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Axios reports that Sen. Joe Manchin (D-W VA), one of the Senate’s key swing votes, wants any extension of the Child Tax Credit (CTC) to include a “firm” work requirement and be limited to parents with “family income” of about $60,000 or less. But that idea raises more questions than it answers.
It isn’t easy to parse a legislative proposal from one sentence in a news story, but Manchin seems to be proposing fundamental changes in the CTC and opening a messy can of legislative worms. Whether you think a work requirement and a $60,000 income cap are good policies or not, turning his idea into an actual bill would be a serious challenge.
To understand what Manchin has in mind, remember how today’s CTC works.
Congress created the credit in 1997 as a subsidy for middle- and upper-middle income parents. In several steps starting in 2001, it increased the credit and made it available, at least partially, to lower-income households. Until this year, low-income parents had to earn income to qualify.
In 2017, the Tax Cuts and Jobs Act (TCJA) raised the maximum credit from $1,000 for each child age 16 and younger to $2,000 and boosted the income level where the full credit starts to phase out to $400,000 for married couples filing jointly. Those increases are effective through 2025.
In the American Rescue Plan (ARP) passed in March, Congress increased and expanded the credit again. Among the changes: The ARP raised the credit amount to $3,000 ($3,600 for each child under age 6) and made the credit fully refundable. Couples with income of $150,000 are eligible for the full increases but the higher benefits shrink as income rises. Those changes apply only for one year.
Here are just a few of the issues Manchin’s plan raises:
What does work mean? Families with no income can receive the full credit--but only for this year. After that, Manchin seems to want at least one adult in each family to work. But would the requirement apply only to the refundable portion of the credit or any of it? Would work mean full time? Part-time? Looking for work? Going to school?
What does $60,000 in family income mean? Would it be the same for single filers, heads of household, and joint filers? Would Manchin adjust it for the number of children? Does it apply to W-2 wage income only? What about self-employment income? How would Manchin deal with unreported income, given the huge incentive he’d create to hide income? And how would he address incentives to report phantom income to become eligible for the credit?
Beware of cliffs. West Virginia has beautiful mountains and deep valleys. But its cliffs can be dangerous. As they are in tax policy. Does Manchin mean parents get no credit until they make some income but then get the full credit once they earn their first dollar? Would they get a credit of $3,000 dollars per child if they make $59,999 but nothing if they make $60,000? That is quite a marginal tax rate on that last $1 of income.
I hope Manchin intends to gradually phase out the benefit. But would he start the phase-out at $60,000 or end it there? Tens of millions of households will be intensely interested in the answer.
What is he phasing out? Would the income test apply only to the ARP’s credit increases or the expansions in the TCJA? Or both? Would those who make more than $60,000 receive the pre-TCJAs $1,000 per child? Or the TCJA’s $2,000? Or nothing?
Biden’s pledge. Manchin—and the White House—must confront the president’s promise to not raise taxes on households making $400,000 or less. But Manchin’s idea raises yet another fascinating question: Is it a tax increase if Congress eliminates a tax cut that did not exist before Biden became president? To put it another way: Is it a tax increase if a family pays more in taxes tomorrow than it does today but less than it would have paid under 2020 law?
Republicans will say it is. And it won’t be easy for Democrats to refute them.
My view is the TCJA’s $400,000 income limit is absurdly high and could be lowered for all CTC benefits as the ARP did for its additional benefits. But a $60,000 income cap is too low. The ARP phase-outs that start at $150,000 for joint filers make more sense.
But whatever you think about income limits and work requirements, Manchin’s idea creates a pile of new complications. If Manchin holds firm, he has a lot of questions to answer before his idea becomes a real plan.
Posts and comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
Andrew Harnik/AP Photo