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Tax Extenders Package Would Cut the Child Tax Credit’s Annual Work Requirement in Half


January 17, 2024

One of the bills Congress punted to the new year is a package of “tax extenders” normally considered at year’s end when temporary tax laws are about to expire. But the agreement announced yesterday by House Ways and Means Committee Chairman Jason Smith (R-MO) and Senate Finance Committee Chairman Ron Wyden (D-OR) is notable for far more than its timing. On the plus side, and to the negotiators’ credit, it’s a rare example of bipartisan cooperation in a Congress that has strained to find agreement on even routine matters. But some pro-work legislators may be troubled by one provision that would cut in half the current annual work requirement for parents claiming the child tax credit (CTC). 

Other than during the pandemic and similar emergencies, the CTC has always required work and earnings in the prior year. Thus, under current law, when parents file federal income tax forms in the coming months, they must have worked in 2023 to qualify for the CTC, which will be based on their 2023 earnings. But the agreement announced yesterday—which the Ways and Means Committee may mark up as soon as Friday—would allow parents to instead use earnings in either of the last two years to claim the CTC in tax years 2024 and 2025. This policy would cut the CTC’s current annual work requirement in half by allowing parents to claim the CTC for two years while working in just one. 

If this “two for one” policy sounds familiar, it’s because work requirements for tax credits have been temporarily relaxed in the past—but only during disasters and emergencies. The IRS Taxpayer Advocate notes the same “lookback rule” for the Earned Income Tax Credit (EITC, the older sibling of the CTC) has been altered that way when the President declared a disaster and Congress “passed legislation to give taxpayers who earn less income in the disaster year…the option of using their prior-year income.” That’s what happened when Hurricane Katrina struck in mid-2005 and Congress allowed affected adults to use 2004 earnings to claim the EITC and CTC. 

Lawmakers applied the same logic nationwide during the pandemic emergency. In December 2020, they created a “temporary special rule” letting individuals use 2019 earnings to claim the EITC and CTC for 2020. Liberal advocates promoted that as a “one-time change,” noting this option was previously provided to families “affected by various hurricanes and natural disasters.” But Democrats’ subsequent American Rescue Plan Act (ARPA) let individuals continue using 2019 earnings to claim the EITC in 2021 (a similar CTC exception wasn’t needed because ARPA separately let even non-working individuals receive the CTC that year). 

As a result, a parent with two children could have collected over $20,000 in EITC and CTC benefits for 2020 and 2021 despite not working those years. That’s on top of expanded unemployment benefits (which in just an average state could total over $46,000 per person) and stimulus checks worth over $11,000 for a family of four, among other benefits. Add it all up and nonworking adults could have easily exceeded their former annual income—without working at all.

The pandemic is over, but some policymakers continue pining to make such record largesse permanent. The “two for one” policy included in the current agreement is inspired by the ironically titled Working Families Tax Relief Act introduced last year by Sherrod Brown (D-OH), Wyden, and other senators. That legislation would permanently cut the EITC’s annual work requirement in half while also making the CTC fully refundable—eliminating its work requirement altogether. That’s where liberals want to go, even if they have to get there in stages. If this stage is adopted, it will only help them revive ARPA’s policy of eliminating the CTC’s work requirement altogether in future legislation. In the meantime, this step would promote less work and more collection of unemployment, food stamps, disability, and other benefits paid in lieu of working. 

As with the 2021 CTC expansion, the true cost of this change is concealed by making it temporary. When it runs its course, supporters will naturally argue that it would be a tax increase to restore current law.

It’s clear why Democrats, desperate to revive the president’s flagging political fortunes, would insist on changes the Washington Post describes as designed to “partially restore Biden’s expanded child tax credit.” Republicans have their own priorities, and achieving bipartisan agreement requires compromise. But many who hailed strengthened work requirements in last year’s Fiscal Responsibility Act may be disappointed to find this agreement includes a policy that moves in the opposite direction by significantly cutting the work requirement for the CTC.