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Making the Child Tax Credit “Fully Refundable” Converts It into Welfare Checks

AEIdeas

December 1, 2023

In what is becoming an annual ritual, news accounts and DC sources suggest liberals’ end-of-year legislative wish list once again includes reviving the worst part of Democrats’ partisan 2021 child tax credit (CTC) expansion. That proposal would convert the pro-work CTC into new federal welfare checks for nonworking parents, which Congress should flatly reject. Here’s how the respected Committee for a Responsible Federal Budget describes what is on the table:  

According to press reports, policymakers are apparently negotiating a possible year-end tax package that would temporarily expand the Child Tax Credit (CTC) and revive certain business tax breaks….The CTC expansion reportedly includes full refundability, but other details are not available. 

What does “full refundability” of the CTC mean, exactly? Here’s a description I provided when proponents tried—and failed—to enact the same policy last year: 

A normal person would assume that making the child tax credit “fully refundable” means increasing the amount of taxes parents paid in that are then refunded to them. But that’s not how DC works. The current child tax credit already refunds up to $2,000 per child in federal income taxes that working parents have paid; making that fully refundable doesn’t offer bigger tax refunds for parents who paid even more in taxes. Instead, it does the exact opposite—increasing the amount “refunded” to parents who paid little or no taxes in the first place. 

The current CTC is already “partially refundable,” meaning that depending on their earnings low-income working parents can receive up to $1,600 of the potential $2,000 credit per child even without owing any federal income taxes. But the current CTC also includes two critical pro-work features: a work requirement and a work incentive. The work requirement means that parents have to work at least part time (that is, earning at least $2,500 per year) to collect any CTC payments. The work incentive means that low-income parents see their CTC payments grow as they work and earn more. The figure below displays the effect of those current pro-work features on CTC payouts for a single mother with one child. It also shows how making the current CTC fully refundable—that is, providing full $2,000-per-child checks even to non-working adults—would eliminate both the work requirement and work incentive.

It should surprise no one that paying adults the same benefit whether they work or not will result in fewer adults working. That’s what Kevin Corinth, Bruce Meyer, and their colleagues found would result from 2021’s CTC expansion. That expansion temporarily provided full refundability for the CTC, replacing its work requirement and work incentive with full checks paid even to non-working parents, among other changes. Corinth, Meyer, and their colleagues found that full refundability, if made permanent as the President’s latest budget proposes, plus the rest of the 2021 changes would lead “1.5 million workers (constituting 2.6% of all working parents) to exit the labor force.”

Parents can’t permanently escape poverty without working, and full refundability sells them far too short. As I noted at the time of the 2021 expansion, providing full refundability

fits the definition of welfare, with large increases in benefits focused on low-income households and the cost for many borne entirely by other taxpayers. That’s especially true of the millions of checks that will flow for the first time to parents who don’t work at all, recalling the worst of former welfare policies. 

All of the new benefits paid by making the CTC fully refundable comprise outlays like welfare payments, and not tax relief. That belies the “tax break” rhetoric proponents often use to sell CTC expansions, and reflects how the real goal is to provide more and bigger government benefit checks. The fact that the expanded checks would be sent by the IRS doesn’t change that in any way. Indeed, the 2021 expansion liberals seek to revive made the IRS into America’s number one welfare-paying agency

We have been down this “revive full refundability” road before. Liberals failed to extend their temporary pandemic expansion, which included full refundability, at the end of 2021 and failed to revive it at the end of 2022. Earlier this year, congressional Democrats even briefly jettisoned White House talking points about the glories of Bidenomics, decrying how “savage” the US economy was without the expanded CTC. That may earn points for rhetorical flexibility, but it shouldn’t sway lawmakers trying to cobble together end-of-year tax legislation. 

In the end, providing full refundability for the CTC isn’t about tax relief at all. Instead, it is yet another front in the left’s quest to replace work requirements, which voters widely support, with new welfare checks for non-working adults. Conservatives and moderates in both parties should find it easy to say no to that.