The upcoming presidential race will have a large effect on tax policy, as many provisions of the Tax Cuts and Jobs Act (TCJA) are set to expire in 2025. So far on the campaign trail, neither candidate has provided many details about how they would change existing tax benefits for Americans.
One of the few proposals we have heard is Vice President Kamala Harris’s proposal for a Child Tax Credit (CTC) boost up to $6,000, which she mentioned at her first debate with former President Donald Trump. Trump’s running mate, Senator J.D. Vance, has also suggested increasing the CTC to $5,000 per child, although the Republican Party platform endorses a $2,000 per child credit. Instead of expanding a popular program to unsustainable levels, the presidential candidates should consider modeling their CTC reforms on existing proposals that make more sense for families and taxpayers.
Vice President Harris claims that her proposal would be “the largest child tax credit that we have given in a long time.” Actually, it would be the largest CTC ever. The CTC has been a part of the U.S. tax code since the Taxpayer Relief Act of 1997 established a $400 per child credit for the 1998 tax year, with an increase to $500 the following year. In today’s dollars, that initial credit would be about $779. Subsequent laws raised the CTC to $1,000 per child until 2017, when the TCJA raised the amount to $2,000 per child. The credit is currently on track to go back to $1,000 per child, the permanent law amount, in 2026, along with other expiring provisions of the TCJA.
The closest the CTC has ever been to what Vice President Harris proposes is when it received a temporary boost during the pandemic, being raised as part of the American Rescue Plan Act (ARPA) to $3,600 for children five years old and below and $3,000 for older children of 2021. ARPA also made several structural changes to the CTC, such as allowing for monthly payments and increasing the refundable portion. Refundable tax credits can be claimed by taxpayers that do not have income tax liability. Harris wants to bring back this CTC amount, while boosting the CTC to $6,000 for the first year of a child’s life.
It is unclear how exactly Harris’s CTC reform would take shape, but it is important to recognize that the CTC is complex and can be costly for taxpayers. The Joint Committee on Taxation estimated that ARPA’s one-year expansion of the CTC cost about $110 billion at the time, and the Tax Foundation estimates that Harris’s proposal could cost up to $1.6 trillion over ten years. Her proposal would also add another layer of complexity by adding a third age range to the credit amount on top of an array of eligibility criteria. If Harris’s CTC follows ARPA’s income phase-in and phase-out thresholds, Tax Foundation estimates that it would cause the economy to shrink in the long-run.
Thankfully, the CTC has long enjoyed bipartisan support and many sensible options exist to help low-income families. The bipartisan Tax Relief for American Families and Workers Act (TRAFWA), which passed the House earlier this year, would retain the CTC at its TCJA level, $2,000 per child with an annual adjustment for inflation. It would also preserve the credit’s link to earned income and phase-in the credit per child rather than per taxpayer to account for larger families.
TRAFWA’s version of the credit looks similar to the fiscally sustainable, effectively targeted, and simple CTC proposal that NTUF published last year. NTUF recommended a permanent $2,000 credit per child, with an increase to $2,400 for children five years old and below, allowing the refundable portion of the credit to increase with inflation. We also recommend a phaseout for taxpayers with income of $75,000 or more, which aligns with both the pre-TCJA phaseout and ARPA’s phaseout, ensuring that the credit mainly benefits the families that need it the most. Our proposal also attempts to account for the potential benefit of advanced payments while balancing the need to minimize improper payments, allowing for payments to be distributed quarterly rather than monthly, as is done by ARPA.
The CTC can be an effective way to mitigate poverty among families and can be more efficient to administer than other government assistance programs. Yet the bloated level of the credit that was in effect under ARPA, and the expanded version under Vice President Harris’s proposal, are expensive and likely not cost effective. Harris should consider a middle-ground approach that benefits those receiving the credit while easing burdens on the taxpayers who are paying for it.