Graeme Sloan/Sipa USA via AP Images
The deal on the federal Child Tax Credit that’s now on the table would have in dollar terms roughly one-ninth of the impact of the 2021 expansion.
“Negotiators Inch Closer to a Child Tax Credit Deal,” reads a headline at Semafor. The enthusiasm around a restoration of the 2021 CTC expansion that cut child poverty in half is palpable. In campaign speeches, Joe Biden repeatedly cites that expansion as a signature policy achievement; while he acknowledges that “the other side … went ahead and blocked” the move to make it permanent (leaving out Joe Manchin’s role in that), he always follows up with “we’re going to get it back.” Is this emerging deal a sign that indeed, we will get it back, in time for the 2023 tax season?
In a word, no. The deal that’s now on the table would have in dollar terms roughly one-ninth of the impact of the 2021 expansion, and even optimistic projections show similarly weakened impact for reduction of child poverty. Moreover, getting not only an agreement, but something that actually passes the House and Senate in time for this tax year—which would be a little more than two weeks from now—is about as unlikely as the other pie-in-the-sky negotiation happening in Washington right now over immigration.
But the most important thing to say about this emerging deal is that it would expire at the end of 2025, along with the other individual provisions of the Trump tax cuts. At that time, without action the CTC would be cut in half, from $2,000 a year to $1,000. So regardless of what happens in Congress this month, the real fight of this decade on taxes and poverty, and the one that Biden should be laying out his plans for immediately, involves that 2025 fiscal cliff.
Both Democrats and Republicans have something they want from the current tax negotiations that they have been engaged in for close to a year. Democrats want that Child Tax Credit expansion back; Republicans want a number of expired business tax breaks restored. Neither will get everything they want, because the amount of dollars in play is way less than either side’s desire: around $70 billion, split equally between the CTC and the business taxes. This would be offset by terminating the employee retention tax credit, a pandemic-era benefit that has devolved into a haven for fraud.
Republicans, led in the negotiations by House Ways and Means Committee chair Rep. Jason Smith (R-MO), would maintain the immediate business deduction for capital expenses (known as bonus depreciation), a provision that began to phase out in 2023 and would be gone by 2027 without action. The deal would also bring back the full tax credit for domestic research and development, which was limited by the Trump tax cuts, as well as restoring the ability for businesses to deduct depreciation and amortization costs, which went away in 2022.
Democrats, led by Senate Finance Committee chair Sen. Ron Wyden (D-OR), want to maximize the Child Tax Credit. But they’re only playing with $35 billion, spread over three tax years (2023, 2024, and 2025). By contrast, the 2021 expansion cost roughly $100 billion in that tax year alone. So dollar for dollar, you’re talking about less than 12 percent of what was available in 2021.
The emerging details reflect that. Most of the changes involve “refundability,” which refers to the ability for low-income individuals with no tax liability to get a credit that is supposed to count against your taxes. Right now, only $1,700 of the $2,000 CTC is refundable. This would gradually expand by $100 each of the three tax years, hitting $2,000, or full refundability, in 2025. (Some reports say that it would actually increase to $2,100 in 2025.)
The most important thing to say about this emerging deal is that it would expire at the end of 2025, along with the other individual provisions of the Trump tax cuts.
However, families have to earn some money to be eligible for the CTC: currently, $2,500. This means that the lowest-income households get no CTC benefit. That doesn’t change in the current proposal, but the phase-in is accelerated for multi-child families. The phase-in of refundability starts at 15 percent of the total benefit, but now it will be for each child, meaning that very low-income households with two kids would phase in at 30 percent, and with three kids, phase in at 45 percent, and so on. Finally, income from prior years can be used to get the benefit, which means that families with no income in the current tax year can look back to other years to qualify.
These are all benefits that help the poorest families in America, and on those terms they are great. According to Sharon Parrott of the Center on Budget and Policy Priorities, 400,000 children would be lifted out of poverty this year under the deal. (That would be around 11 percent of the 3.7 million lifted out of poverty in 2021; a little over 11 percent of the money is being spent.)
But it’s important to explain what this is not. It bears no resemblance to the CTC changes made in 2021.
The 2021 expansion raised the credit to $3,000 a year, and $3,600 a year for children under age 6. This new deal does none of that; the credit is still at $2,000. The 2021 expansion gave the money to households as a monthly check, rather than working it out through one lump-sum payment in tax returns. This new deal does not do that; the tax credit will still only be obtained during tax season. The 2021 expansion was universal; this deal maintains the same phaseouts on families with the lowest incomes. The 2021 expansion was fully refundable; this will only get to that level in the year 2025.
Tax season finalizes on January 29; given that there’s also a near-term government funding deadline next week (a solution for which is looking rather shaky), it seems completely impossible that anything else will get done. It’s possible the CTC could get attached to whatever government funding solution makes it through Congress, but if there isn’t broad-based support—Senate Republicans are not yet on board, for example—you’d imagine the leadership would not risk a shutdown by including it.
But the more important point is this: In tax year 2026, the CTC would go back down to $1,000 under current law. That would have a much larger impact than anything this minor deal achieves.
Some might look at the benefits for multi-child families and wonder why poor families with one child aren’t as deserving. The deal mostly corrects for the fact that current law harms poor multi-child families more. They often get little or no tax credit for a second child, which would change.
However, when a deal needs to be made beyond 2025, this way of incentivizing larger families is now something of a precedent. It resembles the way that the Earned Income Tax Credit also has more rapid phase-ins for families with more than one child. There’s a question of whether that gets locked into practice in a way that benefits multi-child families, but by itself, it fails to deal with the fact that families still need $2,500 in income to obtain the credit at all.
A bipartisan deal that tweaks refundability leaves all of the other parts of the expanded CTC behind as well, and may complicate future negotiations on the grounds that the bipartisan agreement settled for less. As Rep. Rosa DeLauro (D-CT), the founding mother of the CTC, said in a statement, “I am concerned about the deal that is being negotiated, and am skeptical that any changes were necessary to improve the quantifiably successful child tax credit expansion that was included under the American Rescue Plan.”
There’s also the point that giving ground on business tax cuts as the price for a modest expansion of the CTC sets that dynamic in motion for 2025. Republicans are already preparing a number of new business tax cuts.
Wyden has rejected this logic, telling Semafor, “We will have a stronger hand for kids and families in 2025 if we improve the benefit now.”
But what do Democrats want to do in 2025, when all of the individual Trump tax cuts expire? That’s the big question, and it’s a question for the Biden re-election campaign. They haven’t really put out a tax policy yet, aside from the long-expressed assertion that nobody’s taxes will increase if they make less than $400,000 a year. I personally think that’s a mistake, and broader-based taxes will be needed to support a decent society. But what are the Biden campaign’s priorities here? What do they really want after 2025?
Since all the individual 2017 cuts expire, whatever party gains power in this year’s elections will actually have some leverage to dictate terms. To achieve this, they’ll have to sell voters on their vision for what the government can provide for its most vulnerable children and how to finance it. We’re waiting to see where Biden will come down.
