The voices of Tax Policy Center's researchers and staff
The Big Six Unified Framework promises a tax plan that “significantly increases the Child Tax Credit (CTC)”, but provides few details. If the child tax credit in the Framework is similar to the House Republican leadership’s 2016 “Better Way” plan, it would: provide no additional benefit for very low-income families; roughly replace the Framework’s proposal to repeal personal exemptions for most middle-income families; and slightly increase taxes for higher income families.
The Unified Framework is light on details, but seems to include four main elements related to the child tax credit:
- It would repeal personal exemptions for dependents but “significantly increase” the CTC above its $1,000 current law value;
- The first $1,000 of the CTC would continue to be refundable;
- The CTC would begin to phase out at higher income levels than under current law and the marriage penalty associated with the phase-out of this credit would be eliminated;
- It would add a nonrefundable credit of $500 for non-child dependents (which may be limited to adult dependents but could also include children age 17 and above who would not qualify for the CTC).
TPC’s analysis assumes the plan would : (1) keep the credit the same for low-income families who benefit from the refundable portion of the CTC; (2) increase the income amount where the CTC begins to phase out for married couples so it is twice that for single parents; and (3) repeal the personal exemption for children and increase the maximum nonrefundable CTC to $1,500, and create a new $500 nonrefundable credit for dependents 17 and up.
The overall impact of the increase in the CTC and the repeal of personal exemptions for children for most families? Not much.
Today’s child tax credit provides up to $1,000 per child under 17. The credit is reduced by 5 percent of adjusted gross income over $75,000 for single parents ($110,000 for married couples). If the credit exceeds taxes owed, families can receive some or all the balance as a refund, known as the Additional Child Tax Credit (ACTC) or refundable CTC. The ACTC is limited to 15 percent of earnings above $3,000. So, a taxpayer with $5,000 earnings could receive a refundable tax credit of $300 (15 percent of the $2,000 in earnings above the $3,000 threshold.)
It appears that the Framework leaves the ACTC unchanged. That means low-income families, who often owe no federal income tax, would receive no new benefits from an expanded CTC.
Middle-income families would likely see their CTC increase. Under TPC’s assumptions, the CTC would rise by $500, from $1,000 to $1,500, mirroring the “Better Way” proposal. But while the Framework would raise the CTC, it would also repeal the personal exemption, which this year allows families to exempt $4,050 from taxation, per dependent. For a taxpayer in the 10 percent bracket, each exemption reduces income tax liability by $405. However, the Framework’s lowest income tax rate would be 12 percent, making a personal exemption at today’s level worth $486 (nearly the same as the proposed increase in the child tax credit). For taxpayers in the 25 percent bracket, an exemption is worth $1,012.50 today, a lot more than a $500 CTC increase.
For married filers, TPC expects the CTC will begin to phase out once modified adjusted gross income reaches $150,000 (twice that of single parents). That change would cost about $60 billion over 10 years, according to an earlier TPC estimate, with the benefits flowing almost entirely to families in the highest 40 percent of the income distribution (those making more than about $83,000).
By increasing the CTC for higher income families but providing no new benefits to the lowest income households who rely on the refundable portion of the credit, the framework would differentiate between families with children who can access the full CTC and those who cannot. Higher income children would be worth up to $1,500 apiece in tax credits; lower income children would continue to max out at $1,000.
There is one more facet to consider when moving from the personal exemption to a child tax credit. The personal exemption is indexed to inflation, but the CTC is not, thus it loses value over time. (My colleague Howard Gleckman explains the indexing issue here.)
When combined with the Framework’s other provisions, there is a lot less to the CTC increase than meets the eye. TPC estimates that under the Framework, families in the lowest income quintile would, on average, receive a new benefit of about $60. In other words, nothing much to see here.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.