Yesterday, House Republicans laid out their proposal for tax reform. Among other things, the proposal includes an increase in the child tax credit, the focus of presidential adviser Ivanka Trump. Although there was momentum by key Democratic and Republicans to reform the child tax credit into a major support for kids and families, today’s bill introduced by House Republicans is a setback for the cause because it fails to include a refundable child tax credit.
The House Bill Would Harm Families with Children
Similarly to the Big Six tax framework released last month, the Republican legislation increases the value of the nonrefundable child tax credit from $1,000 to $1,600 (that’s $100 per family more than the original framework). However, this increase only goes to the nonrefundable version of the credit, not the refundable additional child tax credit. Without increasing the refundability of the credit, low-income individuals (who don’t owe taxes after different tax credits) won’t benefit from the increase. According to the Center on Budget and Policy Priorities, an estimated 5.4 million fewer poor children will benefit from the credit if the refundability provision is not included, and that number is unlikely to change with the $100 difference between the original framework and today’s legislation.
Even those families that would benefit from the nonrefundable increase won’t feel the full benefit of the $600-per-child credit. That’s because the plan also eliminates the personal exemption, which, according to the Tax Policy Center, is worth $486–$1,012 to moderate-income families. At best the increase in the child tax credit is a wash for these families. Moreover, today’s package increases eligibility for the credit to joint filers from $110,000 to $230,000 per year (single parents from $75,000 to $115,000). That means that a big proportion of the added child tax credit dollars proposed today will go to relatively well-off families who had never received the credit before. The plan also includes family tax credits of $300 for non-child dependents and elderly parents—but this won’t move the needle for the youngest and most vulnerable kids.
The significant overall reductions in revenue proposed by the House Republicans could be the precursor for large reductions in health and human services programs that low-income children depend on.
Moreover, the significant overall reductions in revenue proposed by the House Republicans could be the precursor for large reductions in health and human services programs that low-income children depend on, as proposed in the House Budget resolution. This includes cuts of $1.3 trillion–$1.9 trillion in the Affordable Care Act and Medicaid, $140 billion in food stamps, and up to 30-percent cuts in so-called non-defense discretionary programs, like Head Start, which could serve 170,000 fewer children due to these cuts.
All of this is to pay for $1.5 trillion in tax cuts, primarily as a reduction in the corporate tax rate from 35 percent to 20 percent. As Professor Reuven Avi-Yonah has written for the Century Foundation, there is no economic rationale for such a drastic tax cut for corporations, as most G20 countries tax corporate profits at 20 to 30 percent, and currently U.S. effective corporate taxes are higher than in Europe. The plan proposes to go much further than previously proposed revenue-neutral approaches to making U.S. companies competitive internationally and reducing incentives to move jobs overseas.The tax cut would largely go to the wealthiest of Americans, who reap the benefits of corporate profits in stock dividends, not to mention large cuts to taxes for pass-throughs for professionals, like doctors, who can incorporate as businesses. The Tax Policy Center previously estimated that 80 percent of the benefits of the Big Six framework would go to the top 1 percent of tax files—and the modest changes in the House Bill, like retaining the top rate of 39.6 percent for millionaires, are not likely to make the bill more equitable given the large corporate cuts.
There’s a Better Way to Improve the Child Tax Credit
Although House Republicans undermined real child tax credit reform, there is still real movement on the issue among progressives, and even some conservatives, in the Senate, where Senate Democrats Sherrod Brown and Michael Bennett introduced strong legislation proposals, and Ivanka Trump, Mitch McConnell, Marco Rubio, and other Senate leaders spoke in support of child tax credit proposals at a recent press event.
Leading Democrats Come Together on the American Family Act
The American Family Act, introduced by Senators Michael Bennet of Colorado and Sherrod Brown of Ohio last week, would more than triple the size of the tax credit from $1,000 to $3,000, and would provide a more generous benefit of $3,600 per year for kids under seventeen. The credit would be fully refundable, meaning that families would get the full credit in their pocket regardless of how much they earned in the prior year. Columbia researcher Chris Wimer (along with Sophie Collyer), who had previously analyzed a variety of child allowance proposals for the Century Foundation, found that the American Family Act would slice the child poverty rate nearly in half from 16.1 to 8.9 percent. Moreover, the legislation would direct the Treasury to devise a way to pay out the tax credit on a monthly basis—gaining the advantages of a recurring child allowance, and indexing the credit to inflation to keep up with the costs of raising kids.
This proposal mirrors the ideas of a wide swath of the nation’s leading anti-poverty researchers, including the University of Wisconsin’s Tim Smeeding and Columbia University’s Jane Waldfogel, who together arrived at the conclusion that a $250–$300 per month, per child, universal cash allowance was the leading new strategy for tackling the nation’s stubbornly high child poverty rate. Research has shown that modest amounts of cash infused by the child tax credit and its companion, the earned income tax credit, can make lasting impacts on child well-being. These include lower incidence of low-birth weight, better test scores in elementary and middle school, and remarkably higher graduation rates from high school and better labor market earnings. This has brought the research community together in support of an expansion of these effective programs.
The unification of these two key senators, one from the Democrats’ more moderate wing and the other more progressive, represents a significant move. With Speaker Pelosi long on record in support of a fully refundable credit (and already acting as a cosponsor on such a bill by Rosa DeLauro, along with support from other major Democrats like Steny Hoyer, James Clyburn, and Richard Neal), and Secretary Clinton proposing a similar plan during her campaign, there’s now widespread sympathy for the adoption of a child allowance as a key pillar of Democratic economic policy. It’s a big investment: based on our previous research, the price tag is likely to be between $110 and $130 billion more than than the current child tax credit cost. But there is little doubt this is the most efficient way to make a major dent in child poverty.
Refundable Tax Credits Make Their Way into the Conservative Debate
Even conservative senators Marco Rubio and Mike Lee have moved in the direction of a partially refundable child credit, proposing to improve on the one that exists in current law. Their proposal would begin phasing in the child tax credit with the first dollar of earnings, unlike the current child tax credit, which only begins after the first $3,000 in earnings. The most recent reports have focused on an increase in the credit from $1,000 per child to $2,000 per child. That’s a big improvement from their 2015 proposal, which would have only provided extra child tax credit dollars to families who had maxed out on their earned income tax credit.
They propose making the credit refundable against payroll taxes, in essence meaning that workers would earn 15.3 cents in a child tax credit for each dollar they earn. That’s a direct response to other Republicans, who argue that low-income workers don’t pay taxes. In truth, payroll taxes phase out at $128,700 of income, and workers pay higher taxes than those who rely on investment income.
Like liberals, conservative thinkers have linked an expanded child tax credit or child allowance to their own goals. The Niskanen Center’s study of Canada’s Child Benefit found that a more generous benefit increased mother’s attachment to the labor force. Joshua McCabe, from the Institute for Family Studies, along with others like the Family Research Council, has argued that a more robust child credit would encourage marriage and family formation.
Rubio–Lee’s proposal won’t make the same big impact on poverty as Bennett–Brown. The Center on Budget and Policy Priorities points out that a single mother working full time at the federal minimum wage with two children would only get a child tax credit increase of $494 out of a possible $2,000. But it would be real progress through the combined effect of first-dollar-phase in and a $2,000-per-child credit. At its full implementation, a family with a single parent and one child earning at the poverty level ($16,240 per year) would get a 100-percent increase in their child tax credit from $1,000 to $2,000; a single mother with two children at the poverty level ($20,420) would benefit from a credit that increases from $2,000 to $3,063 (half the maximum increase under the plan).
The problems with the House package are too big for even a modestly better child tax credit provision to solve alone.
With bipartisan support for a child tax credit, there’s a unique opportunity to give millions of families additional help to make ends meet. The House is missing a key opportunity by leaving behind families of some 11 million children who would get little or nothing from the House bill. Perhaps if Congress was willing to better balance its desire to grant large tax cuts for the wealthy with also providing more assistance the nation’s most vulnerable families, we could make important progress. However, for now, the problems with the House package are too big for even a modestly better child tax credit provision to solve alone.