Prices rose 8.5 percent in March compared to a year ago, the largest annual increase since Ronald Reagan was closing his first year as president; the top movie of the year was Raiders of the Lost Ark and the oldest millennials were still in diapers. (That’s December 1981, if you don’t feel like googling it.)
While the White House has recently undertaken a messaging effort to lay enduring inflationary pressures at Vladimir Putin’s feet, the dramatic increase in gas prices spurred by the Russian invasion of Ukraine is not the only culprit; food prices rose 8.8 percent in March from the prior year. And despite the fastest wage gains in years, average earnings were down 2.7 percent compared to last year once adjusted for inflation.
The poorest Americans are facing the greatest squeeze. Studies show that low-income households spend the majority of their budgets on basic needs like housing, food, and transportation—areas which are all seeing price hikes. In 2021, inflation was highest for low-income working households, according to the Penn Wharton Budget Model. Lower-income Americans are also less likely to own savings accounts, a recent report by the Consumer Federation of America found, meaning that they may not have the safety bag needed to soften the blow of higher prices.
But as middle- and lower-income households feel the pain of inflation, they’ve lost a benefit intended to aid families as they raise children, with the expiration of the expanded child tax credit at the end of last year.
The child tax credit was expanded by the American Rescue Plan that passed last year, increasing the amount to $3,600 for children under age six and $3,000 for children between ages six and 17 in households earning under a certain threshold. Beyond increasing the amount, the credit was also disbursed on a monthly basis between July and December 2021, and for the first time became available to the lowest-income Americans. Households are set to receive the second half of their credit after filing taxes this year; the deadline to file taxes is April 18.
But the expanded credit expired at the end of 2021, returning it to its status before the American Rescue Plan: up to $2,000 per year disbursed in a lump sum annually at tax filing season, and unavailable to Americans too poor to file income taxes. Without this “full refundability” provision, allowing the lowest-income households to qualify for the benefit, a third of children—including half of Black and Latino children and 70 percent of children raised by single mothers—did not receive the full credit.
The expanded credit was set to be extended in the Build Back Better Act, President Joe Biden’s massive public investment bill overhauling health care, child care, climate, and tax policy. Given unified Republican opposition, Democrats attempted to pass it through the process of budget reconciliation, which would have required all 50 Senate Democrats to support it. It was torpedoed at the end of last year by Senator Joe Manchin, in large part due to his skepticism of the child tax credit.
Advocates lauded the expanded credit for its nearly immediate impact in cutting child poverty. The Columbia University Center on Poverty and Social Policy reported that 3.7 million children had been lifted out of poverty in December. The vast majority of low-income families used the child tax credit payments for necessities such as food, clothing, rent, and utilities, according to an October analysis of census data by the Center on Budget and Policy Priorities. The introduction of the expanded credit was associated with a cut in household food insufficiency by 26 percent, a Boston University study found. An August report by the Niskanen Center estimated that the credit would increase consumer spending by $27 billion and support the equivalent of 500,000 full-time jobs.
After the expanded credit expired, more adults living with children had difficulty covering typical household expenses in January and February, according to census data. The Center on Poverty and Social Policy reported an increase in the child poverty rate by 41 percent compared to December, with 3.7 million additional children in poverty. The February figure was slightly better, but still staggering: 3.4 million more children were in poverty in February 2022 than in December 2021. A recent CBPP analysis found that annual poverty rates among Black, Latino, and Native American children would be eight or nine percentage points higher without the expanded credit this year. (The poverty rate among white and Asian children would also increase, but by fewer percentage points.)
“For low-income people, who live so close to the edge, to lose substantial income and then face higher costs is really a very hard double hit. So it came at the worst possible time,” said Chuck Marr, the vice president for federal tax policy at the CBPP, about the expiration of the expanded credit. “Inflation should not be an excuse not to [extend the expanded child tax credit], it should be a reason to do it.”
The Federal Reserve has announced it will increase interest rates in an effort to lower inflation. But some experts say that inflation expectations could worsen the situation. “It’s not yet built into people’s expectations that there’s going to be this very high rate of inflation going forward. And certainly the Fed is very committed to bringing down inflation,” said Chad Stone, the chief economist at CBPP. “That runs the risk to the economy of at least a mild recession, which would make the child tax credit even more important.”
Republican opponents argue that the expanded child tax credit contributed to inflation because it increased spending. But some economists argue that the child tax credit’s contribution to rising inflation was minimal, and that the benefit should be reinstated to help families dealing with higher costs.
“The expiration of the expanded CTC has reduced inflation by a very small amount, and in just the worst possible way to reduce inflation,” said Jason Furman, a professor at Harvard and former chair of the White House Council of Economic Advisers during the Obama administration. “That inflationary impact pales in comparison to the overall benefits, net benefits, it would have for families and children.”
Studies show that implementing a child benefit can lower costs in the long term. A cost-benefit analysis published in March found that making the expansion permanent would cost $97 billion per year, but would generate social benefits—such as improved health of children and parents and increased future earnings and future tax payments of children—with a net value of $982 billion per year.
Furman said that inflation would increase only by one- or two-tenths of a percentage point were the expanded credit still in place. He argued that the additional cost a family would pay due to increased inflation would be far outweighed by the benefits of having the expanded credit in place; he estimated that a household earning $30,000 per year, and spending $30,000 per year, would only pay an additional $60 per year because of inflation. When compared to the extra $3,000 or $3,600 per child that family would otherwise receive, that amount is negligible, Furman said. He also noted that the current maximum credit of $2,000 per child is not indexed for inflation, meaning that its value is lower than intended.
Because families will soon be receiving the second half of their credit from last year, if they have not already filed their taxes, the impact of inflation may not have fully hit them yet. “I do think darker times are in the far future for low income families,” said Elaine Maag, a senior fellow at the Urban-Brookings Tax Policy Center. Data shows that low-income families typically use their tax returns to pay off debts and cover everyday expenses. “Once the tax refund is spent, the typical pattern is that families start to get behind again. And so extending the monthly child tax credit now could hopefully keep people from getting behind and going through that cycle of bust and boom, over and over,” Maag said. Research from the Tax Policy Center published last month further shows that some lower-income families are at risk of not receiving the full credit because they are not planning to file taxes this year.
It’s unclear whether the expanded child tax credit will be reinstated any time soon. Democrats are working on a successor bill to Build Back Better that Manchin can support, but it will likely be focused on lowering prescription drug prices, energy policy, and cutting the deficit. (Even if Manchin did get on board, Democrats might have another problem in Senator Kyrsten Sinema, who is opposed to raising taxes on corporations and wealthy Americans—one of the revenue streams for such a bill that Manchin would support.)
It’s possible that Democrats could team up with Republicans on a standalone child tax credit bill in an ambitious crossover event. There are some significant points of contention, however, like the belief of most Republicans that any benefit should be accompanied by a work requirement. Moreover, Manchin seems no closer to supporting an extension of the expanded child tax credit now than he did at the end of last year, and in a statement on Tuesday warned against further federal spending. “Here is the truth, we cannot spend our way to a balanced, healthy economy and continue adding to our $30 trillion national debt,” Manchin said.
Maag noted that the child tax credit had been expanded multiple times since it was first implemented in 1997, and so “it would very much go against history” not to have the most recent expansion made permanent as well.
“There were reasons to expand the credit last year. People were hurting from the pandemic. Those reasons are now, people are exposed to inflation. And they need something to offset that,” Maag said. “Poverty was a problem five years ago, it was less of a problem during the pandemic because of the assistance we gave, and it’s going to continue to be a problem until we direct serious resources to very low income families.”
