Can Democrats Pass an Expanded Child Tax Credit?

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As the midterm elections approach, Democrats are trying to push through key legislative priorities, including renewing the Child Tax Credit (CTC), which gives working parents a credit for each child and will expire in December 2025. No one doubts that it will be renewed; credit enjoys broad bipartisan public support.

But what will it look like? It’s less clear. In general, Democrats want an expansive version that sends funds to poor parents, as was the case briefly during the pandemic; Republicans want to return to a more restrictive version that gives working parents a lower tax bill, meaning people who don’t owe taxes don’t benefit. But in January, Sen. Joe Manchin III (DW.Va.) declined to support the expanded version of the Build Back Better social spending bill, which meant the bill could not pass a Senate. also divided.

However, the debate is open again. Our research looked at who benefits and who loses for different approaches to credit.

What is the child tax credit?

In 1997, Congress passed the Child Tax Credit with bipartisan support because, as its sponsors explained, the U.S. tax code did not “reduce tax liability enough to reflect ability reduced of a family to pay taxes as the size of the family increases”. In other words, having children was expensive and the tax code did not provide enough relief. By offering a tax credit instead of a child allowance to families with children, Congress created a program that would largely benefit middle- and upper-income Americans.

The credit costs the government more than $100 billion a year in tax deductions. But giving people money on their taxes actually requires parents to earn enough money to claim the credit. More income means more credit, up to a certain limit. To get the full credit — $2,000 per child before 2021 — the taxfiler must earn at least $24,000. This is because the child tax credit comes with a work requirement: you only get the full credit if you work enough to earn that much.

Most Americans support Biden’s expanded child tax credit — with some caveats

Prior to 2021, to qualify for the child tax credit, a parent had to earn income. But President Biden’s US bailout changed that temporarily in 2021. The legislation, which expired at the end of 2021, transformed the CLC in two ways.

First, the Pandemic Relief Bill increased the credit from $2,000 to $3,600. Second, and more importantly, it eliminated the work requirement. Or to put it another way, parents with incomes below $24,000 — and even those with no income — could claim the credit, which came in the form of a monthly check for most Americans. Along with other programs, the expansion of the benefit to the unemployed—eliminating the work requirement—helped reduce child poverty rates in the United States. According to some estimates, more than 5 million children have benefited.

However, Manchin is not alone in his opposition to offering child benefits without a work requirement. Some Republicans worry that simply sending money to parents could encourage some to stop working. Last summer, Sen. Marco Rubio (R-Fla.) said in a statement, “We have seen the destructive consequences that follow when the government pays people not to work. We need to take common sense measures to support working parents, not recreate the failing welfare state.

Is he right ? This is hotly debated by academics. In 2021, four economists released a study suggesting that 1.5 million working parents could leave the workforce if the federal government scraps the CTC’s recently reinstated work requirement. Last year, a researcher from the American Enterprise Institute testified that work demands lead to higher earnings. Other studies by economists suggest that non-work benefits may have no effect on employment or, in some cases, increase employment. Which is it?

Why is Manchin such a thorn in the side of the Democratic Party? Let’s count the reasons.

What does our study show?

Looking at Census Bureau revenue data between 2003 and 2018, we analyzed who benefits from the CTC and the amount of benefits they receive.

Single mothers were consistently less likely to receive full benefits than single fathers and married couples. Indeed, single mothers earn significantly less than single fathers, often below the $24,000 cap, making them less likely to get the full benefits. In addition, single mothers generally report more dependent children than single fathers. For each additional child, single mothers are likely to bring only benefits, which means that each child causes a greater net financial loss.

Our study shows that over 1.5 million parents, 80% of whom are women, may be excluded from the full Child Tax Credit despite working. At the current federal minimum wage, we estimate that a single parent would need to work more than 63 hours per week, 52 weeks per year, to claim full benefits. Additionally, we find that the income required to claim the full benefit – $24,000 – greatly exceeds the poverty line ($18,677 for a single-parent family in 2021), set by the Census Bureau.

In other words, poor parents must earn more than the poverty line to claim a benefit aimed at lifting them out of poverty.

The United States has one of the highest single parenthood rates in the world. Most of these parents are women. An increasingly polarized electorate makes the votes of single mothers even more important. To win those votes, policymakers may want to tackle head-on the obstacles single mothers face, such as ever-escalating costs for childcare, food and education. Making the child tax credit easier to claim would help. Policymakers may also want to note that the current minimum wage is too low to allow Americans who earn it to claim the full child credit — an income-tested poverty benefit.

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Ashley Nunes is Director of Competition Policy at the R Street Institute and a Fellow at Harvard Law School.