The voices of Tax Policy Center's researchers and staff
Last year’s stimulus bill extended the Child Tax Credit to millions of poor children, boosting their families’ incomes by as much as $825 in 2009 and 2010. Now, Congress must decide whether to continue that benefit beyond this year, when the credit is scheduled to shrink for low-income families who need it the most.
As it considers what to do, Congress needs to think about the purpose of the credit. Is it a way to aid working families with children or just a means to reduce their taxes? If the idea is to provide assistance, Congress should design the credit to give the biggest benefit to those with the least income. If the idea is to reduce taxes, lawmakers could simply increase the personal exemption and thus exempt more income from taxation.
Congress created the credit in 1997 almost entirely as a way to cut taxes. It was refundable for a few families but mostly went to taxpayers with enough income to pay income taxes. The 2001 tax act expanded refundability to families earning more than $10,000—payments were 10 percent of earnings over that threshold up to $600 per child under age 17. Indexed for inflation, the threshold grew to $11,750 in 2007. At the same time, Congress increased the refundable credit rate to 15 percent and the maximum credit to $1,000 per child. The 2008 stimulus bill temporarily reduced the refundability threshold to $8,500 and the 2009 stimulus cut it to $3,000 for 2009 and 2010. But the poorest families will lose the credit if Congress either lets the broad refundability provision expire next January as scheduled, or chooses to extend the higher threshold in the 2001 tax act.
With the threshold set at this year’s level, a single parent with two children earning poverty-level wages (just over $18,000) can receive a maximum child credit of $2,000. If the threshold returns to its 2001 level (about $12,000 after adjusting for inflation), that family’s credit would shrink to about $900. And if the refundability provision enacted with EGTRRA expires, the family would get no credit at all.
The budgetary cost of keeping the refundability threshold at $3,000 - as opposed to extending the EGTRRA provision - is about $61.4 billion over 10 years. But why not go further and drop it to zero? That would help the poorest working families who arguably need assistance most. This year’s debate over whether and how to extend the Bush tax cuts of 2001 gives Congress a chance to get the child credit right. It ought to take it.
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