STATEMENT on Child Tax Credit Expansion – Marc Stier, Executive Director, Pennsylvania Policy Center
The House Ways and Means Committee today voted in favor of bipartisan tax legislation that includes an expansion of the child tax credit along with the restoration of some expired business tax credits. The legislation is the product of negotiations between the chair of the House Ways and Means Committee, Jason Smith (R-MO) and the chair of the Senate Finance Committee, Ron Wyden (D-OR).
This legislation would benefit 19 million children in low-income families, or 1 in 5 of children under 17, including 506,000 children in Pennsylvania. It would especially help Black, Latino, and Asian children, whose parents are overrepresented in low-paying jobs due to structural barriers to opportunity.
In the first year, the expansion of the child tax credit would lift 400,000 children nationwide—and roughly 16,000 kids in Pennsylvania—out of poverty. Additionally, another 3 million kids nationwide, and 120,000 in Pennsylvania, will be made less poor.
The child tax credit gives families a refundable credit of 15% of their earnings above $2,500—which means that the family receives a cash benefit if they have no federal tax liability. The law makes three important changes in the child tax credit that provides additional benefits to low-income families.
At present, 19 million children in the country receive less than the full credit because of the current “refundability cap” that limits benefits to families with incomes below $40,000. This legislation lifts the cap from the current limit of $1,600 per child to $1,800 per child for tax year 2023 and $1,900 per child in tax year 2024. In 2025, the cap would be lifted entirely and the maximum credit of $2,000 will be available to all families.
In addition, under current law, many low-income families with two or three children receive the same credit as a family with one child at the same earning level. The legislation would allow a credit for each child in a family as is now the case for higher-income families. So, for example, a single parent with two children who earns $13,000 working part time as home health aide currently receives a refundable tax credit of $1575, which is 15% of their earnings above the $2,500. Under the new law, the family would receive $1,575 per child or a total of $3,150.
Finally, the proposed legislation adopts a lookback provision that allows families whose earnings decline in a year to use the prior year’s income to calculate their tax credit. This would help families who experience a temporary drop in their income from also suffering a drop in their child tax credit. This is especially important because of the volatile nature of the low-income job market.
A number of business tax credits are restored as part of the compromise legislation. While we at the Pennsylvania Policy Center have some doubts about the usefulness of these provisions, we welcome this compromise because the benefits to low-income children are so important.
The expansion of the child tax credit under the American Rescue Plan was much larger than under this proposal—and we fervently hope that a similar program will be enacted in the future. Democrats recently put forward a slightly bigger program that would have increased the tax credit for low-income families even more, by ending the exemption of the first $2500 in earnings in the calculation of the credit, and by raising the 15% phase-in rate. But this current legislation, which is rightly targeted to benefit the lowest income families, is a necessary and promising first step in that direction.
The entire program is, rightly, paid for by making administrative and enforcement changes to the Employee Retention Credit, a provision added to the tax code during COVID that has been abused.