For decades, child poverty has been one of the U.S.’s biggest—and least discussed—problems. Even before the pandemic, the richest country in the world allowed more than 11 million children to live in poverty, and 12.5 million to live food-insecure lives. And the American poverty measure understates the number of poor, meaning many more children are likely in unofficial poverty.
The pandemic has, of course, worsened suffering. Researchers at Columbia University’s Center on Poverty and Social Policy estimated that 1.3 million more children were living in poverty in September 2020 than in January 2020. Throughout the first month of 2021, 14 percent of all U.S. households with children reported facing food insecurity, while one in four renters with children in the household reported that they were not caught up on rent.
The Bernard L. Schwartz Rediscovering Government Initiative (RGI) at The Century Foundation for years has been advocating an unconditional cash allowance for each child living in an officially poor family. At last, a bipartisan consensus has formed to support the equivalent of direct cash allowances in the form of an expanded child tax credit. President Biden’s historic American Rescue Plan, which includes an expanded CTC to cover all children, has passed Congress as the American Rescue Plan Act, and been signed into law. It offers a host of measures to respond to the crisis caused by the pandemic, with one of its main proposals being to expand the child tax credit with increased benefit amounts and regular delivery for families. This new and improved CTC will deliver benefits to more than 93 percent of children—especially important, considering the old CTC left out nearly one third of all children who lived in poverty. The CTC expansion is a huge win, and will undoubtedly serve as a milestone in how the nation supports children and families.
With these expansions, the CTC seems to be transitioning from a tax credit to something more closely resembling a child allowance—which is a good thing. Giving more money to families to help with the cost of raising children is now popular with voters, with the majority saying they would use the benefit to help pay for rent, food, utilities, and child care; it is also, globally, the most popular way for nations to support children. But this increasing interest in expanding the CTC into a child allowance brings up an interesting question: Who should administer it?
As a tax credit, the CTC is currently administered by the Internal Revenue Service. But their stewardship complicates the distribution of the program’s benefits. One alternative would be to have the CTC administered by the Social Security Administration (SSA)—something that has been proposed by Senator Mitt Romney (although his plan would also strip children of other social safety benefits).
So, should a reformed CTC that reaches more families and is delivered regularly be delivered by the IRS, as it currently is, or should it be a program within the Social Security Administration? While both agencies have compelling arguments in their favor, and the IRS is likely the best option in the short-term, the long-term future of the CTC would be best served in the SSA. And no matter where the program is, the most important thing now is that Congress take action now on expanding these benefits to low-income families immediately.
Not Just a Tax Credit Anymore
To understand the dynamics of whether the CTC would fit better with either the SSA or the IRS, some history helps. The idea for a Child Tax Credit in the United States began being floated in the 1990s, making appearances in the 1991 bipartisan National Commission on Children recommendations and in the Republicans’ 1994 Contract with America platform. When President Bill Clinton signed the Child Tax Credit into law in 1997, lawmakers decided on a $500 nonrefundable tax credit per child, refundable for families with three or more qualifying children and not indexed to inflation, among other limitations.
The Great Recession kickstarted a big round of changes to the CTC. The 2009 American Recovery and Reinvestment Act (ARRA) expanded the CTC by temporarily lowering the refundability threshold—that is, the level of income above which the refundable credit kicks in—to $3,000. This change was made permanent by the 2015 PATH Act. Next, the 2017 Tax Cuts and Jobs Act increased the maximum credit to $2,000 per qualifying child, increased the refundable portion to $1,400, lowered the eligibility income threshold to $2,500, and finally, increased the phaseout threshold to $200,000 for single filers and $400,000 for joint filers.
The American Rescue Plan Act, just signed into law last week, seeks to further expand the Child Tax Credit into a child allowance. The act includes a one-year increase in the CTC to $3,600 for children under age 6 and $3,000 for those aged 6 to 17. The credit would also be made fully refundable, a crucial addition that will allow lower-income families who owe little or no federal income tax to receive the full credit. The proposal also directs Secretary Janet Yellen to ensure the Department of the Treasury delivers advance payments of the credit (up to a total of half of the benefits) on a regular basis, if feasible, which is important so that families can incorporate the support into their monthly budgeting and bill paying. Researchers at the Columbia University’s Center on Poverty and Social Policy found that, among all of the items in President Biden’s proposal, the CTC expansions alone would cut poverty and deep poverty (those below half the poverty line) for all children under 18 by almost 45 percent and 49 percent, respectively. Importantly, the analysis shows that an expanded CTC would have a particularly large impact on cutting poverty for Black and Hispanic children, whose poverty rates are already above 20 percent.
Senator Romney’s proposal would raise the CTC benefit amounts for one year to $4,200 for children age 5 and under, and $3,000 for those aged 6 to 17, capped at $15,000 per family. The plan would keep the phaseouts at current levels—$200,000 for single filers and $400,000 for joint filers—and would direct the Social Security Administration to administer the program, with the IRS processing reconciliation at tax time in the case of overpayments and underpayments. Importantly, the plan would cut social policy programs such as TANF and the Child and Dependent Care Tax Credit to pay for the CTC expansions.
Whether the IRS or the SSA administers the CTC, there are structural issues with delivering child benefits through a tax credit, which other countries have experienced when adopting such an allowance using the tax code. Some of those technical problems have revolved around overpayment of benefits, which result in the agency requiring the beneficiary to pay back the amount (called a clawback) later in the year—and the new relief act addresses some of those concerns with the inclusion of a safe harbor, which is a great start, but it could do more to protect families from harmful clawbacks.
To illustrate how a clawback of overpayments can be required, consider the following. After the tax year is over, the agency administering the benefit would reconcile the recipient’s previous year’s tax return with the actual year’s tax return. That’s where problems may arise. Every year, more than three million children live with a different adult than they lived with the previous year. The use of the previous year’s tax return means using outdated information to pay out benefits—which may result in people being overpaid, receiving benefits throughout the year, and then being hit with a surprise tax bill at tax time.
For example, if a child lives with one parent in 2019, but custody changes in 2020 and the child goes to live with the other parent, the parent that the child resided with in 2019 but no longer does in 2020 may receive monthly benefits for the child throughout the year, and then be held responsible for repaying them at the end of the year—when the money’s likely been long spent. The relief act includes some safe harbor provisions to protect low-income families from these clawbacks. The text provides that joint filers making $60,000 or less will not be responsible for $2,000 of each overpaid benefit—but only if overpayment was due to miscalculation of the number of children, not for changes in income or marital status. Clawbacks and overpayments are a serious issue no matter who administers the benefit, and there’s still time for policymakers to bulk up the safe harbor by increasing the thresholds before it’ll impact families at the end of the tax year.
The concern over clawbacks points to a larger argument, one that RGI at The Century Foundation has been making for several years: We believe the United States should adopt a child allowance that is not entangled within the tax code, which would avoid clawbacks because the payment would be universal.
Nevertheless, momentum behind expanding the CTC into something more closely resembling a child allowance is critical to moving the policy forward in the short term. The question of which agency is best to administer a child allowance through the CTC has compelling points for both the SSA and the IRS, but it seems that while the IRS may be the most convenient, fastest option to deliver the benefit, the Social Security Administration would likely be the better bet over the long term.
The Short-term Argument for Administering the CTC through the IRS
Because the IRS has traditionally administered the Child Tax Credit, the agency is already familiar with the complex rules and structure of the CTC. The agency has delivered the benefit, albeit once a year, since its inception. Further, the new relief act has zeroed in on delivery to American families by July 1, 2021—only a few months away. If July is the target date for the payments coming online, the IRS is probably more equipped to do so on such a tight timeline.
The relief act also gives the IRS a $400 million funding boost to help with administrative costs, which will be very helpful. But the IRS funding is for technical updates, not for outreach, which is critical for the expanded CTC to be successful. More funding for outreach is another thing Congress can act on this year, given the CTC currently leaves out one third of all children—likely even more now, because of the pandemic’s disruption of family earnings—because their parents don’t earn enough money to receive the full benefit. In order for it to have its poverty impact, the newly eligible will have to know they’re eligible, and outreach by the IRS is needed for that.
Another consideration is that, in general, benefits delivered by the IRS don’t count as income when it comes to determining eligibility for other programs such as SNAP, while benefits from the Social Security Administration such as SSI payments do. This means that CTC benefits delivered by the IRS would already not count as income for determining eligibility for other critical social programs, making it easier for the IRS to not disrupt other important safety net benefits for families. However, if the SSA were to administer the CTC, they could make an exception in legislation to avoid the CTC counting as income when it comes to determining eligibility for other programs, as pointed out by the Tax Policy Center.
However, delivering the CTC through the IRS has serious flaws. Most importantly is the sheer number of children and families that do not file taxes already because they don’t make enough. The IRS misses this group, which would likely prove to be a huge problem given that the CTC expansion would expand eligibility to many individuals in the non-filer group—more than 3 million children live in poor households that do not file federal income taxes. The IRS has had problems delivering support in the past with stimulus payments. The Center on Budget and Policy Priorities estimated that nearly 12 million Americans were at risk of not receiving the stimulus payments in the last year. While the $400 million boost in funding will help the IRS with administering the payments, the agency will likely need more than that to reach nonfilers with CTC payments in the long term.
Further, because the new CTC would send out advanced payments, the agency would have to reconcile the estimated benefit from the previous year’s tax return with the actual tax return—creating messy overpayment situations stemming from child custody changes. The IRS doesn’t have a mechanism to react to changes in child custody changes, which could spell big problems when the two tax returns are reconciled.
The bottom line is that while the IRS makes sense in the short-term to get the CTC payments out to families by July, it’s not the most natural fit for a long-term child allowance program, especially given families don’t generally interface with the actual agency, nor does it have the most user-friendly reputation. For the benefit to be successful in helping lift families out of poverty, it has to be accessible to them.
The Long-term Argument for Administering the CTC through the SSA
Administering the revamped Child Tax Credit through the Social Security Administration has its own advantages and disadvantages. One argument is that the overall ethos of the SSA is more in line with the goals of a reformed CTC that offers families regular support. Part of the agency’s mission statement itself is to “to promote the economic security of the nation’s people”—a similar mission to what a child allowance-like CTC would be. Similarly, there are more than 1,200 offices, making the agency more accessible and friendly to the families who would be interfacing with it. For the child allowance to be successful, families need to be able to interface with the administration easily.
More technically, the Social Security Administration does have a register of children, because most parents apply for Social Security numbers at birth; however, the agency doesn’t keep track of all those children, it only keeps track of about four million who currently receive benefits from the Social Security Administration because their parents are either disabled, retired, or deceased. Further, the Social Security Administration already pays out monthly benefits—to the tune of more than 67 million payments monthly through its programs. What’s more, the SSA already sends monthly checks to children, and last year it had paid out more than $2 billion of benefits to 3.8 million children, as pointed out by People’s Policy Project. Because the SSA at least pays out monthly benefits to some children, it has a strong advantage to be able to expand monthly payments to almost all children.
The SSA already has a mechanism to navigate custody and marital status changes throughout the year because its SSI program has to account for such changes when paying out benefits. This is especially important because in any given year, children’s household situations can change—more than 30 percent of children younger than 6 years old experience a significant change in their household or family status, which could affect their eligibility for programs like the CTC. The SSA already has an online portal to mitigate these changes in status, which the relief act directs the Department of the Treasury to set up for the administration of the CTC through the IRS. The purpose of the portal in the act is for families to be able to opt out of advanced payments, and to report any changes related to the credit, such as income, marital status, and number of qualifying children. If the CTC were administered through the SSA, the IRS could avoid having to reinvent the wheel of navigating children’s household status changes.
While administering the CTC through the Social Security Administration would avoid the IRS having to do the duplicative work required for tracking monthly payments and updated eligibility, the plan is not without some faults. Some advocates of the agency may be wary about adding new responsibilities to the agency’s existing programs, especially proposals that would add to the agency’s responsibilities, such as paid family and medical leave. But with adequate funding, the agency would likely be able to handle an increased workload.
Having the SSA administer the Child Tax Credit in the short-term is likely to be more time-consuming than if the IRS were to maintain that role through July. The SSA would have to start from the beginning of administering the program, whereas the IRS would just make some changes in its current administration—notedly, not small changes. It would be more time consuming for the SSA to take over the CTC now, and so regarding the July delivery date, the SSA may not be the best-suited option.
In short, having the IRS deliver the Child Tax Credit makes sense in the short-term, but the SSA would be a more appropriate option in the long run future to administer a child allowance. Policymakers can continue to pursue Child Tax Credit expansions in the IRS, but should consider moving the CTC to the Social Security Administration in the long-run.
While the IRS may be the fastest path to get the cash out to children, the SSA is more prepared to send out monthly checks and deal with changes in household status. Either way, because the path toward child allowances in the United States is currently bent on delivering the benefits through the Child Tax Credit, it’s important for policymakers to consider the impact of clawbacks for families. The American Rescue Plan Act provides for that with its safe harbor but could be improved upon to shore up more support for families.
No matter where the debates lands, one thing is certain: we must move toward a child allowance in the United States and adequately fund whatever administrative home we choose for it to make sure it has its intended impact of reducing child poverty. We must get this right—millions of families are counting on it.