The child tax credit has had a roller coaster of a decade so far. In 2021, the Democratic Congress and Joe Biden enacted the largest-ever expansion of the provision, making it a monthly benefit of up to $300 (or up to $3,600 annually) paid to all parents, even those without income.
Then … it ended. Despite widespread Democratic support for making that change permanent, the credit went back to a $2,000 annual benefit in 2022, with strings attached that limited how much poor families could get. The poorest families went from getting up to $3,600 per kid to getting $0.
Ever since, anti-poverty activists have been strategizing about how to expand the credit again. The votes clearly weren’t there in the Senate for the full proposal, and after the 2022 midterms, the votes weren’t there in the House either. So hopes started to revolve around a tit-for-tat deal: Maybe an expanded credit with more benefits for poor children could pass if combined with some business tax breaks Republicans wanted. The GOP wouldn’t necessarily want the expanded child credit, but they’d stomach one if they got something in return.
Efforts to cut a deal along these lines foundered at the end of 2022, as my colleague Rachel Cohen reported. A renewed push began at the end of last year, and for a while the outlook was similarly bleak.
Then, in mid-January, Congress’s two lead lawmakers on tax issues — Senate Finance chair Ron Wyden (D-OR) and House Ways and Means chair Jason Smith (R-MO) — announced they had come to a deal. The arrangement was exactly the same one that had been pitched for well over a year: a child tax credit boost in exchange for more favorable treatment of research and development expenses.
On January 31, the deal passed the House by a staggering margin: 357 votes to 70, with large majorities of both Democrats and Republicans voting yes. The bill’s fate in the Senate is unclear, with top Republican tax writer Chuck Grassley expressing skepticism about handing Joe Biden a win in an election year, but the legislation has beaten the odds so far.
The technical details of the Wyden-Smith deal include some provisions besides the child and R&D provisions, like an extension of “bonus depreciation” (which lets businesses deduct the cost of property they buy faster), some provisions on US-Taiwan tax issues, and payments for people affected by the East Palestine train derailment in Ohio. To pay for all this, the deal rolls back the Employee Retention Tax Credit, a business credit enacted to encourage employers to keep people in their jobs during the Covid pandemic.
For people who care about child poverty, though, the real action is in the child credit section.
How the bipartisan deal changes the child tax credit
The Wyden-Smith deal significantly expands the child tax credit, with changes designed mostly to benefit households earning around $20,000 to $40,000 a year. The details of how it does this are a little complicated.
Currently, the credit is limited to 15 percent of a filer’s income in excess of $2,500 a year. That’s a rather slow phase-in, and it means that, for instance, a family with two children making $20,000 won’t get the credit’s full benefit (and a family making $10,000 would get still less). It also features a “refundable maximum”: While the credit is worth $2,000 per child for families earning enough money to owe income taxes, at most $1,600 per child is available to families that don’t have a tax bill — that is, poor and working-class families. About 2 in 5 American households owe $0 in income taxes or get money back on net. The refundable maximum limits how much these families can benefit from the child credit.
The Wyden-Smith deal changes both of these aspects of the credit. The phase-in rate is still 15 percent but is now applied on a per-child basis. Right now, the way the credit works for a family with multiple kids is that the maximum refundable amount is multiplied by the number of kids and then phased in with income at 15 percent, so a family with three kids has a $4,800 total credit, which then gradually phases in. The Wyden-Smith approach treats the family as getting three separate $1,600 credits, which phase in simultaneously at 15 percent, resulting in much more money for low-income families.
This change can be a little hard to grasp, so here’s a chart showing how the phase-in works for families with two or three children, under both the old (dotted lines) and new (solid lines) provisions:
Effectively, the new credit means that everyone gets the full refundable credit once they earn $14,000 a year or more, whereas under previous law parents of three kids making as much as $34,000 a year still weren’t getting the full benefit.
The law also changes the refundable maximum. Under current law, the maximum is indexed for inflation. It had increased to $1,600 for 2023 and was due to keep increasing. The $2,000 maximum credit for families who owe income taxes, by contrast, was not indexed for inflation. Over time, observers expected the refundable maximum to reach $2,000 due to inflation and thus become irrelevant.
The Wyden-Smith deal speeds up that convergence by increasing the 2023 maximum to $1,800, then setting it to $1,900 in 2024 and $2,000 in 2025. Both those numbers and the total $2,000 credit will be indexed for inflation. By 2025, the maximum is done away with, and poor taxpayers get the same $2,000 credit as everyone else from that year onward. Like the change to the phase-in approach, most of the benefit from this policy goes to those making $20,000 to $40,000 a year, per the Tax Policy Center. The average affected household gets about $350 back a year.
Finally, the deal includes a “lookback” provision for tax years 2024 and 2025. This allows a taxpayer to use the previous year’s income to qualify for the credit, if doing so results in a bigger benefit. This rule has been introduced in the past to account for emergencies (like Covid), and it’s generally beneficial to families enduring temporary difficulties. Under current law, a parent who earned $30,000 in 2023 but spent all of 2024 unemployed would get nothing from the child tax credit in the latter year. But with a lookback, they could get the full credit.
How big a deal is this?
Putting all the provisions together, the Center on Budget and Policy Priorities estimates that the deal will lift about 400,000 children out of poverty, and make another 3 million less poor, in its first year. By 2025, it will be keeping 500,000 children a year out of poverty. The Tax Policy Center finds that the bulk of the tax cut will go to families earning $20,000 to $40,000 a year, with most families in the bottom fifth of the income scale getting a tax cut. Because of the business tax cuts, the total package winds up concentrating its benefits at the bottom and at the very top of the income scale.
While nothing to sneeze at, this is a far cry from the roughly 3 million children that would been lifted out of poverty in 2022 if the 2021 expansion of the credit had been extended. It is a dramatically more modest step. It also takes as a given that the credit will not be available to families with zero earnings, a key disagreement between Democratic and Republican legislators on which the latter have shown no flexibility.
All that being said, the CBPP authors note that the proposal is very well targeted, and its CTC provisions “direct all of their benefits to children in low-income families who receive less than the full credit under current law.”
Twenty-three Democratic House members voted against the bill, including many left-wing members disappointed that it does not go far enough. Rep. Rosa DeLauro (D-CT), a historic backer of the child credit who voted no, explained in a statement, “I will keep fighting for the expanded and improved Child Tax Credit that we delivered for all families in 2021—because our children deserve no less.”
And, indeed, for supporters of the 2021 credit, it does not go nearly far enough. By some other standards, it’s also a bit of a disappointment. When I wrote about a possible compromise back in November, I envisioned a bill that increased the credit’s phase-in rate to 30 percent and reduced the earnings minimum from $2,500 to $0. Neither of those changes made it into the final deal. I think they’re logical next steps for anti-poverty advocates to demand.
But 400,000 children taken out of poverty is also nothing to sneeze at, and some business credits with bipartisan support are a pretty paltry price to pay. I expect that as the measure reaches the Senate floor, supporters of the child credit will come around and back it. The alternative is a status quo that does even less for children.
Update, February 1, 2024, 11:40 am: This story was originally published on January 16 and has been updated to reflect the news that the bill has passed the House.