could end up having to pay back that money next filing season.
...some tax professionals are concerned about clients having to pay money back next filing season, due to changing circumstances with their jobs and salaries.
Indeed, the Internal Revenue Service’s (IRS) FAQs for the new CTC point to the various life changes a household could experience during a year that may impact their CTC amount and status during a given year, including but not limited to:
- CTC eligibility and estimated payments based on 2020 or even 2019 tax information the IRS has on file for the taxpayer; any differences between the information the IRS has on file and the taxpayer’s actual income and/or eligibility status in 2021 must be reconciled when the taxpayer files their taxes next year;
- Two phaseout thresholds for CTC amounts; one that reduces the maximum possible value of the CTC from $3,600 per child to $2,000 per child for single taxpayers making $75,000 per year or more (and jointly filing taxpayers making $150,000 per year or more), and a second phaseout that reduces the value of the CTC from $2,000 per child to $0 for single taxpayers making $200,000 per year or more (and jointly filing taxpayers making $400,000 per year or more); and
- Changes in a taxpayer’s mailing address, bank account information, number of qualifying children, marital status, or income that could affect the advanced monthly CTC payments being made by the IRS starting in July.
Some taxpayers who receive advanced CTC payments that exceed their eligible amounts are protected from having to repay some or all of those payments in the 2022 tax filing season, but this “repayment protection” begins phasing out for single filers making more than $40,000 per year (joint filers $60,000 per year) and completely phases out for single filers with more than $80,000 per year in income (joint filers $120,000 per year).
Taxpayers who prefer not to receive the advanced CTC payments this year can opt out with the IRS, but it is unclear if the tens of millions of taxpayers eligible for the benefit will be aware of when and how they can opt out (or even if they will be aware of the risk of possible overpayments from the IRS).
Lawmakers will need to monitor implementation challenges and hiccups over the coming months before they fully extend the expanded CTC. It is important that Congress correct any mistakes or issues that crop up at the IRS before committing another $450 billion in taxpayer dollars to this benefit.
It is also important that the expanded CTC not be paid for with either deficit financing or with tax hikes that will harm job creation and economic growth during the American recovery from COVID-19. NTU has pointed to Sen. Mitt Romney’s (R-UT) Family Security Act as one promising blueprint for CTC expansion, given the Senator’s plan would pay for an expanded CTC by consolidating a number of overlapping and flawed programs like Temporary Assistance for Needy Families (TANF) and the Child and Dependent Care Credit (CDCTC) while still leaving lower- and middle-income families much better off, on net, than they were before the expanded CTC. The Family Security Act would also repeal the regressive State and Local Tax (SALT) deduction, which overwhelmingly benefits wealthy taxpayers.
Lawmakers could also explore limiting eligibility for the expanded CTC beyond the parameters lawmakers set in ARPA, which would make for a more fiscally responsible CTC benefit while still meeting policymakers’ goals of significantly reducing child poverty.
The Treasury Department estimates that 88 percent of children in the U.S. are in families that will receive monthly payments under the new CTC. While it is a legitimate policy goal to eliminate or eradicate child poverty or hunger anywhere it exists, it’s unlikely that 88 percent of children are in families that need monthly CTC payments from the federal government. The Center for American Progress estimates that 11 million children (one in seven overall) live in poverty, one-quarter of children are defined as living at 150 percent of the federal poverty level or less, and “[m]ore than 4 in 10 children live in a household struggling to meet basic expenses.” Even if policymakers sought to help the broadest swath of children in families with need, the four in 10 mentioned above, they could probably target the expanded CTC better than they are doing under ARPA or TCJA.
Tax Policy Center estimates that households in the 60th to 80th percentiles of income (likely making between $80,000 and $130,000 per year) will receive an average CTC benefit of nearly $4,800 under the ARPA CTC, compared with around $2,800 under previous law. Households in the top 20 percent of income earners, making more than $130,000 per year, will also see a larger average benefit. A sample household the White House discusses on their website, making $350,000 per year with two children, would receive $4,000 in CTCs and would receive $2,000 of that $4,000 in advanced monthly payments.
Lawmakers could lower the income thresholds for the entire CTC benefit by accelerating the phase out of the CTC for single filers making more than $75,000 per year and joint filers making more than $150,000 per year. Even better, lawmakers could begin the CTC phaseout at a lower income threshold, something like $50,000 per year for single filers and $100,000 per year for joint filers, and fully phase it out at the $75,000/$150,000 level. This would still cover the vast majority of filers but would ensure that six-figure households do not receive thousands of dollars in CTC benefits. This could also reduce the cost of the CTC by as much as 30 or 40 percent, given that in 2020 more than 40 percent of the CTC benefit went to households making $100,000 per year or more. These changes would help pay for the cost of the expanded benefit and the cost of making the benefit fully refundable for low-income families.
In short, lawmakers have a lot of work and oversight left to do as the Biden administration rolls out ARPA’s significant expansion of the CTC. They should pause and consider what’s working and what’s not working with the new CTC before green-lighting a four-year extension or permanent expansion to ensure any changes are enacted in a fiscally responsible and equitable manner.