This is the first post in a series NTU is publishing on the American Rescue Plan (ARP), the $1.9-trillion COVID relief bill supported by President Biden and House and Senate Democrats. The series seeks to examine what’s next for Congress and taxpayers regarding many aspects of this significant legislation. Here are the others, on state taxation of unemployment, premium tax credit expansion, direct payments, and Employee Retention Tax Credit expansion.
One of the most talked-about features of the newly-passed American Rescue Plan (ARP), President Biden’s COVID relief bill, is a massive expansion of the Child Tax Credit (CTC) and significant changes to how the CTC is administered, though only for tax year 2021. While CTC expansion has the potential to cut child poverty in half in the U.S., lawmakers already seeking to make this expansion permanent (i.e., beyond 2021) should find ways to pay for the expansion given its impact on deficits and debt.
ARP would increase the value of the CTC from $2,000 per child per year to $3,000 per child per year (and $3,600 per child per year for children ages 0-6). Instead of receiving the credit as one lump annual sum when they file their taxes, parents would receive a monthly benefit from the Internal Revenue Service (IRS) equal to $250 per child per month (and $300 per child per month for children ages 0-6). The benefit would start to phase out for individuals making more than $75,000 per year and couples making more than $150,000 per year.
ARP builds on an already-large expansion of CTC passed by Senate and House Republicans, and former President Trump, in the Tax Cuts and Jobs Act (TCJA) in 2017. Here’s how CTC has expanded and changed in just a few years.
| CTC Before 2018 | CTC 2018-2020 (TCJA) | CTC 2021 (ARP) |
Standard Credit Amount | $1,000 per child per year | $2,000 per child per year | $3,000 per child per year |
Additional Benefit for Children Ages 0-6? | $0 | $0 | $600 per child per year |
17-Year-Old Children Eligible for Benefit? | No | No | Yes |
Benefit Distributed Annually or Monthly? | Annually | Annually | Monthly |
Credit Begins Phasing Out At Income Threshold Of... | $55,000 for married couples filing separately, $75,000 for single parents, $110,000 for married couples filing jointly | $200,000 for single parents and married couples filing separately, $400,000 for married couples filing jointly | $75,000 for single parents and married couples filing separately, $150,000 for married couples filing jointly |
Refundable? (i.e., taxpayers with less owed in taxes than the value of the credit can receive the credit) | Partially (up to $1,000 per child per year) | Partially (up to $1,400 per child per year) | Fully |
Estimated Annual Cost to Taxpayers | ~$55 billion (five-year average annual cost before TCJA) | ~$118 billion (tax year 2018 estimate) | ~$225 billion (tax year 2018 estimate + JCT estimate for CTC expansion) |
Sources: Congressional Research Service; Joint Committee on Taxation; American Rescue Plan Act | |||
Some leading Congressional Democrats are already pushing to make the CTC expansion permanent, since the changes made by ARP are only in effect for tax year 2021. Indeed, much like with the Affordable Care Act (ACA) premium tax credit (PTC) expansion, proponents of CTC expansion may frame the expiration of this temporary benefit as a tax hike on working families (or a policy choice that increases the child poverty rate).
As the table above indicates, though, CTC expansion is an expensive proposition -- it may cost between $778 billion and $1.1 trillion over the next ten years, according to NTU Foundation and the Committee for a Responsible Federal Budget (CRFB) -- and lawmakers should find a way to pay for the expansion.
Sen. Mitt Romney (R-UT) outlined a thoughtful CTC expansion plan earlier this year that would have fully offset the cost of expansion with changes to some social programs, duplicative tax credits, and more regressive tax expenditures like the state and local tax (SALT) deduction. Lawmakers looking to make expansion permanent should explore these proposed offsets further. In particular, ARP’s simultaneous and temporary expansion of the Child and Dependent Care Credit (CDCTC) seems unnecessary given lawmakers’ changes to the CTC. The Romney plan, which eliminates CDCTC but still likely leaves low- and middle-income parents better off given the CTC expansion, is more sensible, simple, and fiscally responsible.
Lawmakers could also consider enacting lower income phaseout thresholds for the CTC, closer to what ARP calls for, or even restoring the pre-TCJA phaseout thresholds. If the goal of CTC expansion is to reduce child poverty, it is not necessary to direct an extraordinarily generous benefit to six-figure households.
Permanent expansion of CTC will be a major discussion in the latter part of 2021, but lawmakers should be responsible and pay for a trillion-dollar expansion of this new benefit.