One of the biggest sticking points in negotiations over President Biden’s agenda has been how to extend the American Rescue Plan’s expansion of the Child Tax Credit. The Build Back Better Act that passed the House last month would extend the ARP’s CTC expansion for just one year, but Sen. Joe Manchin (D-W.Va.) has strongly objected to this approach because it obscures the long-term cost of continuing the program, which could total $1.6 trillion over the next decade. Democrats must get creative if they want to preserve this critical accomplishment, which helped cut child poverty in half this year.
There are four main components to the ARP’s CTC expansion. First, it increased the CTC from $2000 to $3000 for couples making under $150,000 and allowed 17-year-olds to qualify for the credit. Second, it provided an additional $600 – bringing the total CTC to $3600 – for children under age 6. Third, it made the CTC fully refundable so low-income families could receive the full credit even if it exceeds their income tax liability. And finally, it made part of the CTC payable in monthly installments to support families throughout the year instead of making them wait until filing their annual tax returns to claim the credit.
Making all these changes permanent would cost roughly $100 billion each year until 2025, and nearly double that amount in later years. The cost jumps because a temporary increase in the CTC from $1000 to $2000 that was included in the 2017 GOP tax bill expires in 2025. By making the ARP CTC levels permanent, Democrats would effectively be paying for the cost of making the last CTC expansion permanent as well as the cost of any new expansions they wish to enact on top of it.
One easy way for Democrats to offset the elevated costs of expanding the CTC after 2025 would be by extending changes to dependent exemptions, personal exemptions, and the standard deduction that are also set to expire in 2025. As my colleague Brendan McDermott previously wrote, these policies were designed to help offset the GOP’s original CTC expansion, and allowing them to expire while making the expanded CTC permanent would result in families unintentionally receiving even greater tax benefits per child in 2026 than they did in 2021.
Extending those offsets would be a common-sense way to cut the cost of making the ARP’s CTC expansion permanent by almost half. But it also might be a violation of President Biden’s pledge not to raise taxes on any households making under $400,000 because some upper-middle-income households would benefit more from the return of dependent exemptions than they do from the ARP CTC. Even if this may be their desired policy outcome, Democrats are probably loathe to take such a party-line vote when the GOP could give them bipartisan cover in 2025.
Another option would be for Democrats to avoid addressing the 2025 cliff by structuring their proposed CTC expansion as a permanent supplement to the current CTC. In other words, rather than receiving a $3000 CTC in 2022, the parents of an eight-year-old would receive a $2000 CTC and a $1000 supplemental CTC. Then, in 2026, the supplemental CTC would still be $1000 regardless of whether Congress chooses to extend the expiring provisions of the 2017 tax bill or not.
Enacting all of ARP’s CTC expansion as a permanent supplement would cost roughly $1.2 trillion, which is likely to be prohibitively expensive for the current Congress. But Democrats could pass a more limited supplement that, in conjunction with making the current-law CTC fully refundable, applicable to 17-year-olds, and payable in monthly installments, would achieve most of their original proposal’s poverty reduction at a fraction of the cost.
For example, if the supplement was structured as a $1600 “Young Kids Tax Credit” for children under age 6, the total cost of this CTC expansion would be just $500 billion. Alternatively, Democrats could enact a permanent version of President Biden’s proposal for universal pre-K and limit the YKTC to kids under pre-K age for roughly the same total cost.
These are just a couple examples of how Democrats can enact a permanent and transformative expansion of the Child Tax Credit at an affordable cost. The bottom line is that the perfect cannot be the enemy of the good, and Democrats should continue working towards a consensus plan to save the CTC that can fit within their budget constraints.