Can Democrats pass an expanded child tax credit?

Can Democrats pass an expanded child tax credit?
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With the midterm elections coming, Democrats are trying to push through key legislative priorities — including renewing the child tax credit (CTC), which gives working parents a credit for each child and will expire in December 2025. No one doubts that it will be renewed; the credit has broad bipartisan public support.

But what will it look like? That’s less clear. In general, Democrats want an expansive version that sends funds to parents in poverty, as was true briefly during the pandemic; Republicans want to return to a more restrictive version that gives working parents a lower tax bill — which means that people who don’t owe taxes don’t get the benefit. But in January, Sen. Joe Manchin III (D-W.Va.) refused to support the expanded version in the Build Back Better social spending bill, which meant the bill couldn’t pass an evenly divided Senate.

However, the debate is open once again. Our research looked at who benefits and who loses for different approaches to the credit.

What is the child tax credit?

In 1997, Congress passed the child tax credit with bipartisan support because, as its sponsors explained, the U.S. tax code did not “reduce tax liability by enough to reflect a family’s reduced ability to pay taxes as family size increases.” Put another way, having kids was expensive, and the tax code didn’t offer enough relief. In offering a tax credit rather than a child allowance to families with children, Congress created a program that would largely benefit middle- and upper-income Americans.

The credit costs the government upward of $100 billion annually in tax write-offs. But giving people money off their taxes effectively requires parents to make enough money to claim the credit. More income means more credit, up to a certain limit. To get the full credit — $2,000 per child before 2021 — the tax filer must earn at least $24,000. In effect, the child tax credit has a work requirement: You receive the full credit only if you work enough to make that much.

Most Americans support Biden’s expanded child tax credit — with some caveats

Before 2021, to get the child tax credit, a parent had to earn income. But President Biden’s American Rescue Plan changed that temporarily in 2021. The legislation, which expired at the end of 2021, transformed the CTC in two ways.

First, the pandemic relief bill increased the credit from $2,000 to $3,600. Second, and more important, it eliminated the work requirement. Or to put it differently, parents whose income was below $24,000 — and even those with no income at all — could claim the credit, which arrived as a monthly check for most Americans. Along with other programs, expanding the benefit to people without jobs — eliminating the work requirement — helped cut child poverty rates across the United States. By some estimates, over 5 million children benefited.

However, Manchin is not the only one who opposes offering child benefits with no work requirements. Some Republicans worry that simply sending parents cash would encourage some to quit working. Last summer, Sen. Marco Rubio (R-Fla.) said in a statement, “We’ve seen the destructive consequences that follow when the government pays people not to work. We need to take common sense steps to support working parents, not recreate the failed welfare state.”

Is he right? That’s hotly debated by scholars. In 2021, four economists published a study suggesting that 1.5 million working parents might exit the labor force if the federal government eliminated the CTC’s recently reinstated work requirement. Last year, an American Enterprise Institute scholar testified that work requirements lead to higher earnings. Other economists’ studies suggest that benefits not tied to work may have either no effect on employment or in some cases, increase employment. Which is it?

Why is Manchin such a thorn in the Democratic Party’s side? Let us count the reasons.

What does our study show?

Looking at income data from the Census Bureau between 2003 and 2018, we analyzed who benefits from the CTC and how much of a benefit they receive.

Single mothers were consistently less likely to receive the full benefit than were single fathers and married couples. That’s because single mothers earn far less than single fathers, often below the $24,000 cap, making them less likely to get the full benefit. What’s more, single mothers typically claim more children as dependents than do single fathers. For each additional child, single mothers are likely to be bringing in only benefits — which means each child results in a larger financial net loss.

Our study shows that over 1.5 million parents — 80 percent of whom are women — may be excluded from the full child tax credit despite working. At the current federal minimum wage, we estimate that a single parent would have to work over 63 hours a week, 52 weeks a year, to claim the full benefit. What’s more, we find that the income required to claim the full benefit — $24,000 — far exceeds the poverty threshold ($18,677 for a single-parent family in 2021), set by the Census Bureau.

Put another way, poor parents must earn more than poverty threshold to claim a benefit aimed at lifting them out of poverty.

The United States has among the highest rates of single parenthood in the world. Most of these parents are women. An increasingly polarized electorate makes single mothers’ votes even more important. To win those votes, policymakers may wish to tackle the obstacles single mothers face head on, such as steadily increasing child-care, food, and education costs. Making the child tax credit easier to claim would help. Policymakers may also wish to note that the current minimum wage is too low to allow Americans who earn it to claim the full child credit — a poverty benefit with an income requirement.

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Ashley Nunes is the director for competition policy at the R Street Institute and a research fellow at Harvard Law School.