Revised May 19, 2008
IMPROVING THE REFUNDABLE CHILD TAX CREDIT:
An Important Step Toward Reducing Child Poverty
By Aviva Aron-Dine
Because of their potential impact in reducing child poverty and hardship, proposals to improve the refundable Child Tax Credit have garnered significant bipartisan support. In the Senate, Olympia Snowe (R-ME) and Blanche Lincoln (D-AR) have introduced legislation that would begin to address key flaws in the credit's structure. In the House, Ways and Means Committee Chairman Charles Rangel’s tax reform proposal would make even larger improvements, as would legislation introduced by Representatives Christopher Carney (D-PA) and Todd Platts (R-PA). A temporary version of Chairman Rangel’s measure is included in the
tax "extenders" bill scheduled adopted last week by the House Ways and Means
Committee.
The Problem: Current Credit Leaves Out Millions of Low-Income Children
The Child Tax Credit is a $1,000 per-child tax benefit intended to defray some of the costs associated with raising children. In general, tax credits can be either refundable or nonrefundable. If a credit is nonrefundable, it is available only to tax filers who can use it to reduce positive income tax liability. Thus, nonrefundable tax credits have no value for those with incomes too low to owe taxes, a group that includes millions of low-income working parents.
In contrast, if a credit is fully refundable, a tax filer can receive a refund for the amount by which the credit exceeds his or her federal income tax liability, meaning that all households who meet the eligibility criteria for the credit can benefit. If a household has no federal income tax liability, it receives the entire credit as a refund.
The Child Tax Credit falls in between these two categories; it is partially refundable. While the credit does benefit millions of families with incomes too low to owe taxes, millions of others are left out or qualify for only a partial credit. In total, some 6.5 million children in low-income working families will be ineligible for the Child Tax Credit in 2008, according to estimates by the Urban Institute-Brookings Institution Tax Policy Center. An additional 10.3 million children will receive less than the full credit amount.[1] (See Figure 1.)
The refundable Child Tax Credit works as follows. If a taxpayer’s Child Tax Credit exceeds her income tax liability, she can receive a refund for the remainder, but the refund cannot be more than 15 percent of her earnings in excess of $12,050 (in 2008). For example, a single parent with earnings of $11,000 could not receive the refundable Child Tax Credit, since her earnings are below $12,050. A parent with earnings of $13,050 could receive a refund of up to $150 (15% x [$13,050 - $12,050]). If this individual had one child, she would be missing out on $850 of the credit due to her low earnings. If she had two children, she would be missing out on $1,850.
As a result of the Child Tax Credit’s current structure:
Table 1:
Working-Poor Families Are Not Eligible for the Full Child Tax Credit |
|
Earnings Needed to Benefit At All |
2008 Poverty Line (estimated) |
Earnings Needed to Benefit in Full in 2008 |
Single Parent, One Child |
$12,050 |
|
$14,698 |
|
$17,230 |
|
Single Parent, Two Children |
$12,050 |
|
$17,180 |
|
$22,630 |
|
Single Parent, Three Children |
$12,050 |
|
$21,700 |
|
$28,030 |
|
Married Couple, Two Children |
$12,050 |
|
$21,624 |
|
$25,190 |
|
Source: CBPP estimates based on CBO inflation projections. |
-
Working-poor families cannot qualify for the full credit; as Table 1 shows, families need earnings well above the poverty line to receive the full benefit. In 2008, a single parent with two children would need earnings of $22,630,[2] while a married couple with two children would need earnings of $25,190.
-
Full-time minimum wage workers with children will not qualify for the full Child Tax Credit even when the minimum wage increases to $7.25 an hour in 2009 (at which point an individual working 40 hours a week, 50 weeks a year at minimum wage will have annual earnings of $14,500). A parent with one child earning $14,500 in 2009 will qualify for a credit of only $323 that year.
-
Low-income workers who experience periods of joblessness — including parents moving from welfare to work and those completing training programs and entering the workforce — are often rendered ineligible for the credit due to insufficient earnings. (Most low-wage workers work full time or close to full time in the weeks when they are employed, but many experience periods of joblessness over the course of the year, in part because low-wage jobs typically lack paid sick leave and other benefits that can help working parents weather family illnesses and other challenges.)
The Child Tax Credit’s unavailability to millions of low-income children substantially reduces its effectiveness in combating child poverty and hardship. For example, the credit lifts about 1.2 million fewer people out of poverty than it would if it phased in from the first dollar of earnings, and 2.6 million fewer people than it would if it were fully refundable.[3]
Current Structure Also Punishes Working Parents Whose Earnings Stagnate
The earnings threshold for the refundable Child Tax Credit is indexed for inflation. The 2001 threshold of $10,000 has gradually risen to $12,050 (for 2008) and is projected to rise to $12,650 by 2010.
In general, the purpose of indexing tax parameters for inflation is to make sure that families do not see their tax burdens increase just because their incomes have grown to keep up with inflation. The underlying principle is that tax burdens should rise only if real
income (adjusted for inflation) increases.
The result of indexing the Child Tax Credit threshold, however, is to reduce tax benefits for workers whose real incomes fall. Many low-income families have not seen income gains commensurate with inflation over the past few years. Instead of cushioning the blow for these families, the tax system has compounded their difficulties by reducing their Child Tax Credit each year.
To see the problem, consider the case of a single mother working full time at $7.25 an hour, beginning in 2008. ($7.25 an hour is the new minimum wage, which takes effect in 2009.) As Figure 2 shows, in 2008 she is eligible for a Child Tax Credit of $368. By 2010, if she is still working at minimum wage, her Child Tax Credit falls to $278. The value of the Child Tax Credit for full-time minimum wage workers will continue to decline in future years (as long as the minimum wage is not increased or indexed for inflation). Meanwhile, each year, some children lose access to the credit altogether because their parents’ earnings stagnate. For example, a parent working full-time at the $5.15 an hour minimum wage that prevailed until this year would have received a small Child Tax Credit in 2001 but lost access to the credit in 2004.
Congressional Proposals Would Extend Child Tax Credit to Millions More Children and Protect Workers Whose Earnings Stagnate
Several proposals introduced in
Congress would make important improvements in the refundable Child Tax Credit,
extending it to several million more low-income children. These bills would
de-index the earnings threshold for refundability, meaning that it would cease
to increase with inflation in future years. They also would lower the threshold.
The Snowe/Lincoln Senate legislation (S. 218) would return the threshold to its
2001 level of $10,000. (Notably, a $10,000 threshold without indexing was
precisely the policy the Senate adopted in 2001; the indexing of the threshold
was added in conference.) The Rangel tax reform bill (H.R. 3970) would lower the
threshold to $8,500, while the Carney/Platts House bill (H.R. 2126) would lower
it still further, to $5,000. The tax “extenders” bill (H.R. 6049) adopted by the
House Ways and Means Committee last week would lower the threshold to $8,500 for
2008.
In 2008, returning the
refundability threshold to $10,000 would extend the benefits of the Child Tax
Credit to 1.8 million children who would otherwise be ineligible, according to
Tax Policy Center estimates. Moreover, the number of children who would gain
access to the credit would increase each year, as the gap between the $10,000
threshold and the threshold that would be in place under current law (with
inflation indexing) increased. By 2010, the Snowe/Lincoln proposal would reach
2.2 million low-income children.
Reducing the threshold to
$8,500 for 2008, as the House-passed AMT legislation would do, would extend the
credit to 2.9 million otherwise-ineligible children. The proposal also would
provide an increased tax benefit to about 10 million additional children
because, with a lower earnings threshold, they would qualify for a larger
refundable credit. For example, a family with earnings of $13,000 will qualify
for a $143 refundable credit [15% x ($13,000 - $12,050)] if the earnings
threshold rises to $12,050 next year as scheduled, but a $743 credit if the
threshold is lowered to $8,500 [15% x ($13,000 - $8,500)]. (For further
discussion of whom the House-passed provision would help, see the box below.)
For state-by-state estimates of
the effects of the Snowe/Lincoln and House-passed proposals, see Appendix Tables
1 and 2.
Families Helped by the Child Tax Credit Provision Work Hard in Low-Paying Jobs
Census data* provide important information about the families that would benefit from the Child Tax Credit provision included in the House AMT patch bill and about the jobs the parents hold:
-
Most of the children helped live in families in which a parent works throughout the year. Some 70 percent of the children who would benefit live in families in which a parent works 30 or more hours per week for at least 50 weeks during the year. A majority of the remaining families experienced periods of unemployment during the year, but when employed worked at least 30 hours per week.
- 480,000 parents provide health care services to the elderly or the ill as nursing home workers, home health aides, personal care assistants, medical assistants, and other low-paid health care professionals.
-
240,000 parents provide child care, serve as teaching assistants, or are preschool or kindergarten teachers.
-
310,000 parents earn a living by cleaning or maintaining the grounds of homes, office buildings, schools, or other community institutions.
* All of the figures presented here are CBPP calculations based on the March 2006 Current Population Survey. Estimates of the number of children who would benefit from the CTC provisions that are based on the March 2006 Current Population Survey are somewhat lower than those computed by the Tax Policy Center. Because TPC has more complete data on tax filing units and tax filers’ taxable income than are available from the Census Bureau, the TPC figures on the total number of children who would benefit are generally considered more accurate than the estimates using the March CPS data. Thus, the estimates we compute from the March CPS data were adjusted to match the TPC figures for the total number of children helped. (The TPC data do not provide information about the characteristics of those helped; that information is only available from the detailed information collected by the Census Bureau.) |
For state-by-state estimates of the effects of the Snowe/Lincoln and House-passed proposals, see Appendix Tables 1 and 2.
TABLE 1:
Number of Children Who Would Benefit From the Snowe/Lincoln Child Tax Credit Proposal, 2010 |
State |
Children Newly Eligible for the Credit |
Children Receiving a Larger Credit |
Alabama |
39,000 |
|
166,000 |
|
Alaska |
4,000 |
|
17,200 |
|
Arizona |
58,800 |
|
250,200 |
|
Arkansas |
25,900 |
|
110,100 |
|
California |
344,600 |
|
1,465,700 |
|
Colorado |
29,800 |
|
126,900 |
|
Connecticut |
14,600 |
|
62,100 |
|
Delaware |
4,700 |
|
20,000 |
|
D.C. |
3,300 |
|
14,200 |
|
Florida |
130,100 |
|
553,400 |
|
Georgia |
71,800 |
|
305,200 |
|
Hawaii |
9,000 |
|
38,300 |
|
Idaho |
14,500 |
|
61,500 |
|
Illinois |
86,500 |
|
368,100 |
|
Indiana |
43,900 |
|
186,600 |
|
Iowa |
17,600 |
|
74,800 |
|
Kansas |
20,300 |
|
86,600 |
|
Kentucky |
28,100 |
|
119,500 |
|
Louisiana |
37,500 |
|
159,600 |
|
Maine |
6,400 |
|
27,200 |
|
Maryland |
27,200 |
|
115,800 |
|
Massachusetts |
24,300 |
|
103,500 |
|
Michigan |
62,300 |
|
265,000 |
|
Minnesota |
26,200 |
|
111,300 |
|
Mississippi |
26,800 |
|
114,000 |
|
Missouri |
42,300 |
|
179,900 |
|
Montana |
6,500 |
|
27,600 |
|
Nebraska |
11,400 |
|
48,700 |
|
Nevada |
19,800 |
|
84,100 |
|
New Hampshire |
3,400 |
|
14,500 |
|
New Jersey |
44,100 |
|
187,500 |
|
New Mexico |
20,100 |
|
85,700 |
|
New York |
123,200 |
|
524,100 |
|
North Carolina |
72,300 |
|
307,500 |
|
North Dakota |
3,300 |
|
14,100 |
|
Ohio |
70,700 |
|
300,600 |
|
Oklahoma |
30,500 |
|
129,800 |
|
Oregon |
26,100 |
|
111,200 |
|
Pennsylvania |
69,400 |
|
295,400 |
|
Rhode Island |
6,000 |
|
25,400 |
|
South Carolina |
34,200 |
|
145,600 |
|
South Dakota |
5,200 |
|
22,000 |
|
Tennessee |
44,800 |
|
190,400 |
|
Texas |
257,200 |
|
1,093,900 |
|
Utah |
25,100 |
|
107,000 |
|
Vermont |
3,400 |
|
14,400 |
|
Virginia |
38,100 |
|
162,200 |
|
Washington |
40,200 |
|
170,900 |
|
West Virginia |
13,800 |
|
58,600 |
|
Wisconsin |
30,200 |
|
128,600 |
|
Wyoming |
2,900 |
|
12,400 |
|
United States |
2,202,000 |
|
9,365,000 |
|
Source: Tax Policy Center national estimate, distributed by state based on CBPP analysis of the 2005 American Community Survey |
TABLE 2:
Number of Children Who Would Benefit From the Child Tax Credit Provision Included in the House-Passed AMT Bill, 2008 |
State |
Children Newly Eligible for the Credit |
Children Receiving a Larger Credit |
Alabama |
52,711 |
|
182,594 |
Alaska |
5,271 |
|
18,259 |
Arizona |
77,017 |
|
266,760 |
Arkansas |
33,677 |
|
116,657 |
California |
458,589 |
|
1,588,565 |
Colorado |
40,705 |
|
141,003 |
Connecticut |
19,620 |
|
67,965 |
Delaware |
6,443 |
|
22,317 |
D.C. |
4,685 |
|
16,231 |
Florida |
169,555 |
|
587,343 |
Georgia |
96,638 |
|
334,755 |
Hawaii |
11,128 |
|
38,548 |
Idaho |
18,742 |
|
64,922 |
Illinois |
114,794 |
|
397,648 |
Indiana |
58,568 |
|
202,882 |
Iowa |
22,256 |
|
77,095 |
Kansas |
27,527 |
|
95,354 |
Kentucky |
37,191 |
|
128,830 |
Louisiana |
50,662 |
|
175,493 |
Maine |
8,492 |
|
29,418 |
Maryland |
35,141 |
|
121,729 |
Massachusetts |
32,213 |
|
111,585 |
Michigan |
88,145 |
|
305,337 |
Minnesota |
34,848 |
|
120,715 |
Mississippi |
36,898 |
|
127,816 |
Missouri |
55,347 |
|
191,723 |
Montana |
8,200 |
|
28,403 |
Nebraska |
14,935 |
|
51,735 |
Nevada |
26,649 |
|
92,311 |
New Hampshire |
4,685 |
|
16,231 |
New Jersey |
58,568 |
|
202,882 |
New Mexico |
27,234 |
|
94,340 |
New York |
161,355 |
|
558,940 |
North Carolina |
96,345 |
|
333,741 |
North Dakota |
4,393 |
|
15,216 |
Ohio |
94,588 |
|
327,654 |
Oklahoma |
40,119 |
|
138,974 |
Oregon |
34,848 |
|
120,715 |
Pennsylvania |
91,659 |
|
317,510 |
Rhode Island |
8,492 |
|
29,418 |
South Carolina |
45,390 |
|
157,233 |
South Dakota |
7,028 |
|
24,346 |
Tennessee |
60,032 |
|
207,954 |
Texas |
344,967 |
|
1,194,974 |
Utah |
31,041 |
|
107,527 |
Vermont |
4,685 |
|
16,231 |
Virginia |
50,954 |
|
176,507 |
Washington |
52,711 |
|
182,594 |
West Virginia |
17,863 |
|
61,879 |
Wisconsin |
40,412 |
|
139,988 |
Wyoming |
4,393 |
|
15,216 |
United States |
2,928,412 |
|
10,144,093 |
Source: Tax Policy Center national estimate, distributed by state based on CBPP analysis of the 2005 American Community Survey |
End Notes:
[1] For a discussion of racial disparities in who receive the Child Tax Credit, see Leonard E. Burman and Laura Wheaton, “Who Gets the Child Tax Credit?” Tax Notes, October 17, 2005, http://www.urban.org/UploadedPDF/411232_child_tax_credit.pdf.
[2] A filer at this earnings level would apply $410 of the credit against income tax liability and would be eligible to receive the remaining $1,590 as a refund, for a total credit of $2,000 (i.e. $1,000 per child).
[3] CBPP estimate based on analysis of the March 2006 Current Population Survey. |