A Renewed Child Tax Credit Could Use a Tune-Up
With 2017 Tax Cuts and Jobs Act (TCJA) provisions expiring next year, the longstanding Child Tax Credit (CTC) is up for renewal. While we wait to see what a CTC renewal will ultimately look like, it’s worth checking in on the health of the credit. What are the goals of the CTC, and does it achieve them? Specifically, does the CTC lift children in low-income families out of poverty and boost the fertility rate?
Who Receives the CTC?
Consistently touted as a tool to help low- and middle-income families with the cost of raising kids, the CTC’s scope and mission have changed over time. The CTC began as a $400 tax credit for children 16 or younger and was nonrefundable so that only families who owed federal taxes could benefit. It was also cited as a tool for middle-income families to alleviate the cost of having and raising children. In 2001, the CTC increased to $600 per child and became partially refundable. The CTC underwent another notable expansion in 2017, this time extending the credit to 2025. These changes increased the credits once more to a maximum of $2,000 per child, of which $1,400 is refundable. The most recent change, which came as part of the COVID-19-era American Rescue Plan Act, made the credit (temporarily) fully refundable by removing the earned income requirement. This meant that even if a filer had zero income, they were still eligible for a tax refund from the CTC.
The income spectrum of tax filers who can claim the CTC has changed considerably over the years. At its inception in 1997, the phase-out income threshold for the $400 CTC per child was $115,000 for married couples filing jointly—about $215,487 in today’s dollars—$75,000 for Head of Household filers ($146,923 today), and $55,000 for married couples filing separately ($107,744). Since then, the phase-out income threshold for married couples filing jointly has nearly doubled to $400,000. On the other end of the spectrum, the phase-in income threshold has changed much less. While the CTC was initially only available to those who owed federal taxes, the income floor has remained $2,500, with the exception of the COVID-19-era expansion. Now, the phase-in income threshold is once again $2,500.
This income spectrum has a significant impact on which families receive the CTC. Many low-income families are currently ineligible for CTC because of the phase-in income threshold. For example, in 2019, only 29 to 37 percent of households in the lowest four income quintiles benefited from the CTC. These households only received between 19 and 23 percent of the CTC’s total $118 billion budget, leaving roughly 80 percent of the credit to the top 20 percent of earners.
In its current form, it’s difficult to call the CTC an effective anti-poverty tool because it’s primarily distributed to middle- and upper-income families. However, with better targeting, the CTC could play a more effective role in reducing childhood poverty. For example, the 2021 expansion and its focus on the very lowest earners mechanically lifted almost 4 million children out of poverty. The additional CTC to low earners went toward basic needs like food and housing and was felt more significantly in low-income households than in average-income ones. To become a true anti-poverty tool, the CTC could return to something similar to the 2021 expansion, particularly for the low end of the income spectrum.
How Has the Total Fertility Rate Changed?
At the onset of the CTC in 1997, the U.S. fertility rate hit a near historic low, at 1.97 births per woman. This rate has somewhat waxed and waned in the decades since but has generally trended downward, concerning policymakers. Resultant policies have tried to incentivize having children for a number of reasons, including the future American workforce size and tax base for government spending.
It’s reasonable that a declining birth rate may have something to do with the increased cost—whether real or perceived—of raising kids. Thus, alleviating the cost is a laudable goal. However, on closer examination, the CTC hasn’t had any real effect on Americans’ family-planning decisions. Even after the recent temporary CTC expansion, the Centers for Disease Control and Prevention reported that the fertility rate hit a new historic low in 2023 after decreasing steadily since 2007.
Historically, birth rates tend to be higher in households with lower incomes and degree attainment and lower in those with higher incomes and degree attainment. Additionally, while those at the lower income percentile typically have a higher birth rate than families with the median income, that rate differs based on race. Looking closer, the relationship between income and fertility seems mostly culturally determined. Clearly, though income does seem to play a part, it isn’t driving the fertility rate. Even diving into state-level data, which could show higher birth rates in more affordable states, the reality is that all states have seen a decline in total births. Teen births have especially declined, which is hardly a negative.
Policy Considerations
The CTC is not currently effective at combating childhood poverty, and it has no real impact on Americans’ decision to have children. However, the 2025 CTC could make key changes so that it does, at the very least, better target poverty. Removing the phase-in income threshold as the 2021 temporary expansion did would better address those at the lowest end of the income spectrum. Additionally, lowering the phase-out income threshold from $400,000, while perhaps not politically popular, better addresses the reality that these households have less to gain in meeting basic needs from a small tax credit.
For those concerned with the incentives of issuing a tax credit to non-earners, this can be fixed relatively easily. By increasing the rate at which the CTC phases in for low- or non-earners, these households would stand to gain a larger CTC from even slightly higher earnings.