The House of Representatives has overwhelmingly passed bipartisan legislation to expand the Child Tax Credit (CTC). The legislation now moves onto the Senate, and while almost any sign of bipartisanship or a functioning Congress deserves some applause, senators should exercise caution before jumping on this particular bandwagon.
In many ways, the CTC is emblematic of the way our current social safety net works. There is no doubt that it makes life easier for many struggling families, but it also does little to give people the tools or opportunities to escape poverty in the long run. The temporary pandemic-era expansion of the CTC, for example, significantly reduced the number of Americans living in poverty while it was in effect. But as soon as the payments expired, poverty rates returned to their previous levels. The $100 billion program did nothing to help poor Americans become self-sufficient or to prepare them for the day the programs expired. When the programs ended, they were still poor. In fact, it is fair to say that these families were poor all along: government payments merely disguised their true condition for a time.
The CTC legislation now being debated would not fully restore the pandemic-era expansion, but would expand the existing CTC in four important ways. First, it would significantly increase the amount of the credit that is refundable; that is, payable even if it exceeds the tax owed. Second, it would apply the refundable amount of the credit on a per-child basis, meaning that the more children in a family, the larger the payment. Third, it would index the non-refundable portion of the credit to inflation. And, fourth, it establishes an ongoing one-year look-back period for qualifying income for the refundable portion of the credit. That means families could use either the previous or current year earnings to qualify, whichever yields the highest benefit.
The legislation has been a priority of liberal Democrats in Congress since a pandemic-era expansion of the CTC expired in 2022. The 2024 legislation has been stymied by fiscal hawks and those concerned about the CTC’s impact on work and family formation. The 2024 bill has been cleverly tied to a number of other tax reductions long-sought by business and anti-tax groups, drawing in Republican support and significantly increasing its chances. The bill passed the House by an overwhelming vote of 357-70, and President Biden has announced he would sign it if it reaches his desk.
But before everyone joins hands and sings kumbaya, there are some important questions that lawmakers must answer.
How will CTC expansion affect employment?
Critics of the CTC have long been concerned that the CTC creates a disincentive to work and family formation. Now, Kevin Corinth and Scott Winship of the American Enterprise Institute are warning that the latest version could make the problem worse. The CTC expansion would enlarge existing welfare cliffs for many working poor. Corinth and Winship cite the example of a parent earning $20,000 today. If he or she increased their earnings to $40,000—by, say, moving from part-time to full-time work—their net total income (after the loss of social welfare benefits, including the CTC) would increase by only $3,400: an effective tax rate of 83 percent. In addition, the look-back provisions for income eligibility effectively cut the program’s work requirement in half, by allowing eligibility based on last year’s earnings rather than requiring work in the current year. Overall, Corinth and Winship suggest that as many as 150,000 parents, on net, could drop out of the labor force. This would substantially reduce their chances for long-term self sufficiency and economic mobility.
How will it be paid for?
The CTC expansion is estimated to add $33 billion to the CTC program’s cost over the next three years—less than a tenth of what President BIden initially asked for—although the other tax measures could bring the bill’s total fiscal cost to as much as $250 billion. The bill would partially offset this cost with some $45 billion in future spending cuts, but such promised savings should always be taken with a grain of salt. Some of the cost might also be offset through economic growth stemming from some of the business tax cuts but there will still be a substantial shortfall. At a time when the national debt has topped $34 trillion (and growing), every dollar should be scrutinized carefully. Moreover, the history of such programs shows that even though the cost of this particular bill is modest by Washington standards, it establishes an architecture that is liable to lead to much more spending down the road. In fact the Center for a Responsible Federal Budget warns that, if one ignores arbitrary sunset provisions and other gimmicks, the bill is likely to end up costing $650 billion over a decade.
What is the CTC intended to accomplish?
The CTC is designed in a way that subsidizes having children more than it does work. But is this the best use of limited resources? No doubt low-income families could use a break. The costs of housing and childcare are a particular burden. But the CTC does nothing to deal with the excessive regulations that drive up the cost of these goods. Indeed, by providing purchasers with more money, the CTC simply props up existing prices. Wouldn’t it be better to attack those high prices directly by encouraging supply? Andthose who look to programs like the CTC to increase America’s declining birth rates should take a cold hard look at the failure of such efforts in other countries. European countries have a host of child allowances and subsidies, yet fertility rates continue a steady decline. Asian countries such as Japan, South Korea, and Singapore experience similar fertility declines. Fertility rates are driven by long-term trends in women’s education and labor force participation, and are thus unlikely to be reversed by modest tax cuts.
Compromises are, by definition, imperfect. But sometimes a bad bill is just a bad bill. The Senate should take its time and scrutinize this legislation very closely.
