American Rescue Plan Act Includes Critical Expansions of Child Tax Credit and EITC

Two key tax credit provisions in the American Rescue Plan Act will provide significant help to those on the fault lines of some of the pandemic’s worst economic effects. People who have lower incomes, are Black or Latino, have less than a college education, or work in face-to-face service occupations have long faced barriers to high-paying jobs and opportunity, which the pandemic and its economic fallout have widened. The Act’s temporary provisions making the full Child Tax Credit available to all children except those with the highest incomes (sometimes called making the credit “fully refundable”) and making an expanded Earned Income Tax Credit (EITC) available to far more low-paid workers not raising children in the home (so-called “childless workers”) will result in historic reductions of child poverty and provide timely income support for millions of people, including millions of essential workers.

"The American Rescue Plan Act, by making one significant set of changes to the Child Tax Credit, will lift another 4.1 million children above the poverty line, cutting the number of children in poverty by more than 40 percent."The current Child Tax Credit and EITC together lift more children above the poverty line, 5.5 million, than any other economic support program.^[1] This level of poverty reduction was achieved through multiple expansions of the EITC and Child Tax Credit since their respective enactments in 1975 and 1997. The American Rescue Plan Act, by making one significant set of changes to the Child Tax Credit, will lift another 4.1 million children above the poverty line, cutting the number of children in poverty by more than 40 percent. Permanently enacting this historic provision — along with the EITC provision, which will stop the federal tax code from taxing millions of workers without children into or deeper into poverty — would be a landmark achievement, and should be an urgent priority for policymakers.

The American Rescue Plan Act expansions will help many hard hit by the current crisis. Many in essential jobs have faced a higher risk of infection and death due to their jobs, while many others lost their jobs or saw their incomes fall due to pandemic-related closures or reduced hours. Jobs in low-paying industries were down more than twice as much between February 2020 and February 2021 as jobs in medium-wage industries and more than three times as much as in high-wage industries.^[2] Due to employment discrimination and unequal opportunity in education and housing, among other factors, gaps in unemployment between Black and Latino workers on one hand and white workers on the other widen quickly in recessions and narrow much more slowly after an economic recovery begins. Today the Black unemployment rate remains at 9.9 percent and the Latino rate at 8.5 percent, while the white unemployment rate has fallen back to 5.6 percent.^[3]

The Act’s two tax credit expansions will do much to alleviate these harmful effects, by:

Making the full Child Tax Credit available to all children except those with the highest incomes. Some 27 million children — including roughly half of all Black and Latino children and a similar share of rural children — received less than the maximum $2,000-per-child tax credit under prior law because their parents earn too little, even as middle- and higher-income families received the full amount. The Act makes the full Child Tax Credit available to children in families with low earnings or that lack earnings in a year, and it increases the credit’s maximum amount to $3,000 per child and $3,600 for children under age 6. It also extends the credit to 17-year-olds. The increase in the maximum amount begins to phase out for heads of households making $112,500 and married couples making $150,000. These changes will lift 4.1 million children above the poverty line — cutting the number of children in poverty by more than 40 percent. They also will lift 1.1 million children above half the poverty line (referred to as “deep poverty”). Black and Latino children in particular, whom the credit disproportionately left out or left behind, will benefit.

Making an overdue EITC increase for low-paid working adults not raising children in the home. The EITC is a powerful wage subsidy but has suffered from a glaring flaw: it largely excluded workers not raising children, providing only a tiny credit to a very small number of these workers. The American Rescue Plan Act fixes this flaw at a critical time by raising the maximum EITC for workers without children from roughly $540 to roughly $1,500, and the income cap for these adults to qualify from about $16,000 to at least $21,000. It also expands the age range of eligible workers without children to include younger adults aged 19-24 (excluding students under 24 who are attending school at least part time), as well as people aged 65 and over. This will provide timely income support to over 17 million people who do important work for low pay, including the 5.8 million people who are currently the lone group that the federal tax code taxes into, or deeper into, poverty, in large part because their EITC is too low.

Expanded Child Tax Credit Will Cause Historic Reduction in Child Poverty

Low-income children, disproportionately children of color, have been particularly hard hit by the pandemic and its related economic and educational harms. Between 6 and 10 million children live in a household where the children didn’t eat enough because the household couldn’t afford it, according to the most recent Census data.^[4] Many of these same children also have a higher risk of losing school instruction time due to the pandemic; “[l]earning loss will probably be greatest among low-income, black, and Hispanic students,” one analysis found.^[5]

Raising the incomes of children growing up in poverty through policies such as the Child Tax Credit can make an important difference in children’s lives now and in the long term, a congressionally chartered report issued in 2019 by a National Academy of Sciences (NAS) panel on child poverty explained. “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,” concluded the panel. The better outcomes that are linked with stronger income assistance include 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 use of drugs and alcohol, and higher rates of college entry. The NAS panel devised two packages of policy proposals aimed at cutting child poverty in half, one of which included as a centerpiece a $2,700-per-child “child allowance” that is very similar to the American Rescue Plan Act’s expanded Child Tax Credit.^[6] (The NAS plan included several other substantial components, including an EITC expansion, that taken together are larger than the Act’s expanded Child Tax Credit.)

The American Rescue Plan Act’s Child Tax Credit expansion will deliver significant additional income to low-income children and their families. It will make the full credit available to 27 million children^[7] — including roughly half of all Black and Latino children and a similar share of children who live in rural areas — whose families haven’t qualified for the full credit because their parents lack earnings or have earnings that are too low.^[8] (See Appendix Table 1 for estimates by state). Of these 27 million children, an estimated 9.9 million are Latino, 5.7 million are Black, and 814,000 are Asian American. (See Appendix Table 2 for state-specific estimates by race/ethnicity.)

Among the 4.1 million children whom the expansion will lift above the poverty line, 1.2 million are Black and 1.7 million are Latino. Of the 9.9 million children it will lift above or closer to the poverty line, 2.3 million are Black, 4.1 million are Latino, and 441,000 are Asian American.^[9]

To see what this can mean to individual families, consider these examples:

• A single mother of a toddler, 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 Act, she will receive $3,600, a gain of $2,475.
• A single mother with a 4-year-old daughter and 8-year-old son, who is out of work for the year due to a health condition, previously received no Child Tax Credit at all, adding to the family’s financial insecurity. Under the Act, she will receive the full Child Tax Credit of $3,600 for her daughter and $3,000 for her son to help with the children’s expenses.
• A married couple in which one spouse earns $20,000 as a short-order cook and the other cares for their 3-year-old son and 7-year-old daughter previously received a credit of $2,625 — well below the $4,000 credit that a higher-income family with two children received. Under the Act, they will receive the full Child Tax Credit of $3,600 for their son and $3,000 for their daughter, for a family gain of $3,975.

The Child Tax Credit expansion will provide important help to people in a myriad of jobs that pay little and often have fluctuating schedules, including people caring for the elderly, driving buses, cooking and serving meals, and doing many other kinds of important work. (See Table 1.) These occupations are also not conducive to remote work, raising people’s risk of infection during the current crisis.

An estimated 65.7 million children will receive a larger Child Tax Credit under the expansion, which will deliver economic support to large numbers of children in every state, including 17.5 million Latino children, 9.4 million Black children, and 2.8 million Asian American children.^[10] (See Appendix Table 3.)

A Meaningful EITC for Workers Without Children

The American Rescue Plan Act expands the EITC for over 17 million adults not raising children at home who work hard at important, but low-paid, jobs. The EITC is a highly successful wage subsidy that’s earned bipartisan support over the years, but until now it largely excluded adults who aren’t raising children in their homes, and it completely excluded young workers without children trying to gain a toehold in the labor market.

Adults not raising children are the lone group that the federal tax code actually taxes into, or deeper into, poverty, partly because their EITC has been so meager. Some 5.8 million workers aged 19-65 (excluding full-time students aged 19-23) without children — including 1.5 million Latino and over 1 million Black workers — are taxed into or deeper into poverty.^[11]

For workers without children, the Act raises the maximum EITC from roughly $540 to roughly $1,500 and raise the income limit to qualify from about $16,000 to at least $21,000.^[12] It also expands the age range of workers without children eligible for the tax credit to include younger adults aged 19-24 (excluding students under 24 who are attending school at least part time), as well as people 65 and over.^[13]

To see how this will benefit these workers, consider a 25-year-old single woman who worked roughly 30 hours a week throughout 2020 as a cashier at a convenience store and earned about $9 an hour. Her annual earnings of $13,700 were just above the poverty line of $13,621 for a single individual. But under prior law, federal taxes pushed her into poverty:

• Some $1,048 — 7.65 percent of her earnings — was withheld from her paychecks for Social Security and Medicare payroll taxes.
• When filing income taxes, she could claim the $12,400 standard deduction, which left her with $1,300 in taxable income. Since she was in the 10 percent tax bracket, she owed $130 in federal income tax.
• Thus, her combined federal income and payroll tax liability, not counting the EITC, was $1,178. She received a small EITC of $160, so her net federal income and payroll tax liability was $1,018.
• In other words, her earnings were just above the poverty line, but federal taxes pushed her income about $940 below the poverty line.
• Under the American Rescue Plan Act, her EITC will grow to $1,116, raising her income after federal income and payroll taxes to $29 above the poverty line.

All told, the Act will benefit 17.3 million workers without children across the country, including roughly 2.8 million Black, 2.8 million Latino, and 678,000 Asian American workers. (See Appendix Table 4 for estimates by state and by race/ethnicity.)

The top occupations that will benefit include cashiers, food preparers and servers, and home health aides. (See Table 2.) The pandemic has helped the nation better understand and appreciate these workers and millions of others who work for low pay and the essential role they play in keeping this economy running, even while they often lack benefits that many other workers take for granted, such as paid sick days. They deserve more than the meager EITC in prior law, and the American Rescue Plan Act will provide concrete, meaningful help.

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