Often, tax policy debates can be settled by splitting the difference. You like a tax rate of 28 percent. I prefer 20 percent. Let’s settle on 24 percent and call it a day.
But a key disagreement over the future of the Child Tax Credit (CTC) is about far more than a number. It is over the very nature of the credit: Is its primary purpose to reduce child poverty? Or is it largely to support middle-income (and even some high-income) families, as most conservatives say?
The depth of that dispute is a key reason why it has been so difficult for lawmakers to reach consensus on the future of the CTC and a big reason why President Biden’s Build Back Better (BBB) agenda has stalled.
The evolving CTC
To review the bidding, in the 2017 Tax Cuts and Jobs Act (TCJA), Republicans increased the credit from $1,000 to $2,000 per child for couples making as much as $400,000. Those paying no income tax could get up to a maximum of only $1,400 but needed to make at least $2,500 to be eligible for any benefit.
The 2020 American Rescue Plan (ARP), raised the credit to $3,000 ($3,600 for each child under age 6) and, crucially, made it fully refundable. As a result, the maximum credit was available to parents who did not work, a significant change from past refundable credits. Those increased benefits were allowed only for 2021 and the law has now reverted to the 2017 version.
Nearly all Democrats want to restore the ARP’s design. And their reason is explicit: To significantly reduce child poverty. Here is what five Democratic senators said in a Jan. 26 letter: “The expanded CTC payments, which are projected to reduce child poverty by more than 40 percent, kept an estimated 3.7 million children out of poverty in December 2021 alone….Nationwide, the payments cut hunger among families with children by 24 percent. CTC payments have helped millions of parents and caregivers enter or stay in the workforce.”
A disincentive to work?
But not every Democrat agrees. Sen. Joe Manchin believes that only parents who work should receive the credit. And many Republicans insist a fully refundable credit discourages work.
Here is a typical conservative critique, from the Wall Street Journal editorial page (paywall): “The larger allowance’s effect on poverty has been overstated because the benefit as structured crushes the incentive to work. Traditionally someone needed $2,500 in income to claim the child credit, which became more generous as a person earned more to encourage advancement. This is an extremely modest amount of income, and Democrats torpedoed this threshold for the sole purpose of sending large checks to people who don’t work.”
Back in 2017, Rep. Kevin Brady (R-TX), the then-chair of the House Ways & Means Committee, said the TCJA’s expanded CTC was focused primarily on helping middle-class families pay for the costs of parenthood, not getting children out of poverty: “We’re boosting family-focused tax benefits like the Child Tax Credit to help families keep up with the rising costs of child care, higher education, and looking after their loved ones.”
In theory, at least, there may be some middle ground between the two parties. Just as not every Democrat believes in the poverty-fighting benefits of the CTC, not every Republican denies them. For example, Sen. Mitt Romney (R-UT) says his Family Security Act is explicitly aimed at supporting families with children and reducing child poverty, sharing the goal of the refundable CTC. Romney’s plan would replace rather than supplement other safety net benefits for low-income households—an element Democrats dislike. Yet it includes a kernel of compromise.
The trouble is that Romney seems to have little support among his fellow Republicans just as Manchin has little or none among Democrats.
The other issues in the current CTC dispute—should the credit be $2,000 per child or $3,000, for example—are relatively easily resolved. The old-reliable trick of splitting the difference can be applied.
But that won’t work when it comes to refundability. Congress is at a stalemate over a profound philosophical issue: Is the primary purpose of refundable tax credits to support children of low-income parents or to encourage those parents to work? Is it to supplement wages or reduce poverty?
Conservative icon Milton Friedman proposed an early version of a refundable tax credit as a negative income tax available to all, whether they worked or not. Romney’s plan, though limited only to families with children, is built on the same idea. But the current Earned Income Tax Credit effectively does have a work requirement.
The choice Congress makes on the future of the CTC will have profound consequences for families and for the way government thinks about its support for low- and moderate-income households. But getting there won’t be easy. It doesn’t lend itself to splitting the difference.