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INCREASE ELIGIBILITY FOR THE REFUNDABLE PORTION OF THE CHILD TAX CREDIT

Key Points

 

·        This proposal would reduce the income threshold at which the Child Tax Credit (CTC) begins to phase in from $12,550 in 2009 and an estimated $12,600 in 2010 to $3,000 and would therefore extend the credit to poorer working families.

·        This is the most highly targeted of the tax provisions – though less targeted than the parallel Ways and Means proposal, because it would exclusively help low-income working families with children, who would tend to spend most or all of the additional funds.

·        The stimulus would be delayed because the credit would generally only come after recipients file their tax returns the following year.

·        JCT estimates that the proposal will cost $14.8 over 10 years.

Current Law

Families with children under age 17 can claim a Child Tax Credit (CTC) of up to $1,000 per child. The credit is reduced by 5 percent of adjusted gross income over $110,000 for married couples ($75,000 for single parents). If the credit exceeds taxes owed, families can receive some or all of the balance as a refund, known as the Additional Child Tax Credit (ACTC). The ACTC is limited to 15 percent of earnings above a threshold—$12,550 in 2009—that is indexed to inflation. The point at which the ACTC begins to phase-in coincides with the end of the phase-in range of the earned income tax credit (EITC) for families with two or more children, providing a smooth transition between the two credits for these families. For families with one child, however, there is a $3,600 gap between the $8,950 end of the EITC phase-in and the $12,550 start of the ACTC phase-in.

Stimulus Proposal

The proposal would reduce the start of the phase-in for the ACTC to $3,000 through 2010 so that families would start getting at least a partial credit at lower earnings levels than they do under current law.

Discussion

The CTC is the largest tax code provision benefiting families with children, distributing about $45 billion to 31 million families in 2007. As currently structured, higher-income families are much more likely to benefit than lower-income families. In 2007, when the ACTC threshold was $11,750, only 8.2 percent of families with eligible children in the lowest quintile—or fifth—of the income distribution received any benefit from the credit, compared to nearly all families in the middle income quintile (see TPC table T07-0296). On top of that, many low-income families who receive the credit get less than its full $1,000 value because their income falls in the phase-in range.

This proposal is the most targeted part of the stimulus package, providing assistance exclusively to poor families (though not to those earning less than $3,000 per year), who are most likely to spend additional income. Research based on credit card data showed that low-income households spent about 75 percent of their rebates from the 2001 tax stimulus (Johnson, Parker, and Souleles 2006). Beneficiaries of this proposal have even lower incomes than the low-income recipients of the earlier tax rebate and would likely spend an even larger share of any additional credit this proposal would provide. On the other hand, survey data contradict that research, suggesting instead that low-income families spent much less than three-fourths of their 2001 rebates and not much more than higher-income families (Shapiro and Slemrod 2003). However, low-income survey respondents were also generally better off than most of the people who will benefit from this proposal so how they reacted to the 2001 rebates may not be relevant; the very low income households newly eligible for the CTC could well spend most of their additional credits and thus help to stimulate the economy.

The lower phase-in threshold would increase the benefits of working and could thus induce some very low income people to look for jobs. In an ordinary time, that would help boost the economy. In today’s weak economy with its high unemployment rate, however, new job seekers are unlikely to find work so the economy would get little stimulus through this mechanism.

The proposal gets marked down because most families would receive no benefit until they file their tax returns in 2010. The stimulus could be made timelier (and thus more effective) if the first installment were paid out as rebate checks based on 2008 incomes.

There would be strong pressure to extend the credit beyond two years. That would significantly increase the long-term revenue cost, but it would make the tax system fairer – allowing more families with children to receive the credit. If the $3,000 threshold were made permanent, it would have mixed effects on economic efficiency. Most lower-income households in the phase-in range would have a greater incentive to work, but some households in the phase-out range for the EITC could face disincentives to work more since the CTC would be fully phased-in prior to the EITC beginning to phase-out, rather than overlapping for a range of income.

Grade: B+

This provision is the most highly targeted in the stimulus package. The proposal would receive an A- grade if the first installment were distributed based on 2008 tax returns and the phase-in threshold were lowered to zero as the House had proposed.