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Testimony: The Child Tax Credit: 25 Years Later

American Enterprise Institute

July 17, 2023

Chairman Bennet, Ranking Member Thune, and subcommittee members, thank you for the
opportunity to testify. My name is Angela Rachidi and I am a Senior Fellow on poverty and
opportunity at the American Enterprise Institute. Before I joined AEI, I was a Deputy
Commissioner for the New York City Department of Social Services, where for more than a decade
I oversaw the agency’s policy research. My research focuses on the intersection of safety net policy
and employment as a path out of poverty.

I want to make three key points in relation to the Child Tax Credit. First, Congress initially created
the Child Tax Credit as a tax credit for working families with children, complementing the Earned
Income Tax Credit or EITC, which is primarily a refundable tax credit for those who do not owe
federal income taxes. Second, over the years, Congress increased benefits to low-income families by
expanding the refundability of the CTC, meaning that it now substantially overlaps with the EITC.
Finally, any efforts to turn the CTC into a child allowance would move it away from the positive
design features that have made the EITC (and by extension the CTC) one of the most effective anti-poverty policies we have. Policymakers should consider the potential negative implications on
employment of changing the CTC, which would make long-term poverty reduction in the US more
challenging. This is especially true in light of the poorly targeted nature of proposals expanding the
CTC into a child allowance.

First, it is important to acknowledge the history of the Child Tax Credit. The CTC started in 1997 as
a modest $500 per child non-refundable tax credit for working families as a way to offset some of
their federal income and payroll tax liability. Over the years and through different Congressional
sessions and Presidential administrations, the CTC has expanded to the point that under current law
it is partially refundable, meaning that families without federal income tax liability can still receive
some of the credit as a transfer payment. Eligible families can receive a refundable credit of 15
percent of earnings above $2,500 per year, up to a maximum $1,500 per child in tax year 2022 (the
maximum refundable amount increases for inflation each year until it reaches $2,000). The 15
percent phase-in reflects the employee and employer share of payroll taxes. Families with significant
federal income tax liability receive $2,000 per child as a non-refundable credit on their federal
income taxes.

Read the full testimony here.