Tax Refund

Fast-approaching government shutdown deadlines in Congress are providing renewed momentum for an expansion of the Child Tax Credit (CTC). A targeted CTC expansion would deliver critical economic relief to families with children, and particularly families with low incomes, who were among those hardest hit by rising prices in the past several years.

Though inflation has slowed since mid-2022, many families with children have had difficulty paying for food, housing, and other basic needs, according to new findings by Urban Institute researchers. In a December 2022 survey, more than 1 in 4 adults living with children under age 18 reported problems getting enough food for their households in the previous year, and more than 1 in 10 had problems paying rent or mortgage costs. Families with children were more likely than those without children to experience these challenges, despite having higher employment rates.

The temporary expansion of the CTC in 2021 offers further evidence that a more generous child credit can lead to significant reductions in food insecurity among families with children. The 2021 expansion increased the maximum credit amount from up to $2,000 per child under age 17 to up to $3,600 per child under age 6 and $3,000 per child ages 6 to 17. It also made the credit fully refundable, enabling the lowest income families to get the full benefit. When these changes expired in 2022, childhood poverty and food insufficiency among families with children increased, as the credit amount returned to its previous level and 19 million children from low-income families were no longer eligible for the full credit.

A compromise deal taking shape now would pair a temporary and limited expansion of the CTC with increased tax deductibility for businesses’ research & development investments and other business tax relief, which also lapsed in 2021. As investments in kids have been shrinking as a share of federal spending, some lawmakers are pushing for any renewal of business tax relief to be paired with an equal investment in the CTC. Targeted expansions that fall short of the 2021 expansion, like faster phase-ins and removing limits on refundability, could expand access to the CTC for families in greatest need of assistance at a modest fiscal cost.

Senate Finance Committee Chair Ron Wyden (D-OR) has said he hopes Congress can adopt the package in time for this year’s filing season. Advocates for business tax relief are pushing for tax changes to be made retroactive to 2023; recently, CTC supporters have shown optimism the CTC would get the same treatment. In the increasingly likely event that a tax compromise is not reached until after the filing season has already begun, the IRS would face significant administrative challenges in implementing new tax rules.

Lawmakers will not be able to avoid action on the CTC for much longer. Many elements of the 2017 Tax Cuts and Jobs Act (TCJA) are scheduled to expire at the end of 2025, including changes to the CTC that doubled the maximum credit amount and increased the income threshold at which the credit begins to phase out. This sets up an expansive debate on the future of the tax code, including how to structure taxes for low-income families with children.

Though lawmakers do not have to sort all of that out in the next two weeks, they have an opportunity now to ease material hardship for families with kids during the current budget negotiations as we await future negotiations on the TCJA’s long-term fate.

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