June 11, 2004

by David Kamin and Robert Greenstein

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Legislation that the House of Representatives passed in May would extend the child tax credit to several million higher-income households.  Under current law, married families with incomes up to $110,000 receive the full tax credit of $1,000 per child, and married families with two children that have incomes between $110,000 and $149,000 receive a partial tax credit (i.e., a credit of less than $1,000 per child).[1]  The House bill would expand the tax credit for families in the $110,000 to $300,000 range.  (Married families would receive a full credit until their income surpassed $250,000 and a partial credit until income reached $269,000 for families with one child, $289,000 for families with two children and $309,000 for families with three children.)

Given the bleak deficit picture and the growing emphasis in the Senate on efforts to restore fiscal discipline, expanding the child credit to higher-income families that do not need government subsidies to be able to afford to raise their children does not represent sound policy.  The Senate did approve a smaller, but still substantial, expansion of the child tax credit to higher-income families last year, as part of a compromise to obtain near-unanimous support for legislation to accelerate to 2003 an expansion in the child tax credit for working-poor families otherwise scheduled to take effect in 2005.  The Senate proposal was not enacted last year, and given further deterioration in the fiscal outlook since last year, such a “deal” would be ill-advised today.


End Notes:

[1]  The point at which the child tax credit is fully eliminated depends on the number of children in a family.  In addition, some families with very low incomes receive a partial tax credit or none at all because the credit is only partially “refundable.”

[2] Under last year’s Senate bill, married filers would receive the full credit until their incomes surpassed $150,000, and a partial credit until income reached $169,000 for families with one child, $189,000 for families with two children and $209,000 for families with three children.

[3] Under last year’s Senate bill, the level up to which the maximum child credit is provided would rise from $110,000 (for married couples) to $115,000 in 2008 and 2009 and $150,000 in 2010.  (The income threshold would then have reverted to $110,000 after 2010.)  By contrast, under the new House bill, the increase in this threshold (to $250,000) would take effect in 2004 and be permanent.  While delaying the year in which such an increase would take effect does reduce costs over the next few years, such a delay has no significant effect on long-term costs, and, from a fiscal standpoint, it is the long-term costs that are of most serious concern.   Similarly, an early expiration, as was included in last year’s Senate bill, artificially reduces the official cost estimate, but it is unlikely to change the long-term cost of the policy.  Such temporary tax cuts are likely to be made permanent.