Issues in Child Benefit Administration in the United States
A wide array of research documents the many harms associated with children growing up in poverty. Early in life, living in poverty is associated with slower brain development (Brito and Noble 2014). In early childhood, poverty reduces a child’s readiness for school through a variety of channels (Ferguson, Bovaird, and Mueller 2007). Research shows that increasing income among low-income children can reverse this lack of school readiness, which in turn increases a student’s probability of attending college, raises earnings, and reduces teenage pregnancy (Chetty, Friedman, and Rockoff 2011).
Despite these findings, child poverty remains relatively prominent. In 2019, just over 14 percent of children—10.5 million—were poor. Strikingly, almost 71 percent of children who were poor were children of color. Black and Hispanic children remain the most likely to be in poverty: just over 26 percent of Black children were in poverty, and almost 21 percent of Hispanic children were poor (Children’s Defense Fund 2021). Child benefits can be used to reduce poverty.
Beyond reducing poverty, a broadly available child benefit could be a way to strengthen the American family (Hammond and Orr 2021), which has experienced substantial declines in marriage rates, particularly among middle- and working-class people (Reeves and Pulliam 2020). Although a child benefit may not be sufficient to reverse these trends, it is likely a necessary component.
Since its creation in 1997, the child tax credit (CTC) has grown to become a core component of American family tax and welfare policy. What began as a $400 nonrefundable tax credit for households with dependent children that could only be used only to offset taxes owed has expanded in both its size and scope. These expansions include increasing the credit’s amount and making the credit at least partially (and then fully) refundable, allowing families to receive some or all of the credit in excess of taxes owed. By allowing households that do not owe federal income tax to claim the credit, the refundable portion of the CTC provides income support to low-income households that would otherwise be ineligible. This change has allowed the CTC to contribute to reductions in child and adult
poverty, while supporting families of all stripes with the extra expenses associated with raising children (Acs and Werner 2021).
Although child and family benefits are common across the countries in the Organisation for Economic Co-operation and Development, the US has historically restricted the poorest households’ eligibility for the CTC through a minimum earnings requirement and a benefit structure that phases in with income. Following the Tax Cuts and Jobs Act of 2017, for example, the maximum CTC was doubled to $2,000 and extended to households up the income scale. But families needed to earn at least $2,500 to be eligible for the refundable portion of the credit, and the maximum amount of the credit that could be refunded was restricted to $1,400 (Maag 2018). The reform grew the budgetary cost of the CTC from $54 billion in 2017 to over $120 billion in 2018, but because it only made modest improvements to refundability, approximately 27 million children in low-income households remained excluded from the full credit because their family’s income was too low (Greenstein et al. 2018).
As we detail below, the American Rescue Plan Act of 2021 (ARP) sought to eliminate this gap in access by increasing the credit’s size and, for the first time, making the CTC “fully refundable.” Although only enacted for one year, full refundability means households with low or zero income are now eligible for the full per child credit, the first half of which is being advanced by the Internal Revenue Service (IRS) as a monthly payment for the remainder of 2021. With a maximum annual credit of $3,600 ($300 per month) for children ages 0 through 5 and $3,000 ($250 per month) for children ages 6 through 17, an expanded CTC structured as in the ARP is anticipated to reduce child poverty by nearly 40 percent in a typical year (Acs and Werner 2021). The Biden-Harris administration has announced its intention to extend the reform in future legislation, with the expectation that a fully refundable CTC will ultimately become a permanent fixture of US social policy.
On a conceptual level, full refundability transitions the CTC from being a conventional tax credit to something resembling the family and child allowances common throughout Europe and countries such as Canada, Australia, and the United Kingdom. In 2019, a panel of experts identified child allowances as a powerful tool for reducing America’s elevated rate of child poverty (National Academies of Sciences, Engineering, and Medicine 2019). In the past year, proposals to transform the CTC into a child allowance have received bipartisan support (Hammond and Orr 2021). Implementing a tax credit designed to resemble a child allowance as closely as possible raises potential administrative challenges. The purpose of this report is to explain those challenges and offer principles for efficiently administering a permanent child benefit in the US policy context.
The challenge facing the IRS in implementing the expanded CTC just four months after the legislation was signed in March 2021 was reflected in the Biden-Harris administration’s decision to declare June 21, 2021, as Child Tax Credit Awareness Day. With many very low−income households newly eligible for the CTC, an awareness campaign was an imperfect but necessary measure to ensure families who do not normally file federal income taxes (because they are not required to and may not benefit from doing so) knew to apply for the program. To aid the effort, the IRS established an online portal that allows households to apply for the credit directly through a simplified return. Subsequently, the IRS recommended using a similar portal developed by an outside organization that provided a simpler, mobile-friendly tool to claim a CTC.1 Although a large share of families with children began receiving payments in July, the IRS’s lack of experience in administering a monthly benefit program leaves questions about the agency’s capacity to reach all eligible families (a question that also exists when other agencies deliver benefits such as Supplemental Security Income or the Supplemental Nutrition Assistance Program). However, a program like Social Security retirement benefits tends to have very high participation rates, likely because of the long-established relationship between the Social Security Administration (SSA) and beneficiary prior to the beneficiary’s becoming eligible for benefits. The IRS continues to gain experience reaching families not traditionally connected to the tax system, and more will be known about participation rates of low-income families after 2021 tax returns have been analyzed.
Although often neglected in the public debate, issues of program administration can have a significant and enduring impact on policy outcomes. For example, the original introduction of the CTC as a nonrefundable tax credit may be one reason for the US’s abnormally high child poverty rate (McCabe 2018). This decision entrenched the CTC within the logic and language of “tax relief,” in contrast with countries where child benefits were enacted according to the logic and language of “income supplementation.” Once that logic was laid down, attempts to expand the CTC to the poorest families faced an uphill battle.
The proliferation of tax credits in social policy is not unique to the US nor family welfare policy. Tax expenditures allow policymakers to harness the popularity of “tax cuts,” even though refundable credits, by definition, do more than just reduce taxes owed. They provide income supplements to families who do not have sufficient tax liability to offset.
We use the remainder of this report to establish a case for a child benefit. We describe the CTC as it exists in 2021 as part of a one-year expansion. We develop principles to guide discussions of a permanent child benefit, discuss likely differences in tax credits and spending programs, and consider what steps might move tax benefits to be more like transfer benefits. Finally, we discuss how the best child benefit would likely draw on the strengths of the tax system and the transfer system.
Originally published by the Urban Institute’s Tax Policy Center on December 3, 2021.
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