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Options for Improving the Child Tax Credit Provisions in H.R. 7024, the Tax Relief for American Families and Workers Act of 2024

COSM Commentary

February 27, 2024

H.R. 7024, the Tax Relief for American Families and Workers Act of 2024, passed the House on January 31, 2024 and now faces an uncertain fate in the Senate. The bill is intended to offer something for both Republicans and Democrats—business tax cuts and an expansion of the Child Tax Credit (CTC). But this bargain—which nods (and winks) at concerns about federal deficits—is a bad one in its current form. The CTC reform, in particular, includes provisions that would discourage work and marriage, undoing some of the progress the nation has made in reducing poverty and expanding opportunity among low-income families. Policymakers concerned about deficits and ensuring the safety net promotes independence should reject the bill and focus their attention on the bigger tax reform debate over the horizon in 2025.

Throughout our nation’s history, until 2020, only in the three years following World War II was the national debt above 90 percent of GDP. But we are now in our fifth consecutive year of debt levels that high. Next year, the national debt will exceed 100 percent of GDP for the third time ever. In four years, debt is projected to reach a new high and to increase indefinitely after that. Already just the interest taxpayers pay annually on the nation’s debt has reached $870 billion, which is nearly double recent federal spending on major non-medical means-tested assistance programs including food stamps, housing assistance, cash welfare, Supplemental Security Income benefits, and the refundable portions of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC).

To their credit, policymakers seeking a temporary expansion in the CTC, coupled with business tax relief policies, have proposed offsetting the short-term cost of those expansions as part of H.R. 7024, the Tax Relief for American Families and Workers Act of 2024, which passed the House on January 31, 2024. H.R. 7024 would offset its revenue reduction and benefit increase costs by raising $79 billion from accelerating the end of the Employee Retention Tax Credit (ERTC), a pandemic-era program that has been riddled with fraud. But this offset simply reduces the amount added to the debt, since the original cost of the ERTC was all added to the debt and the cost of the ERTC has significantly exceeded earlier projections. Turning around and spending those “savings” can only be viewed as a step forward after taxpayers have already taken two steps back.

In the current fiscal environment, revenue losses and spending increases should face strict scrutiny. Business tax cuts sometimes can stimulate economic growth. But the provisions in H.R. 7024 include retroactive tax cuts for investments already made.

Nor are the tax provisions for individuals in H.R. 7024 justified. Individual tax cuts, such as a larger CTC, can also generate economic growth by increasing the incentive to earn more. They can also reduce the tax burden on families who face growing costs of raising children. But H.R. 7024’s child tax credit provisions provide 91 percent of the benefits to families with no income tax liability, belying the “tax relief” marketing proponents often claim. In budget terms, these benefits are outlays just like most safety net spending directed at low-income families. Spending on low-income families can potentially improve children’s outcomes in the long run; but some of the specific reforms envisioned in H.R. 7024 are likely to discourage upward mobility by weakening incentives for full-time work and marriage.

For these reasons, we believe the best outcome would be for the Senate not to take up H.R. 7024 (or to reject it if there is a vote). Instead, the Senate and House should focus their attention over the next year on the impending expiration of tax provisions enacted in the Tax Cuts and Jobs Act of 2017 (TCJA), including consideration of business and individual tax policy reforms better suited to the current fiscal environment.

We recognize policymakers’ urge to expand benefits for families that have weathered recent high inflation. Nevertheless, if lawmakers intend to pass short-term business tax relief through legislation such as H.R. 7024, the current CTC provisions are not an acceptable trade off in our view. Should Congress wish to move forward with H.R. 7024, we recommend several improvements to its CTC provisions, including provisions to retain and provisions to drop.

Provisions to Retain

Increase the Maximum CTC to Account for the Rising Cost of Living

The CTC was expanded in TCJA in part to offset the elimination of personal exemptions. However, those exemptions were updated for inflation every year, while the maximum CTC has remained at $2,000 per child since 2018 (excepting the temporary change to policy in 2021). As a result, the real value of the current CTC has eroded by 23% since 2018 when TCJA went into effect, and if it had kept up with inflation would currently be $2,450 per child. Senators should at least partly remedy this problem by updating the maximum CTC for inflation moving forward, as H.R. 7024 would do. This provision is also the only one in the bill that provides income tax relief to families.

Provisions to Drop

Remove the “Look-Back” Provision

One provision of H.R. 7024 that should clearly be dropped is its one-year lookback. This provision would allow a family with no earnings or tax liability in the current year to qualify for the CTC if they had sufficient earnings in the previous year. This provision effectively eliminates the CTC’s work requirement every other year, a step in the direction of the 2021 CTC which eliminated the work requirement altogether. On net, we have estimated that this provision would reduce annual employment by roughly 150,000 workers due to the changed work incentives. We recommend dropping this provision.

Remove the Per-Child Phase-In

Senators should also reject the provision of H.R. 7024 that would adopt a per-child phase-in of the CTC. This provision would phase in the refundable portion of the CTC at a rate of 15% times the number of dependent children. For example, it would triple the refundable credit available to a family with three children. This provision would sever the CTC from any notion of tax relief because the refundable CTC could no longer be justified as offsetting payroll taxes (which cost workers and their employers approximately 15% of earned income). And while this provision would strengthen the incentive for some parents to work at least some amount, it would substantially weaken their incentive to move into full-time work and get married. We recommend dropping this provision and reducing deficits accordingly.

Senators seeking to help lower-income families who don’t pay any federal income tax could instead consider retaining the provision that raises the cap on the refundable portion of the credit to the CTC maximum, or they could start the phase-in of the refundable portion of the CTC with the first dollar of earnings, or they could do both.

Concluding Thoughts

The legislative fight over H.R. 7024 is not occurring in a political vacuum. TCJA will expire at the end of 2025, and much of next year will be taken up debating the nation’s tax law for the coming years. Progressives are likely to push for a child allowance—that is, a fully refundable CTC paid even to nonworking parents, matching the benefit the American Rescue Plan Act temporarily created in 2021. Should that effort fail, their fallback position will likely be to extend permanently the “bipartisan” CTC expansion provided in H.R. 7024. Reforming the CTC in that way would be harmful, for the reasons outlined above.

The outcome of the current legislative fight, then, will shape the compromises to come in 2025, for good and ill. Conservatives, now and then, should resist trading corporate tax breaks for liberals’ preferred down payment on a child allowance without a work requirement. Ultimately, we believe the CTC should provide income tax relief for families rather than serving as yet another large low-income benefit program in a safety net that already includes dozens of such programs.