The direct cash assistance from child-tax credit payments helped millions of families, making a sizable dent in child poverty rates. But the pandemic-era enhanced credit was discontinued at the end of last year.
Between last July and December, the temporarily enhanced child-tax credit paid eligible households up to $300 monthly per child under age 6 and up to $250 for children between the age of 6 and 17.
Low-income families with $500 monthly checks reduced their food insecurity by 32% and the monthly payments made life easier for some when it came to their medical bills and utility costs, University of Michigan researchers said in a new report released this week. The researchers said the tax credit had a “significant reduction” for those low-income families.
As rising costs squeeze families and recession worries grow this year, some advocates are hoping for a second act for enhanced child-tax credit when Congress returns after midterm elections.
The latest study builds on research showing the tax credit’s large scale consequences. Child poverty levels last year fell to a record low by one of the Census Bureau’s poverty measures, the agency said in September. By itself, the tax credit took 5.3 million people out of poverty, including 2.9 million children, Census researchers noted.
“The enhanced child-tax credit took 5.3 million people out of poverty, including 2.9 million children, but policy experts are divided on whether it will have a Second Act.”
Previous efforts to extend the enhanced credit did not materialize and Congress remains deeply divided as November’s midterm elections approach.
Still, a “lame duck” session might provide an opportunity as Democrats and Republicans debate corporate tax rules, said Adam Ruben, director of Economic Security Project Action, the legislative advocacy arm of the Economic Security Project, an organization that focuses on financial wellbeing and solutions to shore up money for middle and low-income households.
The child-tax credit could be used as leverage in any such negotiations, he said. “There’s a real chance that child-tax credit monthly checks could be restarted and a deal reached before Christmas,” said Ruben. (His organization has been pressing for the enhanced credit’s permanent extension.)
Before then, there’s November’s mid-term elections. For now, polls suggest Republicans are going to wind up in control of the House of Representatives. Control of the Senate is a closer call.
To be clear, not everyone thinks a deal is coming. “It’s very unlikely,” said Ben Koltun, director of research at Beacon Policy Advisors, an independent policy research firm advising institutional investors.
The credit has had bipartisan support in its twists and turns over the years, he said, but between Democrats and Republicans now, “it’s too big a bid-ask spread here to make a market.”
Whatever happens next, tax code watchers think the issue is only starting to unfold — and that’s after President Joe Biden already signed legislation in August earmarking more money for the IRS and a new array of corporate taxes. “The ink on the Inflation Reduction Act is barely dry, but already there are reasons to think Congress may take up more tax issues once it returns for a post-election session,” wrote John Buhl, senior communications manager at the Tax Policy Center.
Republicans vs. Democrats
There has been political will — on both sides of the aisle — to improve the child-tax credit. Exhibit A: As part of the Tax Cuts and Jobs Act of 2017, the Trump administration doubled the child-tax credit to $2,000 per child from $1,000.
Exhibit B: The Biden administration’s 2021 American Rescue Plan increased the child-tax credit to $3,600 for children under age 6 and to $3,000 for children between ages 6 and 17. But that boost was only for one year. The Internal Revenue Service distributed the first half of the sum during the advance payments from July to December. The second half was delivered during tax season 2022.
But the question of whether to reinstate the enhanced child-tax credit could come to the fore as Republicans and Democrats wrangle over how companies can write off their domestic research and development costs.
Beginning this year, corporations are required to gradually write off those domestic costs over five years, and write them off over 15 years for foreign R&D.
The Trump-era Tax Cuts and Jobs Act of 2017 (TCJA) allowed firms to immediately deduct all of their costly research expenses from their taxable income in the year it occurred. But the law only let that happen through 2021. The change introducing amortization was one part of the TCJA, which lowered the corporate tax rate to 21% from 35%.
Hence, the opportunity for negotiation: There’s support on both sides of the aisle to bring back the immediate tax deductions for R&D costs, Buhl and Koltun explained.
“‘We should have never allowed this critical program to lapse, and we should not extend corporate tax breaks at the end of this year without also extending the expanded child-tax credit.’”
The Democrats could compromise and reinstate immediate deductions on those R&D costs — if the Republicans agreed to a beefed-up child-tax credit.
“We should have never allowed this critical program to lapse, and we should not extend corporate tax breaks at the end of this year without also extending the expanded child-tax credit,” several Democratic Senators and Representatives said in a statement after the Census research came out.
People signing onto the statement included Sen. Michael Bennet of Colorado, who’s running for reelection. Bennet has noted his efforts to work a deal on the child-tax credit during the lame-duck session. In a Colorado Public Radio interview, Bennet said he’s been talking with Sen. Mitt Romney, a Republican from Utah, who has his own legislative ideas on the child-tax credit and cash for families.
Bennet’s campaign and Romney’s office did not immediately respond to a request for comment.
During a White House forum on Sept. 28, President Biden repeated his support for a permanently expanded child-tax credit in his remarks on hunger and food insecurity — a notable mention, Ruben said.
“During a White House forum on Sept. 28, President Biden repeated his support for a permanently expanded child-tax credit in his remarks on hunger and food insecurity.”
Families have heard the rumbles before for boosted child-tax credit checks — each time ending with no payoff. For example, the Biden administration pressed for it in a domestic legislative package, but Sen. Joe Manchin, a moderate West Virginia Democrat, opposed.
“This is really a different political moment,” Ruben said. The enhanced credit’s legislative future does not hinge completely on its own popularity, he said.
“Here, the business-tax credit is the engine,” Ruben said. Lawmakers “need to make sure the train doesn’t leave without working families on board,” he added.
Political tempers can cool for a bit and deals can get accomplished in lame-duck sessions, Koltun acknowledged. “But Republicans may not see an even trade between changes to corporate expensing tax rules, and another round of enhanced child-tax credit payments,” he said.
“‘You don’t need 10 Republicans to fall in love with the child-tax credit. You just need them to be fine with the child-tax credit and to love corporate tax breaks and that’s a much easier bar to clear.’”
“I don’t think Democrats have the leverage that they are hoping they do,” Koltun said, adding, “Even for a lame duck session, I think it’s a bridge too far,” he said.
That said, there’s still time before many lawmakers feel the crunch to make more changes, Koltun noted. After 2025, the child-tax credit reverts back to its $1,000 payouts at the 2017. “That’s the real point of negotiation,” he said.
Far reaching bills like the American Rescue Plan and more recently the Inflation Reduction Act — a climate, tax and healthcare package — became law with Congressional maneuvers just requiring a simple majority in the evenly split Senate. Theoretically, Democrats could try the same move again, but Koltun doubts centrists in the party, like Manchin, would go for that.
So that brings the vote count back to 60 to bypass Senate filibusters.
Ruben sounds unfazed. “You don’t need 10 Republicans to fall in love with the child-tax credit,” he said. “You just need them to be fine with the child-tax credit and to love corporate tax breaks and that’s a much easier bar to clear.”
Meanwhile, there may yet be a consolation for some taxpayers.
The IRS sent out direct payments to more than 60 million families and the direct payments topped $90 billion, the Treasury Department said. But if eligible households missed out on the six monthly installments, the IRS said a 2021 tax return would be the way to claim it in one lump sum. A 2021 tax return would also be the way to fix a miss on the $1,400, third round of stimulus checks.
There’s still time to file that income tax return penalty-free, but the clock is ticking.
Oct. 17 is the filing deadline on 2021 returns for taxpayers who received extensions. As of approximately mid-May, the average income-tax refund was just over $3,000 – a 7.5% increase from the payout size at the same time the year before.
The child tax credit money was one likely reason for the year-over-year increase, tax professionals said.
