As part of the response to the ongoing pandemic and economic crisis, President Biden and congressional Democrats have proposed a large increase to the child tax credit. Senator Mitt Romney (R-Utah) has also released a similar plan. The tax credit was designed to help families with the cost of raising children, but the pandemic has made some lawmakers reconsider the amount of credit available and the way it’s delivered.
In 2019, Urban Institute researchers analyzed a child allowance similar in magnitude to the Biden child tax credit expansion for the National Academies of Sciences, Engineering, and Medicine (NAS) as part of a larger report on reducing child poverty. We found that the NAS plan would reduce child poverty by nearly 40 percent.
How the Biden administration’s tax credit would work
Under current law, families can receive a maximum child tax credit benefit of $2,000 per child. The credit is structured so that families earning less than $2,500 annually receive no benefit. For every dollar a family earns above $2,500, the credit phases in at a rate of 15 cents. Because of the phase-in, 27 million children live in families that do not qualify for the full credit.
The credit plateaus once its value reaches $2,000 per child and phases out for single filers who earning $200,000 and for married filers earning $400,000.
The Biden administration’s proposal would enhance the credit in several ways:
- allows all children younger than 18 to be eligible, rather than younger than 17
- increases the credit to $3,600 for kids younger than 6 and $3,000 for kids ages 6 to 17
- makes the credit fully refundable, eliminating the phase-in, so parents and guardians with no earnings are eligible for the full amount
- advances the credit to be paid out monthly
- lowers the credit’s phaseout level to $75,000 for single filers and $150,000 for married filers
Under this proposal, a single mother earning $10,000 a year with one 8-year-old child and no tax liability would receive $3,000, instead of the $1,125 available under current law.
Analysis of similar plans shows expanding the child tax credit would dramatically reduce child poverty
We modeled several child allowance policies for NAS. The policy most similar to the Biden plan, at least for families with low incomes, would replace the child tax credit with a fully refundable child allowance of $3,000 for children of all ages. The two main relevant differences between this policy and the Biden plan are that the NAS policy does not include the higher amount for younger children and that the plans phase out at different levels. Despite these differences, the NAS plan and the Biden plan are similar enough that our estimates of the NAS plan provide a rough idea of the antipoverty effects of the Biden plan.
We conducted two versions of our analysis. The main analysis uses 2015 data and 2015 tax rules. We supplemented this with a version of the analysis that applied the individual income tax elements of the Tax Cut and Jobs Act to the 2015 data. I focus on the results from the supplemental analysis here, because that analysis more accurately reflects current policy.
We found the NAS policy would reduce child poverty—as measured by a modified version of the Supplemental Poverty Measure (SPM)—from 12.6 percent in the baseline to 7.6 percent, a reduction of nearly 40 percent. The effect on deep poverty would be even greater: the share of children in families earning less than half of the SPM would decline by 50 percent. Because the NAS policy does not include the higher payment to younger children that the Biden proposal does, the Biden proposal may have an even larger antipoverty effect.
A permanent expansion of the child tax credit could provide even more relief
Our analysis shows that a child allowance similar to the child tax credit expansion proposed by the Biden administration could significantly reduce child poverty, but this plan would only last a year. Further changes, such as a permanent expansion, would offer more certainty to low-income families. Additionally, after implementing the program to provide aid in the short term, policymakers should work to resolve long-term issues, like whether the Internal Revenue Service or Social Security Administration can more effectively provide the benefit to low-income families. Regardless of which agency administers it, boosting the child tax credit would dramatically cut child poverty and provide relief to families during the pandemic.