Personal finance

Expanded child tax credit may last for 1 more year instead of 5 as Democrats cut economic plan

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The enhanced child tax credit has sent monthly checks to millions of American families since July.

Now, it’s one of the programs on the chopping block as Democrats slim down President Joe Biden’s Build Back Better agenda.

Lawmakers are proposing to extend the benefit for only one year. Previously, the Biden Administration proposed extending the enhanced credit through 2025, while other Democrats argued that it should be made permanent.

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The details

The American Rescue Plan made a few key changes to the existing child tax credit, adding advance monthly payments and increasing the benefit to $3,000 from $2,000, with a $600 bonus for kids under age 6, for the 2021 tax year.

Those in favor of keeping the enhanced credit point to its success as an anti-poverty program.

The first two checks lifted 3.5 million kids out of poverty, according to a study from the Center on Poverty and Social Poverty at Columbia University. If extended through 2025, it could lower the child poverty rate to 8.4% from 14.2%, according to the Urban Institute.

It also slashed hunger rates among children, and eased financial anxiety for families.

“When something works, you grab it and you run and you build on it,” said Natalie Foster, co-founder and co-chair of the Economic Security Project. “And we know these checks are working.”

The credit was also made fully refundable, which ensured it went to 27 million families that previously didn’t have enough income to qualify for the benefit. This meant that about half of Black and Latino children, as well as ones in rural communities, were able to get the benefit this year, according to the Center on Budget and Policy Priorities.

“This is an absolutely critical investment and one that we can afford to make,” said Ashley Burnside, a policy analyst at the Center for Law and Social Policy, adding that continuing the benefit will have greater impacts for children of color.  

Work requirements

Others have criticized the program as too broad and would like to see it more focused.

Democratic Sen. Joe Manchin of West Virginia has proposed changes to the credit, like limiting it to families with income of $60,000 and adding a work requirement.

Most American families receive some money from the child tax credit. The full enhanced benefit goes to married couples with up to $150,000 in adjusted gross income and single parent families with up to $112,500.

There is also currently no work requirement attached to the credit.

That’s a problem, according to Robert Doar, president of the American Enterprise Institute and a former Social Security administrator in New York state and New York City. The child tax credit previously had a work requirement in the form of partial refundability — families had to have about $2,500 of earned income to get the benefit.

“I think that sent a very good message that cash aid of this sort are meant to encourage and support some effort to get into the labor force,” he said.  

One study from University of Chicago economist Bruce Meyer, who is also a scholar at the American Enterprise Institute, found that 1.5 million workers, or about 2.6% of working parents, would leave the labor force over the next two years if the credit is extended.

Other studies have found opposite effects, including that the enhanced credit has supported working parents.  

What’s next

To be sure, the details of the enhanced credit and the duration of its extension could change as negotiations continue.

If the enhanced credit isn’t extended beyond next year, it doesn’t do away with the benefit overall. Before the American Rescue Plan boosted the benefit, the child tax credit was $2,000 per child under the age of 17 for families and was partially refundable up to $1,400.

Plus, other programs including the earned income tax credit and Supplemental Nutrition Assistance Program benefits have been enhanced to help low-income Americans, said Doar.

On the flip side, cutting back the enhanced child tax credit or only offering it for one more year will limit its impact.

If Democrats adopted Manchin’s $60,000 income threshold for eligibility, for example, some 37.4 million children across the U.S. would miss out on the credit, according to the Niskanen Center.

In addition, those in favor of extending the credit hoped that the Biden Administration would include children with individual taxpayer identification numbers — generally undocumented children growing up in the U.S. — in the benefit. This would help about 1 million kids who were left out by the 2017 Tax Cuts and Jobs Act.  

“Families up and down the income ladder benefit from the child tax credit, but it is incredibly important that we draw a big circle around permanent full refundability and dreamers,” said Foster.

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