With debt ceiling negotiations wrapping up, Republicans are already putting together a comprehensive tax package, expected to be released in June, that will likely include changes to the child tax credit and business tax breaks. Congress attempted to craft a similar package during last December’s lame-duck session , but thanks to a major sticking point — that is, the future of the CTC — lawmakers couldn’t reach a compromise before the session ended. Without any changes to the CTC, the June tax package will likely meet the same fate in a divided Congress.
This issue is important and has been the subject of much debate in Congress for years. Democrats’ temporary CTC expansion under the American Rescue Plan, for example, dominated partisan debates for the last two years. What was once a historically bipartisan issue has become highly polarizing, with Democrats pushing to make the credit fully refundable. Doing so would effectively eliminate any income requirements and turn it into a child allowance such as those in Canada or Europe. Republican leaders, while staunchly opposed to these specific changes, have expressed vague support for other CTC changes that keep some income requirements.
So what exactly might an authentically conservative approach to CTC reform look like?
We can draw lessons from 50 years of Republican efforts to make our tax system more pro-family. Republicans from President Ronald Reagan to Donald Trump spearheaded significant expansions to support families, but unfinished business remains. Past efforts to provide families with full protection against inflation and rising payroll taxes keep falling short before the finish line.
When Reagan took office in 1980, inflation was at a postwar high, and families were feeling a pocketbook squeeze. The federal tax system was not indexed, which meant inflation pushed higher taxes on families through bracket creep and the erosion of the dependent exemption — the predecessor to the CTC. Reagan worked with Congress to index the dependent exemption and then doubled it to restore the value lost to inflation.
The CTC, on the other hand, has never been indexed. Inflation recently reached a 40-year high, and as a result, the credit lost 25% of its value since Republicans expanded it in 2017. A prudent first step would be to immediately index the CTC and fully reverse its erosion by raising the maximum credit from $2,000 to $2,500 per child.
Building on Reagan’s successes into the 1990s, congressional Republicans spearheaded efforts to introduce a child tax credit as part of their legendary Contract with America. As it was originally proposed , the credit would have been refundable, providing families relief from both income and payroll taxes. This would have granted more relief to working-class families who tend to pay more in payroll taxes than income taxes.
Still, the credit was ultimately made nonrefundable to make more room for other tax cuts. This version became law as part of the Taxpayer Relief Act of 1997. Subsequent expansions under former Presidents George W. Bush and Trump restored some refundability, making it more accessible to working-class families.
There is still work to be done to get us closer to the original CTC proposal. The current credit is only partially refundable, and it doesn’t begin phasing in until after $2,500 in earnings and only at a 15% rate at that point. Increasing the phase-in rate to 15.3% starting at the first dollar earned would finally achieve Republicans’ original goal of also making it refundable against payroll taxes.
History makes clear there is no reason for Republicans to cede ownership of the child tax credit to Democrats. The Republican origins of the child tax credit make it ripe for reforms that would finish the work the GOP started decades ago. As they look to make changes to the CTC in their next tax package, it’s time to move beyond blanket opposition to Democratic demands and build their own set of reforms based on long-standing conservative principles.