Congress Should Adopt American Families Plan’s Permanent Expansions of Child Tax Credit and EITC, Make Additional Provisions Permanent

Key tax credit provisions in President Biden’s American Families Plan would provide significant help to all but the highest-income families with children and to low-paid working adults without children. The plan would extend through 2025 the American Rescue Plan Act’s Child Tax Credit expansion and make permanent the Act’s provision making the full credit available to children whose parents have low or no earnings. It would also make permanent the Act’s expansion of the Earned Income Tax Credit (EITC) for adults not raising children. Congress should adopt these proposed changes, which would result in reductions of child poverty and provide income support for millions of people. And it should go two steps further: it should make all of the Rescue Plan’s Child Tax Credit expansion permanent, as House Ways and Means Chairman Richard Neal recently proposed, and make certain immigrant children who have an Individual Taxpayer Identification Number (ITIN) rather than a Social Security number eligible for the credit.

"Congress should adopt these proposed changes, which would result in reductions of child poverty and provide income support for millions of people. And it should go two steps further: it should make all of the Rescue Plan’s Child Tax Credit expansion permanent and make certain immigrant children who have an Individual Taxpayer Identification Number (ITIN) rather than a Social Security number eligible."In 2018 the Child Tax Credit and EITC together lifted 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 a 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, we estimate. Permanently enacting these historic provisions — along with the Rescue Plan’s EITC expansion, 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 in the upcoming recovery bill.

Congress should make the complete set of Rescue Plan Act expansions permanent, including its provisions that:

Make the full Child Tax Credit available to all children except those with the highest incomes. The Rescue Plan Act makes the full Child Tax Credit available (sometimes called making it “fully refundable”) to children whose parents previously would have been eligible for a partial credit or no credit at all because their earnings were too low or they didn’t have earnings in a year. Like all of the Child Tax Credit changes in the Rescue Plan, this change is currently only in place for 2021. The Rescue Plan also increases for one year the credit’s maximum amount to $3,000 per child and $3,600 for children under age 6 and expands the credit to cover 17-year-olds. (The Rescue Plan Act’s increase in the maximum credit amount begins to phase out for single filers making $75,000, heads of households making $112,500, and married couples making $150,000.) The American Families Plan would make permanent the Rescue Plan’s provision making the full Child Tax Credit available and would extend through 2025 the Act’s maximum credit increase and the inclusion of 17-year-olds. Congress should make all of these changes permanent.

Prior to the Rescue Plan some 27 million children — including roughly half of all Black and Latino children and a similar share of rural children — received less than the then-maximum credit of $2,000 per child because their parents earned too little, even as middle- and higher-income families received the full amount. The Act’s changes will lift roughly 4.1 million children above the poverty line — cutting the number of children in poverty by more than 40 percent. They also will lift about 1.1 million children above half the poverty line (referred to as “deep poverty”). Black and Latino children in particular, whom the prior credit disproportionately left out or left behind, will benefit.

Make an overdue EITC increase for low-paid working adults not raising children in the home. The EITC is a powerful wage subsidy, but before the Rescue Plan it 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 Families Plan would fix this flaw permanently by extending the Rescue Plan’s one-year provisions raising both 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 would also permanently expand 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 expansion would provide income support to over 17 million working adults without children who do important work for low pay. That includes some 5.8 million people aged 19 to 65 whom the federal tax code would otherwise tax into, or deeper into, poverty — the lone group for whom that happens — in large part because their EITC would be too low without an extension of the Rescue Plan’s expanded provisions.^[2]

In addition to making these permanent changes, Congress should permanently make children with ITINs eligible for the Child Tax Credit. (For tax purposes, non-citizen children who do not have Social Security numbers may use ITINs.) A 2017 tax law change revoked their eligibility; restoring it would help their families meet basic needs and decrease hardship while better positioning these children, and in turn the future economy, for later success.

Expanded Child Tax Credit Would Cause Historic Reduction in Child Poverty

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, according to a congressionally chartered report issued 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. 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.^[3] (The NAS plan included several other substantial components, including an EITC expansion, in addition to the Act’s expanded Child Tax Credit.)

The Child Tax Credit expansion in President Biden’s American Families Plan would deliver significant additional income to low-income children and their families. It would make the full credit available to about 27 million children in families that didn’t qualify for the full credit prior to the Rescue Plan because their parents lacked earnings or had earnings that were too low.^[4] (See Appendix Table 1 for estimates by state.) That includes roughly half of all Black children and half of all Latino children, whose families (along with other families of color) are overrepresented in low-paid work and face worse employment prospects due to historical and ongoing discrimination in education, housing, employment, and criminal justice that has systematically limited opportunity.^[5] Similarly, about half of children who live in rural areas would benefit from making the full credit available, which is not surprising because the median yearly wage for year-round workers is lower (by roughly 19 percent) in rural than in metro areas.^[6] Of the 27 million children who would get the full credit permanently, an estimated 9.9 million are Latino, 8.8 million are white, 5.7 million are Black, and 813,000 are Asian.^[7] (See Appendix Table 2 for state-specific estimates by race/ethnicity.)

In addition to making the full credit available to low- and no-income families, the Families Plan’s Child Tax Credit proposal also would increase the amount of the credit to $3,000 per child and $3,600 per child under 6 and make 17-year-olds eligible for the credit. The Administration proposes to make these two changes — the increase in the maximum credit and eligibility for 17-year-olds —through 2025. The full Families Plan’s Child Tax Credit would lift an estimated 4.1 million children above the poverty line, of whom 1.6 million are Latino, 1.2 million are white, 930,000 are Black, and 132,000 are Asian. Black and Latino children would disproportionately benefit due to many of the same barriers mentioned previously that affect their families’ economic security.^[8] Of the roughly 9.9 million children it would lift above or closer to the poverty line, 3.8 million are Latino, 2.9 million are white, 2.1 million are Black, and 426,000 are Asian.^[9] These changes would reduce the number of children in poverty by more than 40 percent nationally. (See Appendix Table 3 for state-specific estimates of reductions in child poverty rates by race/ethnicity.)

Restore Credit Eligibility for Children With ITINs

In the upcoming recovery bill Congress should also restore Child Tax Credit eligibility to children with ITINs. A provision in the 2017 tax law denied the credit to such children— even though there is generally broad support to grant legal status or take other steps to encourage them to finish their education and equip them for future success in our communities and economy. The country has a stake in ensuring that these children get the resources they need to realize their potential. And a permanent Child Tax Credit would help up to 675,000 of them and their families meet basic needs and decrease hardship.^[10]

What the Credits Can Mean for Families

All of the Rescue Plan’s Child Tax Credit expanded provisions are central to its historic projected impact on child poverty and should be included in upcoming recovery legislation. The Families Plan would make permanent the crucial provision that makes the full credit available to children whose families lack earnings or have low earnings. But the Rescue Plan’s increase in the maximum credit and inclusion of 17-year-olds are also significant — accounting for roughly half of the Act’s anti-poverty effects, we estimate. In other words, making the Rescue Plan’s complete Child Tax Credit expansion permanent would essentially double the impact of just making the credit fully available on a permanent basis.

Upcoming recovery legislation should incorporate the Families Plan and make the complete Rescue Plan expansion permanent to ensure that families continue to receive expanded Child Tax Credits for more than this year. To see what these actions can mean to individual families, consider these examples:

• A single mother of 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), received a Child Tax Credit of $1,125 prior to the Rescue Plan. The proposed Families Plan would expand her credit through 2025 — continuing the Rescue Plan’s 2021 expansion — and she would receive $3,600 for her toddler and $3,000 for her second-grader, for a total of $6,600 (a gain of $5,475 relative to 2020). Under the proposed Families Plan, however, her credit amount would fall back to just $2,000 in 2026 (assuming the same annual income), underscoring the urgency for permanence.
• 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, would have received no Child Tax Credit at all prior to the Rescue Plan, adding to the family’s financial insecurity. Under the Rescue Plan, this year 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. The American Families Plan would ensure that this family would permanently receive the full Child Tax Credit. The credit’s maximums would remain at the higher amounts ($3,000 for children age 6-17, $3,600 for children under age 6) if Congress makes all of the Rescue Plan’s provisions permanent, but they would fall back to $2,000 in 2026 under the Families Plan.
• 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 received a credit of $2,625 prior to the Rescue Plan — well below the $4,000 credit that a higher-income family with two children would have received. Under the Rescue Plan, 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 Families Plan would extend these gains through 2025, after which their overall credit amount would fall to $2,000 — below the credit they received even before the Rescue Plan’s enactment. (In 2026 the maximum credit per child would revert to the pre-2017-law amount of $1,000.)
• And to look beyond the provisions’ anti-poverty outcomes to their broader effects, where almost 90 percent of children benefit, consider a married couple with combined income of $125,000. (One spouse makes $75,000 as a dental hygienist and the other makes $50,000 as a property manager and they have 8-year-old twin daughters.) This family’s Child Tax Credit rose from $4,000 to $6,000 under the American Rescue Plan. This boost would continue through 2025 under the Families Plan but would fall to a total of $2,000 in 2026, or $4,000 below the proposed levels if the expansion is not made permanent.^[11]

Extending all the provisions in the Rescue Plan would provide important help to people in a myriad of jobs that pay little and often have fluctuating schedules and lack benefits that many others take for granted, such as paid sick days. That includes people caring for those who are elderly, driving buses, cooking and serving meals, and doing many other kinds of work whose importance the pandemic has only further revealed. (See Table 1.)

An estimated 65.6 million children — almost 90 percent of all children — would receive a larger Child Tax Credit under this permanent expansion, which would deliver economic support to large numbers of children in every state, including 31.9 million white children, 17.5 million Latino children, 9.4 million Black children, and 2.8 million Asian children.^[12] (See Appendix Table 4.) The only two groups that wouldn’t benefit are children in high-income households and children who lack a Social Security number because of their immigration status, a group that often struggles to make ends meet.

A Meaningful EITC for Workers Without Children

The American Families Plan would make permanent the American Rescue Plan Act’s expansion of the EITC for adults not raising children in their homes and who work hard at important, but low-paid, jobs. This permanent expansion would benefit over 17 million of these adults. The EITC is a highly successful wage subsidy that’s earned bipartisan support over the years. But prior to the Rescue Plan, it largely excluded adults who weren’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 were the lone group that the federal tax code actually taxed into, or deeper into, poverty prior to the Rescue Plan, partly because their EITC was so meager. Some 5.8 million workers aged 19-65 (excluding full-time students aged 19-23) without children — including about 2.7 million white, 1.5 million Latino, 1 million Black, and 253,000 Asian workers — were taxed into or deeper into poverty.^[13] The shares of such Latino and Black workers are disproportionately high (about 26 percent are Latino and 18 percent are Black, compared to 19 percent and 12 percent of the population, respectively), again reflecting historical barriers to economic opportunity that have led to their overrepresentation in low-paid work.

For workers without children, the Families Plan would make permanent the increase in 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. It would also make permanent the expansion in 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.^[14]

To see how this would benefit these workers, consider a 25-year-old single woman who works roughly 30 hours a week throughout 2021 as a cashier at a convenience store and earns about $9 an hour. Her annual earnings of $13,800 are just above the poverty line of $13,745 for a single individual. Prior to the Rescue Plan, federal taxes would have pushed her into poverty:

• Some $1,056 — 7.65 percent of her earnings — is withheld from her paychecks for Social Security and Medicare payroll taxes.
• When filing income taxes, she can claim the $12,550 standard deduction, which leaves her with $1,250 in taxable income. Since she is in the 10 percent tax bracket, she owes $125 in federal income tax.
• Thus, her combined federal income and payroll tax liability, not counting the EITC, is $1,181. Prior to the Rescue Plan, she would have received a small EITC of $165, so her net federal income and payroll tax liability would have been $1,016.
• In other words, her earnings were just above the poverty line, but federal taxes would have pushed her income about $961 below the poverty line.
• Under the Rescue Plan, her EITC will grow to $1,164, raising her income after federal income and payroll taxes to $38 above the poverty line. The American Families Plan would make this permanent, keeping her from being taxed into poverty in 2022 and beyond.

The Rescue Plan’s EITC expansion will benefit an estimated 17.4 million workers nationwide without children, including roughly 9.7 million white, 3.6 million Latino, 2.7 million Black, and 816,000 Asian working adults.^[15] The Families Plan would make this crucial EITC expansion permanent. (See Appendix Table 5 for estimates by state and by race/ethnicity.)

The top occupations that would benefit permanently include cashiers, food preparers and servers, and home health aides. (See Table 2.) Again, 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. They deserve more than the meager EITC in prior law, and the Families Plan Act would provide concrete, meaningful help.

Appendix