R Sheets Competition Policy

The Federal Child Tax Credit: A Bipartisan Solution That Reduces Poverty and Encourages Employment

by Steven Greenhut AND Ryan Crow

Dec 8, 2023

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Authors

Steven Greenhut

Resident Senior Fellow and Western Region Director, State Affairs

Ryan Crow

Director, Program Design, Impact, and Implementation

Key Points

Congress created the Child Tax Credit in 1997 to help working families with kids stay out of poverty.

During the pandemic, the Biden administration increased the size of the credit and eliminated the requirement that recipients are working.

After the CTC’s expansion expired, child-poverty rates increased.

The president and Republicans in Congress are debating whether and how to expand the program, with the main battle centering on work requirements.

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Current Debate

As with all congressional debates, the publicly drawn lines in the sand do not tell the full story in that there might be a compromise solution that addresses both sides’ concerns. An R Street Institute study from February 2023 looks at the three main options on the table. The first option, favored by Republicans, increases the size of the current tax credit but still restricts it to those who are working. The second option, favored by Democrats, makes permanent the temporary pandemic-era changes by expanding the size of the credit and making it available to everyone, working or not.

A third option offers a blueprint for a bipartisan deal. In essence, it is a hybrid that makes some CTC benefits available to non-workers and then phases in additional benefits as earnings increase. This involves adjusting income thresholds and benefit phase-in periods. Some economists have argued that as many as 1.5 million working parents would exit the labor force if the federal government permanently eliminated CTC’s work requirements, but this study found “only a small work disincentive.” There is also the caveat that the 2021 changes occurred during the pandemic, “when labor supply and labor demand were abnormal and other economic impact payments were given out; people may have reacted differently under more normal circumstances,” the study added.

R Street researchers have also proposed a middle-ground solution that could, for example, “provide $2,000 in CTC benefits for everyone and another $2,000 that phase in for workers.” Specifically, this third option would reduce child poverty by nearly the same rate as the second option while also minimizing any dis-employment effects. It is a solution that could reduce poverty rates and even encourage employment.

Read the full study here.