Congress May Finally Pass a Child Tax Credit—but Will It Pay Off for Families?
There’s a lot of news on the child tax credit this week, so I’m focusing the full newsletter on that topic. Rest assured, the key deals dominating conversation in Congress—on funding the government, foreign aid, and the border—will be live issues going forward. But the chances of a bipartisan deal on a critical anti-poverty measure is my favorite story on Capitol Hill this week.
I reported earlier this week that the top members of the tax-writing committees in the House and Senate are close to hashing out a deal on legislation that would expand the child tax credit and implement business-friendly tax benefits and deductions. Senate Finance Committee Chair Ron Wyden, a Democrat, and House Ways and Means Committee Chair Jason Smith, a Republican, have been negotiating an agreement for several months, and lawmakers believe that they are close to creating compromise legislation amenable to both parties.
Democrats have long aimed to reinstate some version of the expanded child tax credit that was briefly implemented by the American Rescue Plan Act in 2021, which drastically lowered child poverty during the six months it was in effect. However, it appears that one of the key elements of the expanded child tax credit that helped alleviate child poverty may not be included in the final tax deal.
Democratic members of the Ways and Means Committee told reporters on Wednesday that they had been briefed on a framework that would cost around $70 billion, with $35 billion each for the expanded child tax credit and business tax benefits. Democrats said they were told it would be paid for in part by ending employee retention tax credit claims. The framework discussed would also increase partial refundability of the child tax credit, without providing full refundability for the poorest Americans. However, a source familiar with the negotiations between Wyden and Smith cautioned that the numbers related by House Democrats were not final and that there were still elements of a deal under consideration.
The American Rescue Plan Act eliminated the earnings requirement for the credit and allowed families too poor to pay income taxes to claim it—a provision colloquially known as “full refundability.” The American Rescue Plan Act also increased the amount of the credit and disbursed it on a monthly basis, instead of an annual lump sum. During the six months that it was in effect, from July through December 2021, this measure contributed to a dramatic decrease in child poverty, as well as a drop in food insecurity among families with children.
Although the decrease in child poverty in 2021 was due to a combination of those changes to the child tax credit, the refundability portion was perhaps the most significant expansion, because it allowed parents without income tax liability to still access the credit. Under current law, the $2,000 credit is only refundable up to $1,600.
“The refundability piece is critical, because you can’t just raise benefit levels on their own and expect to see these gaps close,” said Megan Curran, the policy director of the Center on Poverty and Social Policy at Columbia University. Curran and her colleagues recently released a report finding that 18 million children under age 17 were ineligible for the full credit—including 91 percent of children living below the poverty line and 36 percent in households living between 100 and 200 percent of the poverty line.
Democrats have been unsuccessfully working to revive the credit for years, and the current negotiations appear to be the closest lawmakers have come to a deal. However, Democrats on the Ways and Means Committee were unhappy with the numbers they were seeing from Wyden and Smith’s talks.
“This has to be a CTC tax package that makes that kind of profound difference in people’s lives. And right now, I don’t think they’re there yet,” said Representative Jimmy Gomez, a member of the Ways and Means Committee.
Representative Don Beyer told reporters that “it’s definitely not enough.” “There’s no refundability, which we’ve always wanted. It’s not monthly, which we’ve always wanted. It does move the dollar amount up, which is good,” said Beyer. Democrats said that the amount refundable would be $2,000 by 2025, matching the amount of the nonrefundable credit.
Partial refundability meant that low- to middle-income children do not receive the full credit, as well as children in very poor households. Moreover, the amount available changes based on how many children a household has: For example, a parent with one child would need to earn around $31,000 per year to obtain the full credit, while a parent with two children would need to have an annual salary of $36,000.
Under the current framework being discussed, people earning under $2,500 would be ineligible. The credit would still phase in at a 15 percent rate for each dollar of earnings above $2,500. But rather than getting up to 15 percent of annual income in tax credits capped at $1,600 per year—the refundable amount of the current credit—those eligible would receive 15 percent of their income capped at $2,000 in 2025.
A source familiar with the negotiations also said that the framework would phase in the credit per child, allowing parents with multiple children to receive a higher amount. A November analysis by the Tax Policy Center found that phasing in the credit at a rate of 15 percent per child would “benefit 23 percent of families in the lowest income quintile by an average of $270.”
Democratic senators also appeared more sanguine with the turn of events than their House counterparts.
“It’s not going to be everything that I would’ve wanted,” Senator Michael Bennet, a Democratic member of the Finance Committee and longtime advocate for expanding the credit, told me on Wednesday. “We weren’t going to do any extensions of the [research and development] tax credit without improvements to the child tax credit, that’s going to make a difference here, and that’ll make a difference to a lot of poor kids.”
Some progressives voiced their frustration with the possible deal in a meeting of Democrats on the Finance Committee Wednesday morning. But Wyden noted that because the credit would be “relitigated,” it would give Democrats the opportunity to push for some of their priorities—such as full refundability—again in 2025.
“I’d much rather get into 2025 from a position of strength, which is what we get if we get the child tax credit improved now,” Wyden told me.
Meanwhile, Republican lawmakers appear pleased about the addition of benefits and deductions for businesses in a potential deal, even if it’s still unclear when an agreement will be formally announced. Smith told me that he believed “pro-growth tax policies” would be crucial for combating inflation.
“The three tax provisions of R&D, business expensing, and interest expensing—those are crucial, and they’re crucial for Republicans and they’re crucial for Democrats,” said Representative Blake Moore, a Republican on the Ways and Means Committee. However, he acknowledged that the future of such legislation is uncertain, adding: “I don’t have any visibility on how it plays out. I don’t think anybody truly, truly does.”
Lawmakers would want to pass a deal by the end of January, to allow for the credits to retroactively apply to the 2023 tax year. But that gives them little time to reach an agreement, and it’s uncertain what vehicle they would use to pass such comprehensive tax legislation. The opacity of the deal’s future was echoed by Neal, who sounded more bearish on its prospects.
“This idea that it’s just around the corner doesn’t seem to be very plausible,” he told reporters.
What I’m Reading
The nation’s capital is falling behind on fighting violent crime. Here’s why, by Yours Truly. (Yes, I realize I’m promoting my own article in the “What I’m reading” section, but that’s because it’s a very thorough reported piece!)
The U.S. is dealing with an Israeli leader who’s losing control, by Nahal Toosi in Politico
Trump is connecting with a different type of evangelical voter, by Ruth Graham and Charles Homans in The New York Times
Skipping school: America’s hidden education crisis, by Alec McGillis in ProPublica
This tribe got their “land back.” But it’s no longer livable, by Margaret Grebowicz in The New Republic
The queerest thing about Taylor Swift, by Spencer Kornhaber in The Atlantic