Tax Refund

Talks on the expansion of the Child Tax Credit appear to have stalled, with a key sticking point being opposition of some lawmakers to making the credit fully refundable – or allowing low-income families to qualify for the maximum credit regardless of how much they earn. However, there are potential compromises short of full refundability that would still increase the credit for some of the almost 19 million children in families receiving less than the full credit now because their earnings are too low.

Several facets of the CTC restrict benefits for low-income families. Each of these can be modified. The Tax Cuts and Jobs Act of 2017 requires that families must earn at least $2,500 a year to access the credit. Benefits then phase in at a rate of 15 percent for each dollar of earnings beyond that amount. In 2023, up to $1,600 of the credit can be received as a refund (up from $1,400 under prior law and $1,500 in 2022). That threshold is indexed annually for inflation.

To put the benefits of the lowest income families on par with the full $2,000 per child benefit that over 45 million children living in middle- and high-income families receive each year, Congress could choose from many options. Tax Policy Center analyzed four of them.

Option 1: Repeal the earned income threshold, allowing families to calculate their benefit on all their earnings, rather than excluding the first $2,500.

This is one element of what Senator Romney and others have proposed in the Family Security Act 2.0 (FSA 2.0). It would boost the credit by up to $375 for families that can’t currently receive the full amount of the credit as a refund. TPC estimates 85 percent of benefits from this change would flow to families in the bottom 20 percent of the income distribution. In 2023, this change would deliver about $2 billion in additional benefits (or cost the federal government about $2 billion in additional foregone revenue).

Figure showing the percentage of benefits by income quintile for various options to increase Child Tax Credit refundability.

Option 2: Repeal the limit on how much of the credit can be received as a refund.

Eventually, because of adjustments for inflation, the limit will rise to equal the full amount of the credit under current law. Congress could hasten this parity by removing the limit now.

To receive the full $1,600 refundable amount in 2023, families will need about $13,200 in earnings for the first child, plus another $10,600 for each additional child. Because of these requirements, even middle-income families are not always able to access the full refundable portion of the credit.

This option would deliver about $3 billion in additional benefits in 2023. About 54 percent of benefits would go to families in the bottom 20 percent of the income distribution and another 37 percent go to families in the second income quintile.

Option 3: Congress could phase the credit in faster.

Doubling the phase-in rate from 15 percent to 30 percent would reduce the amount of earnings needed to get the full credit to $7,800 for the first child, plus $5,300 for each additional child. Benefits would be distributed similarly to Option 1, but total additional benefits would be about $3.7 billion in 2023. Under this option, families would still have their credit limited to the amount available as a refund.

Alternatively, Congress could adopt a faster phase-in, targeting full benefits once a given income is reached. Under the FSA 2.0, for example, benefits would fully phase in once earnings reach $10,000. This design allows larger families to get larger benefits at the same income level as smaller families.

Option 4: Congress could combine all the above options.

This would deliver about $11 billion in additional benefits (cost about $11 billion in additional foregone revenue) in 2023. Just over three-quarters of benefits would go to families in the bottom income quintile and most of the remaining benefits would be delivered to the second income quintile. In addition, it would reduce the number of children living in families that do not get the full CTC because their families do not earn enough to just over 6 million.

Of course, Congress could also extend larger benefits to young children, consider counting income other than earnings (such as unemployment, Social Security, or disability) to calculate the credit, or make part of the credit fully refundable and phase in the remainder.

Research has shown that delivering cash assistance to children can be a great investment. It can aid in a child’s development and produce a lifetime of economic and social benefits. Plenty of options could move the federal government closer to delivering a benefit to the lowest income children on par with higher income children.

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