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POLICY INSIGHT
BEYOND THE NUMBERS

Tax Season Message: Congress Should Dramatically and Permanently Cut Child Poverty With an Expanded Child Tax Credit

Families nationwide are filing their taxes ahead of the April 18 deadline and most are claiming the second half of their expanded Child Tax Credit for 2021, enacted under the American Rescue Plan. The first half, delivered monthly to most families last year, went overwhelmingly toward food, utility bills, and other basic needs and dramatically eased hardship and poverty. The remainder of the credit will help still further by lowering families’ tax bills and helping them afford the rising costs of basic needs. Congress should build on this remarkable success by enacting an expanded credit that’s permanently available to families with low or no earnings.

It’s hard to recall a policy initiative that’s had such obvious success in improving families’ income security as the expanded Child Tax Credit. In December 2021 the advance credit payments kept an estimated 3.7 million children above the poverty line (using a monthly poverty measure), a 29 percent reduction that was reversed when the credit expired. The expansion is projected to reduce child poverty even more in the annual poverty figures (for 2021) that will count the remaining credit amounts due to be paid out as families receive their tax refunds.

The greatest driver of these poverty reductions is “full refundability,” or making the full Child Tax Credit available to children whose families would otherwise receive a partial credit or no credit at all because their incomes are too low. The Rescue Plan also substantially increased the 2021 maximum credit, from $2,000 to $3,600 for children under 6 and to $3,000 for children 6-17, with 17-year-olds included for the first time (and with phase-outs starting at incomes of $112,500 and $150,000 for head-of-household and married filers, respectively), and made payments monthly.

The changes meant most families received monthly payments of $300 per young child and $250 per older child, from July 2021 until the payments ended in December. These families will receive the remainder of their expanded credit through the tax return process this year, and families who did not receive monthly payments can claim the entire expanded credit as a lump sum when they file their taxes.

Thanks to widespread use of the monthly payments toward basic needs, more children across the country had enough to eat and had their electricity stay on. Many families with low incomes also used their credit payments to cover education costs like school books, supplies, and after-school programs, so it’s likely many kids got a better chance at enrichment opportunities like taking up a musical instrument or joining a sports team.

Children can thrive under trying circumstances but poverty can also take a heavy toll — of going to bed hungry, of having to move frequently, and of the tremendous stress for families living on the financial edge. Even short periods of food insecurity, for example, pose long-term health and developmental risks for children. The expanded Child Tax Credit provided financial stability for millions of children in families with low incomes, and enactment of an expanded credit that’s fully refundable on a permanent basis and issued monthly would be a game changer.

It’s critical that policymakers recognize the stakes involved. The need for an expansion right now is especially pronounced (and the economic benefits to families clear, economists note), with prices of basic needs rising. Absent a new expansion, the expiration of the Rescue Plan’s expanded Child Tax Credit will push a projected 4.1 million children back below the poverty line in 2022, of whom 1.6 million are Latino, 1.2 million are white, 930,000 are Black, and 132,000 are Asian, we estimate based on annual income.

As the graph shows, annual poverty rates among Black, Latino, and American Indian or Alaska Native children would be an estimated 8 to 9 percentage points higher without the Rescue Plan expansion than if the expansion were still in place. Poverty among white and Asian children would also rise, but by less.

 

The greatest driver of these rises in poverty would be the loss of the expanded credit’s full refundability. Accordingly, making the full credit available to children in families with the lowest incomes would be key to reducing child poverty.

Families with low incomes have been among the hardest hit by the pandemic. Many children have lost parents and grandparents, suffered many disruptions to their education, and experienced the stress of their families’ struggles to afford food, rent, and other usual household expenses. An expanded Child Tax Credit is a proven tool — one that rigorous research shows would improve the health, educational attainment, and adult earning power of millions of children — and policymakers need to use it.

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Vice President for Federal Tax Policy