The expanded child tax credit was a broadly popular initiative with serious impacts on child poverty. Efforts to continue the expansion, however, have stalled in Congress, in part due to ongoing concerns over inflation. To help understand the policy we have answered the following questions:
WHAT IS THE CHILD TAX CREDIT?
The expanded Child Tax Credit was signed into law by President Biden on March 11, 2021 as part of the American Rescue Plan. The expansion increased the amount each family could receive from $2,000 per child to $3,600 per child under 6 years old and $3,000 per child 6-17 years old. Families making up to $150,000 were eligible to receive the full amount
Regular advance payments of the Child Tax Credit refund were distributed to families on or after July 15, August 15, September 15, October 15, November 15 and December 15. Families were eligible to receive up to half of their expected tax credit as advance payments, equaling regular payments of between $250 and $300 per child.
The Child Tax Credit was originally established in 1997 with the Taxpayer Relief Act at $400. From that point onwards the Child Tax Credit increased in value—the tax cut was set at the value of $2,000 per child in 2018—as well as changing in other ways. For example, the Child Tax Credit became refundable in 2001, and earning thresholds were gradually reduced. The expanded Child Tax Credit is only effective for 2021, however, and it is expected to revert to $2,000 per child in 2022, absent additional legislation.
According to the Department of the Treasury, the federal government distributed cumulatively 92.8 million dollars through advance Child Tax Credit payments over the latter half of 2021. By December 2021, these payments reached roughly 61 million children, or 36 million households.
HOW DID AMERICAN FAMILIES USE THE CHILD TAX CREDIT?
In the initial weeks after the first payments went out, roughly two-fifths of American families primarily used it to pay off debt, while one-third primarily put it in savings and over one-quarter spent it, according to the U.S. Census Household Pulse Survey.
From July to mid-October, a plurality of American families reported that they used their tax credit to pay off debt. After mid-October, the proportion of families that reported spending the credit increased and became the most common use of the tax credit. The last few months of 2021 also saw the proportion of families saving the credit go down.
When looking at how the use of the credit varied by income of households, around 50% of families with household incomes below $50,000 used the credit for paying off debt for the entire six months that advance payments were delivered. This compares to 40% of families in the $50,000 - $99,999 group and around 30% of families in the $100,000 - $149,999 group using the credit for paying down debt.
The inverse was true for saving—more families in the higher income bracket were saving their credit payments compared to the lower income bracket, with the middle income bracket again in between the other two. The proportion of families spending their credit payments was similar regardless of income group—starting at around 30% of families and rising to about 40% of families by the end of year.
The consistently large number of Americans that used the tax credit to primarily pay off debt suggests that credit cards and other loans were a significant means of paying for regular expenses at least during earlier stages of the pandemic, if not prior to it. Household Pulse Survey data from the beginning of January to mid-July 2021 shows that over one-fifth of Child Tax Credit-eligible households regularly used credit cards to meet their spending needs.
The most striking change over this six-month period is the increasing proportion of American families across all income brackets that report primarily spending their tax credit payments. A report from the JPMorgan Chase Institute from last fall notes that on average lower income families had roughly 70%, or $1,000, more in their checking accounts over the course of the first three Child Tax Credit payments than they did prior to the pandemic. A separate analysis by Columbia University’s Center on Poverty and Social Policy suggests that as other forms of COVID relief dwindled or expired, the Child Tax Credit took an increasingly large role in contributing to disposable income.
WHAT DID AMERICAN FAMILIES SPEND THEIR CHILD TAX CREDIT PAYMENTS ON?
Consistently over the six months that advance Child Tax Credit payments were distributed to families across the U.S., families spent their payments on food more than anything else. On average, over half of American families who received Child Tax Credit payments allocated those payments to purchasing food.
Looking at Household Pulse Survey data gathered between late-July and mid-August 2021, researchers at Washington University in St. Louis and Appalachian State University noted that food insecurity fell by nearly 30% among families eligible for the tax credit after they began to receive their advance payments.
The decrease in food insecurity is especially notable given that the cost of food was increasing fairly rapidly in the same time period. According to the Bureau of Labor Statistics, between January 2021 and January 2022, the cost of food rose 7% in the U.S. The “all items” index rose 7.5%, the largest 12-month increase in roughly 40 years.
After food, families were most likely to spend their tax credit on utility bills—the cost of energy soared 27% in 2021—followed by clothing and then rent and mortgage. Each of those categories, on average, drew responses from 30% of families (respondents were able to select more than one use for their tax payment so answers do not sum to 100).
Roughly 20% of American families reported spending their tax credit on schoolbooks and supplies during the six-month period, including 35% during the back-to-school months of August and September. Other school-related expenses, such as tuition and transportation to school, were much lower on the list. These categories of spending were not subject to the same inflationary pressures as food and energy, but nonetheless they were common spending categories for families receiving the tax credit.
WHAT IS THE IMPACT OF THE EXPANDED CHILD TAX CREDIT EXPIRATION IN DECEMBER 2021 ON POVERTY?
According to the Columbia University Center on Poverty and Social Policy, the child poverty rate rose from 12.1% in December 2021 to 17% in January 2022, an increase of 41%, due to the expiration of the Child Tax Credit. It was the highest rate since December 2020, and this staggering increase equated to 3.7 million more children in poverty. In addition, poverty rates also increased for the other age groups, but only slightly.
Latino and Black children were hit the hardest. More than 1.3 million additional Latino children and 660,000 Black children fell into poverty over that month period. One in four Black children lived with a monthly income below the monthly poverty level. While White children experienced the greatest percentage and numerical increases in poverty (52.3% and 1.4 million), Latino and Black children’s poverty rates had the largest percentage point increase (7.1 and 5.9) when considering their total population sizes.
HOW DID THE EXPANDED CHILD TAX CREDIT ADVANCE PAYMENTS AFFECT 2020 TAX RETURNS?
With this year’s Tax Day on April 18, many Americans were in for surprises with the amount they received in returns. The Child Tax Credit payments were advances against what could be claimed on returns and not just free money from the government.
As reported by Politico, some saw their refunds greatly reduced or even eliminated, including divorced couples who trade kids each year for tax purposes (since the IRS sent payments based on what people reported in their 2020 returns). And even though the credit increased from $2,000 to $3,600, many people had less to claim when filing this year than in previous years since they received credit in monthly payments.
However, for middle-income Americans with children, there is a loophole in the law that allowed some people who made too much money to qualify for the economic stimulus and Child Tax Credit payments to claim them on their 2022 tax returns.
WHAT IS THE FUTURE OF THE CHILD TAX CREDIT?
Originally, Biden’s $2 trillion Build Back Better Act to rebuild the middle class included a Child Tax Credit expansion for 2022. Previously part of the American Rescue Plan, it would have provided 39 million American households (90% of households with children) with up to $3,600. Every month, guardians would receive $300 per child under six and $250 per child aged 6-17. This new framework would have also granted permanent refundability for the tax credit, regardless of how much a family owes in taxes.
In November 2021, the House passed the bill by a narrow 220-213 margin. However, as the bill moved on to the Senate in December 2021, Senator Joe Manchin released a statement reversing his support and essentially withdrawing his future vote for the bill, one that Democrats needed in order to pass it with no Republican support.
While the White House expressed shock at Manchin’s change of heart, Biden stated in a January press conference that he is confident that “big chunks” of Build Back Better will be signed into law. Whether one of those chunks includes the Child Tax Credit is unclear.
While issues like inflation and the war in Ukraine are currently forefront in voters’ minds, opposing another expanded Child Tax Credit could have election-year impacts. Fifty-seven percent of Americans favor the Child Tax Credit.