The Washington PostDemocracy Dies in Darkness

The truth about the child tax credit

It excludes the Americans who need it most.

Senate Majority Leader Charles E. Schumer (D-N.Y.) holds a news conference to talk about the benefits of the Child Tax Credit at the Capitol in Washington on July 15, 2021. (J. Scott Applewhite/AP)
6 min

As Democrats celebrated the recent passage of the Inflation Reduction Act, their glee was tempered by inaction over a long-standing party priority: the Child Tax Credit (CTC). Despite months of ardent lobbying, fervent favor-trading and political arm-twisting, Congress took a pass on expanding a program that provides financial support to millions of people.

For many, this was a missed opportunity to rectify a fundamental flaw in a program several decades in the making. By virtue of its design, the program prices out millions of hard-working Americans from a benefit that could help more than 27 million children.

The origins of the CTC date back to 1987, when President Ronald Reagan established an advisory panel charged to “serve as a forum on behalf of the children of the nation,” and to make recommendations to Congress and the president on the state of children across America. After years of study, the newly formed National Commission on Children identified income security as crucial to proper child development. “When families have an adequate income, they are better able to meet their children’s material, intellectual, and emotional needs and help them become healthy, productive adults,” reasoned commission members in a 1991 report.

Two financial burdens were identified as likely to compromise income security. The first included housing, education, health care and transportation costs that had grown steadily since the 1970s (and consequently accounted for more of a family’s income compared to previous decades). The second was rising tax liability. Federal, state, local and Social Security taxes accounted for 25 percent of a family’s income in 1991, up from 19 percent in the 1960s. These increases collectively meant smaller paychecks for American families, the consequences being most profound for economically vulnerable communities.

The commission’s proposal — a per-child monetary benefit that would help with these challenges — was largely embraced by lawmakers across the political spectrum. After the 1994 midterm elections, Republicans introduced the American Dream Restoration Act, and subsequently the Tax Fairness and Deficit Reduction Act in 1995, both of which would have provided a CTC for children younger than 18. Democrats — led by President Bill Clinton — countered with a CTC proposal of their own, introducing it in the Middle Class Bill of Rights Tax Relief Act of 1995.

However, partisan fault lines quickly appeared as lawmakers largely disagreed over whether CTC recipients should simultaneously benefit from another government program, namely the Earned Income Tax Credit (EITC). Clinton wanted to ensure low- and moderate-income taxpayers who earned less than the standard deduction plus personal exemptions could claim both benefits concurrently — thereby boosting a household’s earnings — arguing that these groups needed financial help the most.

Republicans, however, weren’t convinced. Labeling Clinton’s proposal a form of “welfare,” the GOP instead pushed for a less generous arrangement. Their plan excluded parents who were working but did not earn enough to owe any income tax from receiving the additional benefit. “Why should people who already pay no tax get what amounts to more welfare?” reasoned then-House Speaker Newt Gingrich (R-Ga.).

The CTC was eventually codified into law, but what emerged — the Taxpayer Relief Act of 1997 — strayed from the commission’s original proposal in three important ways.

First, in a nod to Republicans, the credit was made nonrefundable for most taxpayers. This meant that parents who earned less than the standard deduction would be unable to claim the full benefit.

Second, the size of the credit was substantially reduced from the original $1,000 proposal endorsed by the commission. Ultimately, the benefit reached $400 per child in 1998 and $500 for each year thereafter.

Third, the credit was not automatically adjusted for changes to the cost of living over time.

Over time, however, many of these restrictions were eased. The Economic Growth and Tax Relief Reconciliation Act of 2001, for example, allowed some families who were initially excluded from the benefit to claim the CTC. The Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 — both passed in the wake of the 2007-2008 financial crises — sought to do the same. And in 2017, the Tax Cuts and Jobs Act dramatically expanded the size of the credit, which went up from $400 in 1998 to $2,000 in 2018.

While the program has helped many American families over the years, not everyone who needs the assistance has been able to reap the benefits. By one estimate, 70 percent of children in families headed by single mothers were unable to claim the full credit, compared with 25 percent of children in two-parent households.

There was also unequal access across racial lines. More than 50 percent of Hispanic and Black non-Hispanic children also did not receive the full credit, compared to 23 percent of White non-Hispanic children. Moreover, nearly 1 in 5 Black non-Hispanic children were not eligible to receive the credit at all.

These statistics reflect how poverty is distributed across the country’s racial and class lines. Because claiming the CTC necessitates being gainfully employed — that is, it is the only way to accrue sufficient tax liability to become eligible — those who do not work or are unable to work are ineligible for benefits.

While many have argued that the millions of parents who do not receive CTC benefits should first find employment, history demonstrates that it’s not that simple. Contrary to popular belief, throughout its history the CTC program has required more than just work to qualify. Parents must meet specific income thresholds that — for America’s poorest — have long been virtually impossible to meet. In 2020, claiming the maximum CTC allowed under law (i.e., $2,000) required an annual income exceeding $24,000.

The problem? At the federal minimum wage, workers toiling 40 hours a week for 52 weeks a year would earn just $15,080. For these individuals — among America’s poorest — claiming the full CTC necessitates working the near equivalent of two full-time jobs.

The 2021 American Rescue Plan temporarily eliminated the CTC’s work requirement and increased the size of the credit. The move guaranteed that millions of parents — whether employed or not — would get a hefty government check. Democrats were elated. Republicans, less so. Democrats called President Biden’s actions integral to reducing child poverty (CTC eligibility rose among America’s poor). Republicans said the president’s action was too pricey and would discourage work.

The CTC-related provisions of the American Rescue Plan have since expired, and efforts to revive it have stalled. In a routinely gridlocked Washington, what happens next is anyone’s guess. One thing is certain: The CTC represents one of the most expansive financial relief programs underwritten by the U.S. government. Over time, “blue” voters and “red” voters alike have come to rely on the CTC for help. As rising inflation and financial uncertainty hits families across America, the need to address political disagreement over the CTC is more timely than ever.