Maintaining Tax Credits Would Ensure Children, Low-Paid Workers Have a Strong Future

MDCEP Research Analyst Christopher Meyer contributed to this post

Federal and state tax credits for working families have a long history of reducing childhood poverty and helping ensure more families can afford the basics. When Congress addressed longstanding gaps in the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) as part of the American Rescue Plan earlier this year, it reduced the child poverty rate by an estimated 40 percent. Making these changes permanent through the Build Back Better legislation now under consideration would help maintain this progress long term, narrow racial disparities in child poverty rates, and help more children reach their full potential.

To ensure families and our economy see the full benefits of these expansions, Congress must also reject wrongheaded calls to attach an earnings requirement to the permanent CTC expansion, which would essentially lock out the families most in need of an income boost.

Expanded Child Tax Credit Reduces Child Poverty

The Child Tax Credit (CTC) is a partially refundable tax credit that enables low- and middle-income families to get money back at tax time for each qualifying child. Historically the tax credit has benefitted the families that received it but it left others behind. Ever since the credit was created in 1997, policymakers have advocated for strengthening the credit’s reduction of child poverty by increasing the availability and maximum amount of the tax credit.

This year’s American Rescue Plan took significant steps that, if made permanent, will shape the future of children in America for years to come. This legislation made several important changes to the credit:

• Ensured that very low-income families who previously received no credit or a small partial credit were eligible for the full credit
• Restored eligibility for immigrant children who were excluded from the credit as part of the Trump tax bill in 2017
• Raised the maximum credit for children ages 6 and over to $3,000 and for children under 6 to $3,600 (up from $2,000)
• Created monthly advance payments so that families can benefit from the additional funds now, rather than waiting to file their 2021 taxes next year.

Congress is now considering legislation that would extend these improvements through 2025 and also adjust the credit amount for inflation during that time. This proposal could also be part of the larger economic recovery package referred to as the “Build Back Better” plan. In addition to the CTC, congressional proposals would permanently expand the Child and Dependent Care Tax Credit. This credit is fully available to low-income families and works to help offset childcare costs through a system of vouchers. This will enable more parents to work and will likely ease the pressure on family budgets.

Research shows that their family’s economic security has a huge influence on a child’s future. Additional family income improves outcomes for children in areas such as their health, education, and future earnings that shape their future and the future of the United States as a whole. America was built on policies that make it difficult for impoverished families to bring themselves out of poverty. Making the recent expansions of the CTC permanent provides an opportunity to permanently reduce child poverty in the United States by upwards of 40 percent. This policy change would serve to protect children from the damaging effects of poverty and hardship that ensue, and support a stronger recovery from the economic effects of the COVID-19 pandemic.

An improved CTC would also significantly reduce racial, ethnic and geographic disparities in child poverty. Prior to the American Rescue Plan changes, about half of Black and Latinx children, as well as children in rural communities, received either a partial credit or no credit at all due to their family incomes being too low. It will also ensure all immigrant taxpayers with children are eligible to receive the credit. In all, the CTC expansion is expected to benefit upwards of 65 million children nationwide, greatly reducing poverty and working to bridge the extreme disparities in poverty rates by race and ethnicity.

Making the CTC fully refundable for very low-income households was the most effective revision and is the most important piece to make permanent. Raising the maximum amount and adding 17-year-olds without full refundability only raises an estimated 543,000 children above the poverty line, reducing child poverty by only 5%. This is because most children with incomes below the poverty line didn’t receive the full credit prior to the rescue plan, so increasing the credit is of no benefit to them. However, with full refundability , about 27 million children nationwide (35 percent of children) will benefit. Making the CTC fully refundable will help ensure that credit reaches those most in need and would work against the child poverty that is all too prevalent in our country.

Child Tax Credit Benefits 352,000 Maryland Children in Low-Income Families

The temporary expansion of the Child Tax Credit has provided a vital economic lifeline to hundreds of thousands of Maryland families. The monthly payments that started in July have helped parents afford enough food, buy school supplies and clothes to prepare kids to return to in-person classes, and cover other essentials. This includes at least 352,000 children that previously were partly or fully excluded from the CTC due to low or no family earnings:

• Black – 148,000
• Latinx – 85,000
• White – 82,000
• Asian – 13,000
• Another race or multiple races – 24,000

The disparities are clear – prior to this year’s changes, Black and Latinx children were excluded from the CTC because of low or no family earnings at a much higher rate than White children. Making the expansion permanent would reduce these disparities in Maryland. ITEP conducted an analysis of the state-by-state impact of full refundability in 2022, including all undocumented children in the CTC expansion and found that in Maryland 403,400 children would benefit (30% of children in Maryland). Full refundability in Maryland would have a remarkable impact in both the present and the future of the lives of hundreds of thousands of children in Maryland.

Expanding the EITC Supports Low-Paid Workers

 Along with the CTC expansion, Congress is considering a permanent expansion of federal Earned Income Tax Credit enhancements. The expansion would extend the changes in the American Rescue Plan that assist low-paid adults who are not raising children. The expansion would help 17 million people make ends meet, while preventing 5.8 million low-paid workers from being taxed into or deeper into poverty.

Similar to the Child Tax Credit, the EITC changes expanded eligibility to those who have been historically excluded from receiving the credit, including younger adults and people over 65 who are still in the workforce, and increased the value of the credit for workers not claiming dependent children on their taxes.

Federal EITC Expansion Has Additional Benefits in Maryland

Making this year’s EITC expansion permanent would also have significant benefits on the state level because Maryland has a state EITC that partially matches the federal credit. With the existing state EITC, the federal American Families Plan in 2022 would result in a $92 million benefit for workers in Maryland, which equates to an average $302 increase to each of the individual 317,000 adult beneficiaries. The expanded EITC eligibility in Maryland coupled with the federal EITC enhancements that are currently under consideration would make a significant impact in the efforts to assist low-wage workers in their fight with poverty.

Congress Should Reject Calls to Exclude Families with Greatest Needs

Some policymakers have recently called for attaching an earnings requirement to the permanent CTC expansion, essentially locking out the families most in need of an income boost. This wrongheaded proposal would kneecap the policy’s ability to reduce child poverty, with long-lasting harms.

• The temporary CTC expansion included in the American Rescue Plan reduced child poverty by more than 40%. More than four-fifths of this reduction was due to the inclusion of families with the lowest incomes.
• This means that locking out families with low or no income would push about 6 million children back into poverty.
• Monthly CTC payments that began in July dramatically reduced the number of children nationwide who weren’t getting enough to eat. Locking out the lowest-income families would ultimately take food off of children’s plates.
• Locking out low-income families would hit children of color hardest. Before the American Rescue Plan expanded eligibility, the CTC fully or partially excluded half of Black and Latinx children, compared to one in five white children.
• Raising children is work. As any parent in the world can attest, parents don’t need to be “incentivized” to work—that’s what they do day in and day out to put food on the table, get kids to school and doctor’s appointments, and perform all the responsibilities of raising a child.
• Furthermore, there is no evidence that excluding low-income families would draw parents into the paid labor force. In more than 95 percent of families who benefit from making the credit fully refundable, the parent or other caretaker is working, between jobs, ill or disabled, elderly, or has a child under age 2. One study found that a recent expansion of child benefits in Canada had no effect on labor force participation.

It would be a grave mistake to lock out the families with the most need. Congress must reject this wrongheaded proposal.