Tax Refund

President Biden’s fiscal year 2024 budget would revive 2021’s enhanced child tax credit (CTC) with some new twists that seek to make the credit work better for families. But in doing so, the plan would likely deliver extra benefits to some very well-off families. It could also increase complexity – pushing against a key argument for operating benefit programs through the tax system.

First, the good stuff. The proposal would extend full refundability permanently, allowing even very low-income families to receive the full benefit of the CTC. Full refundability is critical to reducing child poverty, especially among Black and Hispanic children. Under current law, about 19 million children in low-income families fail to get the maximum credit because their parents don’t earn enough money.

As in 2021, younger children would qualify for larger benefits than older children – an idea backed by research. This would last through 2025.

Most families would have the option to receive a monthly benefit. Many households received half their CTC in monthly payments from July to December 2021. Urban Institute analysis showed that 45 percent of families liked the option, 28 percent had no preference, and 27 percent preferred an annual benefit. A monthly benefit likely explains at least part of the observed drops in food insecurity after 2021’s enhanced credit.

Delivering a monthly benefit requires some way to protect families with low incomes from being at risk of repaying overpayments. Not doing so could undermine take-up. Overpayments can happen because of income or family composition changes. Income changes are much more common. But the proposal would actually protect many higher income families, presumably less of a concern.

The proposal would allow a person to calculate their credit based on the lowest AGI from two years ago, one year ago, or the current year. That way, if payments were advanced based on prior year information, families wouldn’t risk having to pay the credit back if their income increased enough to cause their credit to phase down. But that would direct resources toward higher, not lower, income families, and it could be quite costly. A simpler solution would be to not advance the full credit or, start advancing the credit halfway through the year when families know more about their short-term finances, as I proposed here.

If the administration is worried that full refundability will not pass but monthly payments will, then they could design the provision to protect exclusively people whose credit drops in response to a drop in earnings – and ideally limit the safeguard to low-income families as in other parts of the tax code.

Finally, the proposal would allow the benefit to move with the child. This provision will likely break the $400,000 pledge for some families but could ensure the person most likely to spend the money on the child will receive it. It also can reduce the risk of overpayments but likely comes with considerable record keeping complexity for households in which children move in and out throughout the year.

All-in-all, the CTC proposal will benefit many families. And it starts an important conversation about how to better match credit timing to need and support families whose circumstances change throughout the year. Policymakers and researchers should work with the lived experience of real families to understand how those goals can be met, while still maintaining a tax code that seeks to be fair and efficient.

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