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What’s in the New Child Tax Credit Proposal?

The expansions on offer in the new bipartisan tax deal are more modest than the Covid-era changes, but advocates say the changes to the credit will reduce child poverty.

Tasos Katopodis/Getty Images
Senator Sherrod Brown speaks during a press briefing on the expanded child tax credit back in December in Washington, D.C.

The leaders of the tax-writing committees in Congress announced a $78 billion bipartisan tax policy deal on Tuesday, including an expansion of the child tax credit. As I reported last week, the measure looked ripe for rejuvenation, following a long period of fits and starts in negotiations after the pandemic-era expansion expired in 2022. Although the newly proposed credit is not as generous as the version that was temporarily enacted by the American Rescue Plan Act in 2021, advocates nevertheless say that this latest version will lead to a significant decrease in child poverty, if passed.

“Given today’s miserable political climate, it’s a big deal to have this opportunity to pass pro-family policy that helps so many kids get ahead,” Senator Ron Wyden, the chair of the Senate Finance Committee, said in a statement announcing the agreement negotiated with House Ways and Means Committee Chair Jason Smith.

An analysis by the left-leaning Center on Budget and Policy Priorities found that around 16 million low-income children would benefit from the changes, roughly 80 percent of the 19 million children under 17 who currently receive less than the full credit. “There is no other legislative opportunity on the horizon that would lift as many as 400,000 children above the poverty line, and three million closer to the poverty line,” said Kris Cox, the deputy director of federal tax policy at the Center on Budget and Policy Priorities.

The changes to the child tax credit will primarily target low-income families, but the deal does not increase the credit amount dramatically or disburse it in monthly payments—two key expansions from the American Rescue Plan Act that were in effect from July through December 2021. The deal also does not include the provision of “full refundability” long sought by Democrats—another element of the 2021 expansion—which would allow households without tax liability to obtain the entire credit. Under current law, the credit is only partially refundable, meaning that it is not fully available to families that do not owe more in taxes than the $2,000 amount of the credit.

Still, the proposal does make several changes to the child tax credit, including indexing it to inflation for the first time, so that parents would see a boost in the amount for the 2024 and 2025 tax years. It would also increase the maximum refundable amount of the credit; currently, the $2,000 credit is refundable up to $1,600 per child. Under the proposal, the maximum refundable amount of the credit would increase to $1,800 in tax year 2023, $1,900 in tax year 2024, and $2,000 in 2025.

It would also allow taxpayers to calculate their credit based on their income from the previous year. For example, if a person was employed in 2022 but lost their job in 2023, they could use their earned income from the previous year to obtain the maximum amount possible in the current taxable year. Although the proposal maintains the $2,500 income requirement for receiving the credit, a household that earned too little in the current year could still receive the credit if they met the threshold the prior year.

Proponents of the deal are perhaps most enthused about a provision that would allow low-income families to receive a credit for each child. The current credit phases in at a 15 percent rate for families earning more than $2,500; however, a low-income family with multiple children receives roughly as much as a household with only one child. In order to receive the full credit, larger families need to earn more than single-child households.

The deal reached by Wyden and Smith would keep the 15 percent phase-in rate but would allow the credit amount to be calculated on a per-child basis. So if a single parent with two children earns $12,500 a year, the parent would now receive $1,500 for each child—$3,000 total—doubling the amount of the credit that they receive.

The CBPP analysis also found that the expansion would particularly aid Black and Latino children, who are disproportionately more likely to live in poverty than their white counterparts. “It would particularly help groups whose parents are overrepresented in low-paid jobs due to historical and ongoing discrimination and other structural barriers to opportunity,” said Cox.

However, receiving those benefits would require low-income households to file their taxes; as Americans earning under a certain threshold are not required to file taxes, some may opt not to do so, even if they would earn money back.

“A large percentage of those people aren’t receiving anything now, and will continue not to receive anything, because they don’t file taxes,” said Matt Bruenig, the founder of the People’s Policy Project, a left-leaning think tank. Bruenig also expressed skepticism that households eligible for the credit would be able to jump through the hoops for calculating their maximum credit based on their income the previous year.

“It’s just hard to imagine most people … looking at two years of their tax data—even having it—and then being like, ‘OK, which one of these should I plug in for the CTC?’” said Bruenig. “It’s administratively badly designed, and those bad designs are going to make it difficult for it to achieve even its stated purpose.”

Many Democrats wished to return to the version of the expanded child tax credit that was implemented by the American Rescue Plan Act, which contributed to a dramatic drop in child poverty in 2021. However, that version of the credit had passed entirely along party lines while Democrats controlled both chambers of Congress. Republicans had particular misgivings about the measure’s lack of income requirements, concerned that it would discourage low-income parents from working. (Evidence from the six months that the credit was in effect indicates that it had little to no effect on parental employment.)

“We got to a place where a lot of Democrats had wanted to go back to the Biden-style credit and that just wasn’t going to happen. And for a lot of Republicans, the child tax credit became synonymous with the Biden credit, so they were less likely to come to the table,” said Josh McCabe, the director of social policy at the Niskanen Center. Previous efforts to expand the child tax credit to its American Rescue Plan form were perhaps doomed to fail because of opposition to making that version permanent from all Republicans and one conservative Democrat, Senator Joe Manchin.

“People were going for the holy grail of the Biden-style credit, which I just don’t think Congress is ever going to do. So now we’re back on track,” said McCabe. As McCabe notes in new analysis, the proposal would “effectively make any family working full-time at the federal minimum wage eligible for the maximum refundable credit amount.”

Democrats on the Senate Finance Committee reacted largely positively to the deal on Tuesday. “We need to get this done, and after we do, I’ll keep fighting to make the expanded child tax credit permanent. Our goal should be to end childhood poverty in this country,” said Senator Michael Bennet, a longtime proponent of expanding the child tax credit. Ohio Senator Sherrod Brown, another member of the Finance Committee and advocate of an expanded credit, said in a statement that the deal was a “win-win that will cut taxes for Ohio families and Ohio manufacturers.”

Other Democrats were more skeptical. Senator Elizabeth Warren, another member of the Senate Finance Committee, told reporters on Tuesday that “we should demand more of ourselves than going along with a deal that gives corporations billions and billions of dollars more in tax breaks than help for struggling families.”

But Senator Cory Booker, another Democratic supporter of expanding the child tax credit, said that he would tell his disappointed colleagues that the deal could still aid hundreds of thousands of low-income children. “This next expansion is not as far as we want to go, and it’s very frustrating. But the reality is, it’s the compromise bill, and we will live to fight another day,” Booker said.

Still, it’s unclear whether the deal will pass in either chamber of Congress, particularly since Senate Republicans and House Democrats have been tepid in their response to the negotiations between Wyden and Smith. Senator Mike Crapo, the ranking member of the Senate Finance Committee, called the agreement a “thoughtful starting point for the House to begin the process” in a statement on Tuesday, although he later told reporters he would like to negotiate it further.

“I’m a ‘hopeful’ on the deal,” Crapo told reporters on Tuesday, although he declined to discuss ongoing negotiations. “As is always the case, the devil is in the details. And we’ve got to get the details.”

Many Senate Republicans would like the tax legislation to go through “regular order,” approved by the whole Finance Committee. The Ways and Means Committee is expected to consider the legislation this week.

Many Democrats on the House Ways and Means Committee were notably silent after the deal was announced on Tuesday, but Ranking Member Richard Neal told reporters last week that he believed “some of the proposals are maybe going backwards.”

There is also a very limited window to approve the deal, as it would need to pass before the end of January in order to apply to tax year 2023. Lawmakers are primarily focused this week on passing a short-term measure to keep the government funded through early March. Wyden and Smith will also need to find a legislative vehicle to attach the tax deal to get it passed in a timely manner.

The proposal also includes tax benefits for businesses, such as a full deduction for research and development costs, as well as provisions related to housing assistance and disaster aid, and a bill to extend benefits to Taiwan. It would largely be funded by ending the employee retention tax credit program.