Expanding the Federal Child Tax Credit Comes With Pros and Cons

The federal child tax credit, first enacted at $500 per child for middle- and upper-class families in 1997, rose to $1,000 per child following more tax legislation four years later. In 2017, the credit temporarily doubled to $2,000 per child and increased the income level where the credit began to fade.

The credit rose again under the American Rescue Plan, a pandemic-era benefit that gave a $3,000 tax break per child for children over 6 and $3,600 per child for children under 6. It then shrank to $2,000 after Sen. Joe Manchin (D-W.Va.) opposed President Joe Biden’s 2022 spending package, which included an extension of the expanded credit. The credit is set to decrease to $1,000 again in 2026.

Since the decrease in benefits, states have started developing legislation. We feature two perspectives on child tax credits and government policies that can impact child poverty and cost of living.

Antidote to Inflation

Rep. Rosa DeLauro (D-Conn.)

Paid family and medical leave, paid sick days, and wage equality are among the policies that will help strengthen the American middle class and those striving to join it. Key to that work is the American Family Act—legislation I’m sponsoring to expand and improve the child tax credit.

The expanded credit would reach 90% of all families, including the most vulnerable. The larger benefit would be delivered monthly and help families better meet their expenses.

Opponents say the expanded credit costs too much, but it costs us more not to make it permanent. The National Academy of Sciences found child poverty costs the US $1 trillion per year. Economists have found that the expanded credit, in part by alleviating child poverty, will bring back an estimated $8 for every $1 we spend, according to the National Bureau of Economic Research.

Under the 2021 American Rescue Plan Act, the maximum credit increased to $3,600 per child under 6 and to $3,000 per child ages 6 to 17. The credit became fully refundable and ensured families received advanced monthly payments from July to December 2021.

These included single parents working two jobs to support two children, retired grandparents serving as the sole caretaker of their grandchildren, and parents of a child with a disability.

This expansion reached more than 61 million children and lifted nearly four million out of poverty in 2021 alone. Child poverty was cut in half. Within four months of passage, the IRS correctly sent 98% of payments. Hunger was cut by over a quarter.

Those opposing the expanded credit argued families would abuse the funds, but 2023 research from experts in the field found that families used the money mostly for food and shelter costs. On average, for each $100 families received, they spent $28 on food, $31 on housing, and $15 on expenses related to their children.

This data validated what my constituents told me during those six months—and I still hear from constituents more than two years later about how the credit helped.

After Congress allowed the program to lapse without extension, we’ve seen drastic increases in child impoverishment. The US Census Bureau tracked a nearly 140% increase in child poverty, the largest increase on record. That is 5.2 million children and their families back in poverty.

This is unacceptable. We know low-income families are the hardest hit by the rising cost of gas, food, and housing. The child tax credit ensures that families are better equipped to deal with these costs.

We can’t move a tax package that solely caters to giant corporations and billionaires while leaving working and middle-class families behind. If they receive a tax break, we should certainly be able to provide one for America’s children.

Rethinking Value

Adam Michel, Cato Institute

Advocates of the child tax credit laud the subsidy program for its ambitions to tackle poverty, ease middle-class family finances, and boost falling fertility rates. Unfortunately, it fails at each of these goals.

The current $2,000 credit costs about $1.2 trillion over 10 years. Democrats’ proposed extension of the larger 2021 pandemic-era credit would more than double the cost to roughly $2.8 trillion—a full trillion more than the much-derided revenue reduction of the 2017 Republican tax cuts.

However, the clamor for spending ever larger sums of money through the tax code has left a critical question unanswered: Is the child tax credit serving its intended purpose?

Unlike the earned income tax credit, cash aid, food aid, and public health care, the child tax credit is primarily a subsidy for middle‐ and upper-income Americans. Families making as much as $400,000 a year can claim the full credit as currently designed.

According to a 2021 Congressional Budget Office estimate, only 19% of child tax credit expenditures are claimed by the lowest quintile of income earners. The poorest Americans are fully ineligible due to the income requirements.

To better target the lowest-income families, Congress could eliminate the earned income requirement, as was temporarily done in 2021. Proponents claim that such a permanent change would reduce child poverty by more than 40%. However, such rosy estimates fail to account for how newly eligible families will change their behavior, often by working less.

Considering behavioral effects, researchers estimate the larger child tax credit without income requirements would lead 1.5 million workers to stop working—83% of whom would be the sole earner in the household. Expanding the credit would reduce overall child poverty by 22% and wouldn’t reduce deep poverty, defined as below 50% of the poverty line. This modest poverty reduction would cost nearly twice as much as those of alternative programs such as food stamps.

Other proponents argue we need larger child subsidies to offset the rising cost of raising a child. While the costs associated with raising children are significant, they haven’t outpaced income growth over the last 60 years.

The annual cost of raising a child in a two-earner family fell to 13% of median family income in 2020 from 22% in 1960. While children do come with additional costs (and benefits!), so do many other decisions individuals and families make. And additional subsidies will tend to feed inflation, making it more, not less, expensive to raise a family.

Some proponents rightly worry that Americans aren’t having enough kids, driving US fertility well below replacement. But not every problem can be solved with more cash. Financial incentives have demonstrated minimal impact on fertility rates, particularly in the long term.

As an anti-poverty program, the child tax credit doesn’t target those most in need. To address child poverty, Congress should focus on streamlining the myriad purpose-built programs funded through annual appropriations. Family affordability is better addressed with deregulation to increase supply in critical areas such as housing, education, and child care.

Ultimately, Congress should focus on more targeted reforms and should repeal the child tax credit. The additional revenue should be plowed into lower tax rates, which would benefit all Americans.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Rosa DeLauro represents Connecticut’s Third Congressional District in the US House of Representatives.

Adam N. Michel is director of tax policy studies at the Cato Institute, an American libertarian think tank.

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