FAMILY TAX CREDITS ADVOCACY
Introduction
The Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) help U.S. households offset the high cost of raising children and support workers with low or moderate wages. The credits have been hallmarks of bipartisan success: They have been expanded multiple times since their enactment with the backing of both parties. Moreover, the spillover effects create societal benefits beyond the households they serve. By improving health and educational outcomes for children, creating incentives to participate in the labor force, and generating an increase in tax revenues, among other benefits, they are well worth the cost of government—and taxpayer—investment.
In recent years, each of these credits has been governed by overlapping layers of permanent law and temporary expansions. The Tax Cuts and Jobs Act of 2017 (TCJA) temporarily expanded the CTC and made the credit available to households with higher incomes. In response to the economic impacts of the pandemic, the American Rescue Plan Act of 2021 (ARP) increased the value of both the CTC and EITC for tax year 2021 only. Additionally, the ARP further broadened eligibility criteria for the CTC, providing the credit for the first time to very low- or no-income households raising children. The legislation also introduced monthly advanced payments of the CTC, temporarily transforming the credit into a child allowance akin to those offered in other Western nations. Now that the ARP expansions have expired, the TCJA expansion of the CTC remains in effect until the end of 2025 and permanent law governs the EITC.
The Earned Income Tax Credit: The EITC lifts more than 5 million people out of poverty every year by raising the after-tax income of workers with low earnings. Initially introduced on a temporary basis in 1975, the credit has been significantly expanded multiple times over the ensuing decades on a bipartisan basis. It was most recently expanded in 2021 under the ARP in response to COVID-19.
By supplementing wages, the EITC draws people with low incomes into the labor force and incentivizes them to increase their earnings. In fact, it can significantly raise a worker’s after-tax income: It paid recipients an average of $2,411 in 2020, the most recent year for which tax return data is available. Thus, the credit creates a double benefit for recipients: It gives them a large transfer and amplifies the income gain by encouraging them to earn more in the labor market.
Because the EITC increases earnings, it also raises revenue for the federal government and reduces spending on other benefit programs; after accounting for these savings, one study finds that each $1 of net spending on the EITC creates more than $3 of social value.
The Center on Budget and Policy Priorities calculates that the EITC was responsible for lifting 5.6 million people out of poverty in 2018. This makes the EITC the single most effective program targeted at reducing poverty for working-age households.
The Child Tax Credit: The CTC was established by the Taxpayer Relief Act of 1997 and has been expanded under every president since. The credit can help parents pay for critical needs like healthy food, clothing, child care, utilities (including broadband access), school tuition, books, and housing. These necessities give children more stable, economically secure childhoods, thereby promoting healthy development that will benefit them in the long term. The CTC is also a powerful anti-poverty program. In 2018, the credit lifted 4.3 million Americans out of poverty, including 2.3 million children. When combined with the EITC, its poverty reduction is even greater. In the same year, the two credits together pulled 10.6 million Americans (including 5.5 million children) out of poverty and lessened poverty for another 17.5 million (including 6.4 million children).
Under permanent law, the CTC gives parents a tax credit worth up to $1,000 per child, phasing in with parental earnings and phasing out at higher incomes. If a parent’s credit exceeds their tax liability, they receive the difference as a refund payment to the taxpayer.
Recently, this underlying law has been superseded by a temporary credit expansion under the TCJA, which increased the maximum credit to $2,000 per child while limiting the refundable portion to $1,400 per child and reduced the start of the credit’s phase-in from $3,000 of earnings to $2,500.
In 2021, the ARP further expanded the CTC; for that tax year only, the law eliminated the CTC’s refundability cap as well as its phase-in, allowing families to receive the full credit even if they had little or no earnings. The ARP also temporarily increased the maximum credit to $3,000, introduced a larger credit of up to $3,600 for children aged 5 or younger, and raised the maximum age of qualifying children from 16 to 17. Half of the credit was delivered in advance monthly payments that ran from July to December 2021, while the other half was available for families to claim when they filed their 2021 income tax returns.
Now that the CTC has reverted to its pre-ARP form, many non-filers are no longer eligible to receive the credit due to having insufficient earnings.
United Way of Greater Lorain County Position
United Way of Greater Lorain County supports sustaining and expanding poverty alleviating federal and state tax credits that provide a boost to lower and moderate income households.
