off the charts
POLICY INSIGHT
BEYOND THE NUMBERS

The Expanded Child Tax Credit Must Be Permanent and Monthly

chuck_marr-500x500.jpg

Senior Director of Federal Tax Policy

“Shell Reed’s 1-year-old needed diapers.” The first sentence of a recent Washington Post story highlights why the American Rescue Plan both expanded the Child Tax Credit to help families make ends meet and authorized that the benefit be paid monthly. The Child Tax Credit expansion in the Rescue Plan is temporary and policymakers should make both the expansion and the monthly delivery mechanism permanent this year in recovery legislation.

Struggling families need to buy diapers, food, and school clothes for their kids and to pay rent throughout the year. A Child Tax Credit that the government delivers monthly, rather than as a lump sum after the year has ended, can help families make ends meet by boosting their incomes throughout the year. When families struggle to keep up with monthly expenses, they often have to take on expensive debt to make ends meet; a monthly benefit will help alleviate their need to do so.

Struggling families need the Rescue Plan’s Child Tax Credit expansion on a permanent basis, and they need it to be available as a monthly benefit. Let’s take these two issues in that order.

First, before the American Rescue Plan, 27 million children — including roughly half of Black children, Latino children, and rural children — did not receive the full $2,000 Child Tax Credit because their parents earned too little. The American Rescue Plan not only increased the full credit to $3,600 for a child under 6 and $3,000 for a child 6 or older, but it also made the full credit available to children in families with low or no earnings in a year, just as it is to middle-income children — ending (on a temporary basis) a policy that meant that children who needed the help the most were left out or left behind.

A single mother with a toddler and a second grader who earns $10,000 a year providing in-home care to older people (with work hours that fluctuate significantly from month to month) previously received a Child Tax Credit of $1,125. Under the American Rescue Plan, she will receive $6,600 — for a $5,475 increase that can go a long way to help her care for her children.

Even before the American Rescue Plan, the Child Tax Credit and Earned Income Tax Credit (EITC) together lifted more children above the poverty line (5.5 million) than any other economic support program. That level of poverty reduction was the result of successful efforts by policymakers to expand the EITC and Child Tax Credit multiple times since their respective enactments in 1975 and 1997. By significantly expanding the Child Tax Credit, the American Rescue Plan will lift another 4.1 million children above the poverty line, cutting the number of children in poverty by more than 40 percent.

Raising the incomes of children whose families have incomes below the poverty line can make an important difference in their lives now and in the long term, according to a congressionally chartered report in 2019 by a National Academy of Sciences (NAS) panel on child poverty. “The weight of the causal evidence does indeed indicate that income poverty itself causes negative child outcomes, especially when poverty occurs in early childhood or persists throughout a large portion of childhood,” the panel concluded. Stronger income assistance is linked to such better outcomes as healthier birthweights, lower maternal stress (measured by reduced stress hormone levels in the bloodstream), better childhood nutrition, higher school enrollment, higher reading and math test scores, higher high school graduation rates, less drug and alcohol use, and higher rates of college entry.

Second, allowing families to receive the credit monthly should also become a permanent feature of an expanded Child Tax Credit. Struggling families need to pay the rent each month, and they also need to pay for electricity, food, child care, and transportation throughout the year. The goal of the Rescue Plan authors is for the Child Tax Credit to be provided monthly to most recipients during the latter half of this year to help them meet these recurring expenses, though the law lets families opt out of the monthly payments if, for example, they do not think they are eligible for the credit in 2021. Policymakers should ensure that families can continue to receive the credit on a monthly basis when they consider making the expansions permanent.

The American Rescue Plan also included critical funding for the IRS to implement the expanded Child Tax Credit and the monthly payments. At a congressional hearing this week, IRS Commissioner Charles Rettig reported that his agency “fully expect[s] to launch in July… with payments going out on a monthly basis.” That’s wonderful news, and a sign that the IRS, already stretched thin in delivering the Economic Impact Payments and managing an extended filing deadline, is prioritizing the implementation of this landmark credit expansion.

There remains an important role for a lump-sum payment through the EITC at tax time. Families can use lump sum payments to meet important needs. When families are interviewed, they often talk about how lump-sum tax refunds help them manage larger expenses, such as a used car purchase, a large appliance, or a security deposit that enables them to move to a new residence. Families that receive both a monthly Child Tax Credit and a lump-sum EITC could use those funds to cover basic and recurring expenses and also make sizeable investments — such as buying a vehicle or paying a security deposit — without having to borrow money (or needing to borrow far less).

Together with the existing EITC, an expanded, monthly Child Tax Credit would provide a powerful income boost to low-income families. In upcoming recovery legislation, the President and Congress should make the Child Tax Credit expansion — and its monthly delivery mechanism — permanent.