Misguided Expansion of the Child Tax Credit

By :: June 30th, 2014

Congresswoman Lynn Jenkins (R-KN) wants to expand the child tax credit (CTC) with the Child Tax Credit Improvement Act of 2014. She’s on the right track, but her proposed expansions are ill-targeted and fail to address the credit’s biggest looming issue: the change in refundability that will hit the poorest recipients after 2017.

Jenkins’s plan would index the credit for inflation and extend the credit to higher-income married couples­­­. There are better alternatives. A much cheaper option would simply continue today’s relatively generous version of the program after 2017. An even better solution would make the credit refundable for all families, starting at the first dollar of earnings. Such a change would cost about as much as Jenkins’s plan but would target assistance to the neediest workers rather than higher-income households, as she would.

The CTC provides a credit of up to $1,000 per child. The basic credit is not refundable—that is, it can only offset income tax you would otherwise owe—but the “additional child tax credit” is. Parents can receive 15 cents for every dollar of earnings above $3,000 – until they reach the maximum credit. Without that refundability, families that owe no income tax would not benefit.

But after 2017, that $3,000 refundability threshold is scheduled to jump to around $15,000 and rise with inflation going forward.

President Obama proposed making the current threshold permanent as part of this year’s budget at a cost of about $72 billion over 10 years (12.1 billion in 2023). Two-thirds of the benefits from that extension would flow to workers in the 20 percent of households with the lowest income.

Contrast that with the Child Tax Credit Improvement Act of 2014. It would boost the income level above which the credit phases out from the current $110,000 to $150,000 for married couples, making the credit available to many higher-income households. It would also index the $1,000 per child credit amount and the phaseout thresholds for all parents. JCT estimates the proposal would cost $115 billion over 10-years ($18.4 billion in 2023).

CTC-options

The bill has some good elements. Indexing the credit (as opposed to the phaseout level) would prevent the value of the CTC from eroding. Boosting the phaseout levels would protect many middle-income couples from being hit by a marriage penalty as their credit declines.

But these changes focus benefits on high income families, and ignore the looming cut in the CTC for low-income families. Two-thirds of the bill’s benefits would go to workers in the top 40 percent of the income distribution. That’s not the best use of limited tax dollars.

Congress has better alternatives. Besides adopting the President’s proposal of making the $3,000 refundability threshold permanent - which targets nearly two-thirds of benefits at families with the lowest 20 percent of incomes, it could eliminate the refundability threshold entirely, so that low-income working parents would start to benefit from the CTC when they earn their first dollar. That would simplify the tax code and also provide benefits to the poorest workers. Last year, the Tax Policy Center estimated that change would cost about the same as the Jenkins bill ($16.3 billion in 2023). But it would be much more progressive. Just over two-thirds of the benefits would go to families in the lowest 20 percent of incomes.

Reforming the CTC is a great idea. But reforms ought to be targeted at those most in need. Before doing anything else, Congress should make the current refundability threshold permanent.

15Comments

  1. AMTbuff  ::  1:52 pm on June 30th, 2014:

    Welcome to that 70’s show. Step 1 is to enact a non-indexed tax law (such as the CTC). Step 2 is to wait for inflation to increase taxes on millions of middle class and upper middle class taxpayers. Step 3 is to come to the rescue with a fix, which is normally not fully indexed either.

    Step 4 is to water down the fix because it favors people with higher incomes. When making this argument it’s essential to exclude from consideration the fact that inflation-induced creep disfavored people with higher incomes by the same amount over the years. The argument that the tax rules are merely being brought back into line after decades of inflation must not be allowed to gain traction.

    We will eventually see this scenario play out on the Section 121 home sale exclusion. That provision is not indexed for inflation and the dollar thresholds have never been changed. A full adjustment of its terms for 17 years of inflation is politically unthinkable. Restoring the value of Section 121 would be a giveaway to the “rich”, even though inflation’s takeaway from these same “rich” has continued 17 years without notice.

    I recommend that TPC, in the interest of honest presentation, provide a distributional comparison of any proposed law in the new year to the old law in the year in which is was enacted. That comparison would be apples to apples.

  2. Michael Bindner  ::  1:55 am on July 1st, 2014:

    I am all for ending the refundability threshold and would make the entire credit refundable (although for some people, they would still see nothing because they make too much). I would raise the credit to at least $6000 per child per year – refundable with pay – and work to get an equal match on the state side and twice the federal credit in states with no income tax. I would pay for this by ending the home mortgage interest deduction, the child tax exemption and the property tax deduction. Of course, then few will itemize.

    As for the provisions making wealthier people eligible, I would do those too! Why – to make the credit even more politically acceptable to everyone with children – including the rich. Also, because in my proposal to do a net business receipts tax, gross income would be reduced and one of the reductions would be the child tax credit paid by the average family. The more average families get it, the more cutting salary by that amount is harmless and politically expedient.

  3. Misguided Expansion of the Child Tax Credit | Tax Credits for Working Families  ::  2:31 pm on July 1st, 2014:

    […] post was authored by Elaine Maag of the Tax Policy Center and originally appeared on their TaxVox blog. We are re-posting with her […]

  4. Solomon Jurdiss  ::  11:50 am on July 2nd, 2014:

    I agree with comment #2: fund an improved child tax credit with the (ridiculous) home mortgage interest deduction…what are we, encouraging debt with that one?

  5. Peter Rudolph CPA  ::  4:11 pm on July 6th, 2014:

    Making it refundable with no work incentive makes the system more vulnerable and encourages not working.

  6. News Round-Up: July 7, 2014 | Tax Credits for Working Families  ::  3:48 pm on July 7th, 2014:

    […] looming issue: the change in refundability that will hit the poorest recipients after 2017. (TaxVox, The Christian Science Monitor, Tax Credits for Working […]

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