Modifications to the child tax credit (CTC) are included in H.R. 7024, the Tax Relief for American Families and Workers Act of 2024, which the House of Representatives approved on January 31, 2024. That legislation pairs an extension of expired business tax relief policies, generally sought by Republicans, with an expansion of the CTC, which Democrats regard as a signature policy goal. At the time of this writing, further action on the legislation is pending in the Senate, and it remains unclear whether the legislation will reach President Biden’s desk for his signature.
If enacted, the legislation’s business tax relief policies and CTC expansions would apply only through 2025, when more consequential tax policies enacted as part of the 2017 Tax Cuts and Jobs Act (TCJA) also are scheduled to expire. For example, one of TCJA’s changes was to expand the per-child CTC from $1,000 to $2,000, while eliminating the personal exemption. H.R. 7024 would temporarily raise that to $2,100 per child through 2025, but absent another extension, the CTC will drop back to $1,000 per child in 2026. That underscores the fact that, whatever happens this year, there will be a more consequential debate over the CTC next year as part of broader tax policy negotiations around the expiring TCJA changes. In the meantime, the current proposed expansion represents another step in the Democrats’ decades-long campaign toward a fully refundable CTC, making efforts to oppose a fully refundable CTC in 2025 more challenging.
That debate over the CTC’s role beyond 2025 is complicated because, while part of the CTC involves tax relief, a growing share—specifically the refundable portion of the CTC—really belongs with discussions over the broader safety net. “Refundable” in this context means that households can still receive the CTC as a government payment even when they do not have any federal income tax liability. This practice serves as government aid directed towards families with incomes below the threshold for owing federal income taxes, setting the CTC apart from traditional tax credits that reimburse households for taxes already paid. Indeed, government scorekeepers consider refundable CTC payments to be outlays—just like assistance checks and unlike tax cuts many legislators frequently call them. For these reasons, the refundable CTC should not be labeled tax relief, and policymakers should consider changes to it in the context of the broader safety net.
Placing the refundable CTC in discussions about the broader safety net requires policymakers to confront the realities of the evolution of US safety net policy. This context helps explain why the refundable CTC has become a focal point for liberal policymakers. In 1996, the bipartisan Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) or welfare reform, replaced the longstanding unconditional cash welfare program, called Aid to Families with Dependent Children (AFDC), with the Temporary Assistance for Needy Families (TANF) program. TANF imposed work or training requirements on participants, and set lifetime limits on benefit receipt.
The requirement to work or participate in work-related activities in exchange for benefits, along with an expanded Earned Income Tax Credit (EITC), increased incentives to work rather than collect benefits, and brought about a profound transformation to the nation’s welfare system. The result—depicted in Figure 1 below—was an unprecedented surge in labor force participation among never-married single mothers, the group most likely to depend on welfare benefits. Additional and equally lasting improvements included a two-decade decline in child poverty rates and sharp reductions in dependence on welfare checks.
Figure 1. Labor Force Participation for Select Groups of Women, Age 18-54, 1990-2022
Source: Analysis of US Census Bureau, Current Population Survey data, 1990-2022.
While President Bill Clinton signed PRWORA into law, the legislation represented a historic policy achievement for congressional Republicans, who took the House majority in 1995 for the first time in 40 years and made welfare reform a key part of their promised Contract with America. Policymakers had spent decades unsuccessfully trying to fix the broken welfare system that many across the political spectrum viewed as encouraging government dependence and single parenthood, while discouraging employment. Where those efforts had failed, PRWORA succeeded, by creating TANF and applying work requirements and time-limited benefits, among other reforms.
For proponents of open-ended government assistance programs, however, pro-work welfare reforms represented an undesirable shift in policy. Despite significant bipartisan support for the 1996 changes, the liberal base of the Democratic Party remained consistently opposed to requiring work in exchange for government welfare benefits. Unable to roll back TANF’s work requirements in the years since, Democrats have spent recent decades expanding other benefits provided to non-working adults in an effort to replace now-restricted welfare checks. That effort led to significant expansions in the number of Americans collecting food stamps (officially, Supplemental Nutrition Assistance Program or SNAP benefits) and the growing value of those benefits over time. Similarly, liberal policymakers have insisted on expanding the duration and receipt of unemployment checks during recent recessions, viewing such financial emergencies as opportunities to enact policies that Congress might otherwise have blocked. For example, early in the pandemic, record $600-per-week supplements were added to regular unemployment benefit checks, resulting in benefit checks exceeding paychecks for most recipients.
While those expanded benefits often serve as a proxy for welfare payments, Democrats never abandoned their efforts to roll back welfare reforms that expected low-income parents to participate in work or training in exchange for monthly government checks. As it has continued to evolve in recent years, providing a fully refundable CTC—that is, a benefit payable even to nonworking parents—has emerged as the leading practical alternative to the former open-ended entitlement to welfare checks. A refundable CTC has roots as far back as 1991, when the National Commission on Children proposed a fully refundable $1000 CTC as a way to enact a European-style child allowance—payable to all parents regardless of their work and earnings. Ignoring that recommendation, Congress enacted a non-refundable CTC in 1997, meaning it was payable only to parents who worked and also had income tax liability. And in 2001, lawmakers added partial refundability to the CTC to supplement EITC benefits—which offered new benefits to working parents whose income was too low to owe federal income taxes.
Unsurprisingly, partial refundability served only as a prelude for calls for greater and eventually full refundability. In 2008 the left-leaning Center for American Progress proposed making the CTC fully refundable because “low-income families are more likely than middle-income families to be denied the full benefits of the credit.” They argued: “The Child Tax Credit should therefore be made fully refundable for all low-income children.” As reviewed below, such statements ignore the substantial safety net already in place for the same families, including SNAP, Medicaid, and other benefits.
Specific efforts to achieve full refundability, and thereby eliminate the CTC’s work requirement, soon followed. Senator Michael Bennet (D-CO) proposed eliminating the CTC’s work requirement in 2015, and several Democratic representatives, including former House Speaker Nancy Pelosi (D-CA), proposed a bill to do the same in 2016. These legislative efforts failed, but liberal interest groups continued to press for providing the CTC to non-working parents. For example, in 2018 Robert Greenstein, president of the liberal Center for Budget and Policy Priorities, and others proposed increasing the CTC and making it fully refundable and thus payable even to parents with no earnings.
With the election of President Joe Biden in November 2020, this coalition found its moment to address many Democrats’ long-held antipathy towards pro-work welfare reforms. Leveraging arguments for expanded COVID-19 pandemic relief, under the March 2021 American Rescue Plan Act (ARPA) policymakers unhappy with welfare reform were able to recreate unconditional monthly benefit payments to even nonworking parents in the form of the fully refundable CTC.
Controlling majorities in the House and Senate along with the White House, Democrats designed and enacted ARPA without any Republican support. They had finally achieved their long-held goal of making the CTC fully refundable, if only on a temporary basis during 2021 and within the context of a national crisis. But the broader intent was clear. A headline from a Washington Post opinion piece in March 2021 read “Goodbye, Clinton welfare reform. Hello, child tax credit.” And a 2021 article in the American Prospect titled “Undoing Welfare Reform” celebrated 2021’s temporary expansion of the CTC, especially its being made fully refundable for the first time:
“Most notably, the legislation included an expanded Child Tax Credit (CTC). The expansion didn’t merely increase the benefit to as much as $3,600 per child; it also expanded eligibility to families with little or even no earnings. Passage of a universal child allowance finally reversed a 25-year trajectory of welfare reform.”
Despite that setback, Democrats continue to make expanding refundability—and ultimately permanently providing a fully refundable CTC—a focus of their domestic policy agenda. The changes in H.R. 7024 include several important steps in that direction.
One significant change involves the legislation’s proposed “lookback” provision, which would allow non-working parents to qualify for the CTC based on earnings in the current or a prior tax year. On the surface, this change may appear minor; proponents argue that Congress has enacted similar changes on a temporary basis in the past. They leave out that Congress made those changes when individuals were constrained in working in the current year due to a disaster or other emergency, such as during the pandemic. In the absence of such “disaster” conditionality, the proposed policy in H.R. 7024 reflects a halfway point between current law (which requires parents to work each year to qualify for the CTC) and a fully refundable CTC (which requires no work in any year to claim the CTC).
Admittedly, H.R. 7024 does not include full refundability. But history suggests that Democrats will build on this expansion and continue to erode the CTC’s existing work requirements until they achieve their goal of a permanent, fully refundable CTC. Indeed, that is precisely what policymakers pledged to do as members considered H.R. 7024 on the House floor. As Rep. Suzan DelBene (D-WA) noted,
“The tax bill we are considering today contains several wins for families and our economy, but one piece falls short. The child tax credit expansion would still leave behind millions of kids in families that need it the most….I will still continue leading the effort to fully expand the child tax credit…”
The precedent will extend beyond the CTC, too. If Congress enacts this expanded CTC lookback policy, policymakers will certainly seek to apply similar “bipartisan” reforms to the EITC, and possibly other work-dependent benefits.
Even if never expanded in the future, the proposed lookback provision creates its own net disincentives to work. As we show in a recent working paper led by our colleagues Kevin Corinth and Scott Winship, the potential negative employment effects from the proposed lookback policy are notable. We estimated a net employment reduction from a permanent lookback policy of approximately 150,000 per year. Kevin Corinth and Scott Winship also examined the proposed increase in the per-child benefit included in H.R. 7024, concluding that it incentivizes part-time/part-year vs. full-time employment, threatening long-term success in escaping poverty for many families. It is difficult to ignore the potential for negative employment effects from this policy, and certainly from any future CTC expansions that offer even greater benefits to nonworking parents.
Despite the “tax cut” rhetoric proponents regularly apply to such changes, another noteworthy feature of the expansion of the CTC proposed in H.R. 7024 is its decided tilt towards expanding federal outlays on benefits rather than providing Americans with tax relief. In fact, as displayed below, H.R. 7024 directs an even greater share of its CTC costs toward benefit payments (91 percent) and less to tax relief (9 percent) than even Democrats’ ARPA law or their Build Back Better legislation that would have extended ARPA’s full refundability and related policies (Figure 2).
Figure 2. Share of Proposed Child Tax Credit Expansion Devoted to Benefit Increases Versus Tax Cuts
Source: Authors’ calculations using Joint Committee on Taxation data. Note that the total estimated cost of the CTC policy in ARPA ($110 billion) and BBB ($185 billion) significantly exceeds that in the Tax Relief for American Families and Workers Act ($33 billion).
This disproportionate tilt toward expanding benefits confounds claims that the latest policy would “put money back in families’ pockets” and returns us to our original point – any changes to the refundable CTC should be considered within the context of the broader safety net and not solely in tax policy negotiations. If poverty is the problem Democrats seek to address through a fully refundable CTC, it is crucial that lawmakers consider changes to the refundable CTC within the context of the more than 80 current means-tested programs designed to reduce poverty.
To illustrate this point, Figure 3 shows federal spending on just a handful of those 80-plus means-tested assistance programs in constant dollars, including on the refundable share of the CTC. These programs provide cash assistance (and other support) to low-income parents through TANF, monthly payments to disabled people through SSI, food assistance from SNAP, Section 8 housing assistance, and benefits from the EITC and CTC. The figure displays how, even as it was expanded in 2021, the refundable CTC offered just a fraction of overall assistance provided to low-income individuals and families (Figure 3).
Figure 3: Federal Spending on Selected Assistance Programs, Constant Dollars (billions), 1995-2022
Source: Federal Office of Management and Budget, Historical Data Tables, Outlays (billions of dollars) in Constant (FY 2012) Dollars.
Also notable in the figure above is the tremendous growth in the non-CTC part of the safety net since 1995. Even before pandemic-era expansions, federal expenditures on SNAP and the EITC alone doubled in constant dollars while expenditures for the remaining programs grew 50 percent in constant dollars. Yet proponents of a fully refundable CTC often suggest it would be the only safety net for low-income families. For example, during consideration of H.R. 7024 in the House Ways and Means Committee, Rep. Gwen Moore (D-WI) characterized an amendment to provide full refundability this way: “Even if your parent is poor, baby, we are not going to let you starve.” In reality, the CTC is a small part of a much larger system of safety net benefits—including for food assistance—that has experienced tremendous growth in recent years.
Over the past two decades, safety net programs have been most effective when paired with an expectation for employment. Yet a fully refundable CTC—which is clearly the ultimate goal of those promoting the current interim step—would move safety net policy in the opposite direction. Meanwhile, proponents mask these safety net changes within tax policy and describe them as “tax cuts for working families,” taking advantage of broad support for tax relief to distract from the fact that the changes take us one step closer to work-free welfare benefits. Indeed, the changes sought by liberal lawmakers in the form of a fully refundable CTC offer the greatest additional benefits to parents who do not work at all.
The current debate over proposed CTC changes in H.R. 7024 is important for a number of reasons. For starters, it offers a rare example of bipartisan compromise, which is a considerable achievement in the current hyper-partisan policy environment. But while the CTC expansions included in the legislation at Democrats’ insistence are seemingly small and effective only temporarily, supporters noted on House passage that they view these as only interim steps. For example, Rep. Richie Neal (D-MA), the ranking Democrat on the tax-writing Ways and Means Committee, said the policies amount to “a down payment in our vision,” which ultimately includes making the CTC fully refundable and eliminating its work requirement altogether.
If Democrats retake the House and retain the White House this fall, they could realize their vision in 2025 when the tax code will be fully open for renegotiation, and their starting position will be to unravel work-based welfare reforms via a fully refundable CTC. That will reduce employment for American families and make reducing long-term poverty in the US more challenging.