The expanded Child Tax Credit (CTC) has the potential to dramatically reduce child poverty, improve child and parent health, and smooth fluctuations in available funds for lower-income families. On the latest episode of Policy Outsider, Leigh Wedenoja, senior policy analyst at the Rockefeller Institute, discusses changes to the child tax credit, how those changes make the credit operate more like the Earned Income Tax Credit, and why the CTC is predicted to improve outcomes for children and families.
Guest:
Leigh Wedenoja, Senior Policy Analyst, Rockefeller Institute of Government
Learn More:
The Expanded Child Tax Credit Looks Like the Earned Income Tax Credit—That’s Great News
Transcript was generated using AI software and may contain errors.
Alexander Morse 0:07
This is Policy Outsider. I’m Alex Morse. The expanded child tax credit as part of the American Rescue Plan has the potential to dramatically reduce child poverty, improve child and parent health, and smooth fluctuations in available funds for lower-income families. Today we talk with Leigh Wedonoja, senior policy analyst here at the Rockefeller Institute, about the changes to the child tax credit, how the changes make the credit operate more like the earned income tax credit, and why these changes are expected to improve outcomes for children and families. Coming up next.
Alexander Morse 1:04
I’m here today with Leigh Wedonoja, senior policy analyst at the Rockefeller Institute. Hi, Leigh, thanks for joining today.
Leigh Wedenoja 1:11
Very happy to be here.
Alexander Morse 1:12
How are you doing?
Leigh Wedenoja 1:13
I’m doing well. Excited for the child tax credit to get started up.
Alexander Morse 1:18
So that starts today. We’re recording July 15th (2021). Checks hit families bank accounts.
Leigh Wedenoja 1:23
Yes. So on July 15th is when checks were sent out. So depending on whether or not you get direct deposit or you’re receiving a physical check in the mail, families should start receiving them today or sometime in the next week or so.
Alexander Morse 1:35
Now, these child tax credits, they’re part of the American Rescue Plan. So why are Americans now receiving these checks?
Leigh Wedenoja 1:39
So one of the provisions of the American Rescue Plan Act or ARP Act was an extension of the child tax credit. Now the child tax credit should be familiar to most Americans with children, it’s that $2,000 write-off you get on your taxes when you file them every year for each child you have at the time under 17. But now it’s going to be every child under 18. So this applies to pretty much every family in the US making under $400,000 a year. So the checks that families are receiving now are going to be monthly advance payments for the rest of the year, which are equal to about half the tax credit that they are eligible for. So they would ordinarily get it just during the tax filing season but they’re going to start receiving credits of $250 per child six and over, and $300 per child under six.
Alexander Morse 2:32
Okay, so if a family has two kids who are three years old, four years old, they’ll be getting $600 a month extra.
Leigh Wedenoja 2:38
Exactly.
Alexander Morse 2:39
Okay, so is there anything else new in this ARP Act extension?
Leigh Wedenoja 2:44
So the first thing we’ve covered is that monthly advance payment of half the credit. The second thing is that the amount of the credit has actually gone up. So it’s risen from $2,000 per child to $3,000 per child between the ages of six and 17 and $3,600 per child under six. The other thing that’s changed is something called refundability. So the child tax credit in the past has only been partially refundable, which means that if you don’t have a tax burden, as in you’re a very low-income family, you only get the part of the credit that is refundable. So that was about $1,600. Now, the lowest-income families will receive the entire value of the credit refunded, which is that $3,000 or $3,600 for a younger child. So those three changes are the main differences with this child tax credit extension compared to the child tax credit we’ve all been accustomed to.
Alexander Morse 3:40
This might be a side note, were there any obstacles in passing this legislation or getting these numbers? How did the Biden Administration come up with this?
Leigh Wedenoja 3:48
I think that’s a good question. Researchers and policymakers have long been pushing, particularly, for the credit to be fully refundable because that would allow it to help some of the most low-income families, those that receive other forms of support such as Food Stamps or the earned income tax credit. I think the biggest reason was that families need more money for younger children who are not school aged yet. But for the exact numbers, I think that came out of the compromise structure of the bill.
Alexander Morse 4:21
Do you think they reached those numbers as we’re coming through a pandemic?
Leigh Wedenoja 4:25
Yes, I think the pandemic has a lot to do with how these tax credits got expanded, particularly because the closing of schools made it much more difficult for parents to go back to work. So as we’re coming out of this pandemic into the economic recovery, especially given that it’s summer and schools are out, having additional monthly payments to parents to support childcare, summer camp, or other ways to get themselves back into the workforce is going to be really valuable and that’s one of the reasons why the payments are monthly rather than tax a credit. We’ll all see when we file our taxes in February, March.
Alexander Morse 5:05
Okay, so you’ve mentioned that low-income families are going to be benefiting from this, who else is going to be affected by this program?
Leigh Wedenoja 5:11
So the child tax credit has always been one of the widest reaching supports for families. And it is available to families both in lower- and middle- and even some higher-income groups. So the traditional tax credit can be paid to families making up to $400,000 a year, which is quite high income. The expansion, however, is only going to affect lower- and middle-income families. Single filers who make under $75,000 a year are eligible. Head of household filers who make under $112,500 a year, and married couples filing jointly making up to $150,000 a year. Now, these might seem like familiar thresholds and they are the exact same income thresholds that were used for other forms of COVID aid. So if you make above $150,000 but below $400,000, you’re going to receive that same $2,000 benefit as you always have that you file for with your standard taxes. But due to this increase in refundability, it’s actually low-income families that are going to gain the most. So a head of household with one child who works at minimum wage would see roughly an 11 percent increase in take home income, compared to a married couple making about $62,000, which is 200 percent of the poverty line, who has three kids, they would see a 7 percent increase. So we are seeing the bulk of this going to the lowest-income families, whereas a married couple who’s in the top quintile making about $250,000 would see absolutely no gain in income from this program. As such, it’s going to affect a huge amount of families, 39 million families are likely to be affected. And that’s nearly 90 percent of all children in the US.
Alexander Morse 7:00
So this is a significant expansion. I mean, this is really going to affect a lot of different families. My next question is, is this going to be an automatic payment? Do folks have to file anything additional? Or is this just going to hit their bank accounts without any additional work?
Leigh Wedenoja 7:17
So that’s an important question. For families who filed taxes in either 2020 or 2019, who had the same number of children then as they do now should receive this as an automatic payment in whatever form you get your tax refund. Also, if you’re a nonfiler but filed for any of the COVID-19 relief payments, you should also receive it automatically. The people who are not going to receive it automatically are people who have not filed their taxes for the past two years. That’s predominantly the lowest-income folks who make under the tax filing threshold. Or people who have had a child since the last time they filed their taxes. So those people should go to the IRS website to look for how to file for the child tax credit because they are definitely still eligible. If you don’t file in time to get these monthly payments, you will still be eligible if you file your 2021 taxes in the normal structure, you will receive what you should have gotten in advance payments then.
Alexander Morse 8:16
Yes, highly recommend that people update their tax information. There’s money on the table to be had.
Leigh Wedenoja 8:20
Absolutely, especially if you are someone who is currently struggling with additional monthly payments from childcare or rent or car payments, now is the time to go make sure that you’re getting the credit that you are eligible for.
Alexander Morse 8:36
Now is this a permanent change?
Leigh Wedenoja 8:37
Unfortunately, this is not a permanent change. This is going to be a change for the 2021 tax season only. And it’s important to note that only half the payment is being paid up front. So everyone should still file their 2021 taxes to get the rest of this expanded payment. There is however a plan to extend this tax credit that is in the Biden Families Plan, but that is still being debated within Congress.
Alexander Morse 9:02
Now switching gears a little bit. Leigh, you actually just wrote about this child tax credit expansion. So we’ll dive deeper a little bit, how should we expect this program to affect families in the long and the short term?
Leigh Wedenoja 9:15
Now of course, it’s impossible to assess a program before it’s put in place. That’s just not how program evaluation works. But just in terms of take-home income, this would lift about 4.1 children above the poverty line who are currently below it.
Alexander Morse 9:31
To clarify, that’s 4.1 million children. Now back to Leigh.
Leigh Wedenoja 9:36
Which would result in a cut in the number of children living in poverty by about 40 percent. Because of this, even though this is a temporary program, we should still expect some long-term effects. Most of this is because we have seen previous expansions of similar tax credits, specifically the earned income tax credit, which is available to the lowest-income families. Now that tax credit has been expanded over the years, both the federal benefit and some state additional benefits. So we do know something about how supporting families affects the short- and long-term outcomes for children and their parents.
Alexander Morse 10:16
So the earned income tax credit or EITC for short, walk us through that.
Leigh Wedenoja 10:21
So the EITC is a means-tested social program. What that means is that you have to have a low enough income to qualify. This is in comparison to other non-means-tested social programs like public schools, where they’re available to everyone regardless of income. So the payments to families are based both on income and their number of children. It’s intended both as a child support and a work incentive for low-income families. The credit phases in at very low levels of income. As you work more and make more, you receive more in the EITC. And then it phases out for higher levels of income, whereas you work more and have a stable income, you are no longer eligible for the EITC. Currently, the maximum income is $56,000 for a married couple with three kids is the end of the phase out. The maximum credit for the EITC is quite similar to the maximum credit for the new child tax credit. The maximum credit for three or more children is $6,557. But the average payment to families is about $2,400. This is a large program. It’s the largest single support for low-income families. And it’s worth about $62 billion and goes to 25 million families.
Alexander Morse 10:21
This is the EITC?
Leigh Wedenoja 10:58
This is the EITC. The EITC affects 25 million families. This child tax credit expansion in the ARP Act is going to affect more like 39 million families. So there are 14 million additional families who will receive this current child tax credit expansion who do not qualify for the EITC. Those are the middle-income folks who are really going to benefit. The one issue with the EITC is because the application process is a little bit harder than the child tax credit process, only about 80 percent of people who qualify for the EITC actually receive it. So that means about one-in-five families who qualify for the EITC are leaving money on the table due to either not filing for taxes or not filing for taxes in the correct way. Why do we care about the EITC? We’ve covered this a little bit that the expansions of the EITC in the past, specifically a huge expansion in 1993, looks a lot like the expansion we’re currently seeing in the child tax credit. Researchers have been able to compare similar families who are eligible for different levels of EITC spending based on the timing of the births of their children, the state they live in, the city they live in, and incentives for take-up to look at the causal effects both in the short- and long-term of these types of programs.
Alexander Morse 13:08
So you bring up the causal effects. What are the causal effects from the EITC that are most relevant to the child tax credit?
Leigh Wedenoja 13:15
Over the past 30 years, the measured effects of the earned income tax credit generally measured as an additional $1,000 in funding have been nearly uniformly positive and the effects that aren’t positive are null. So most of this comes from the way in which families use the EITC and the most common usage is actually paying down debt. Sixty-three percent of families use some or all of their yearly one-time EITC payment to pay down debt. The second most common thing is families invest in durable goods, such as cars, computers, and appliances that can help them earn more income in the future. The result has been pretty amazing for low-income families. It’s a decrease in poverty across nearly every poverty measure, increases in both child and maternal health, increased measurements of children’s home lives. These are scores based on everything from the amount of books in a child’s house, the amount of television they watch, the type of discipline their parents use, the happiness reported of children, the safety of the house. It’s also improved education outcomes. There’s evidence both reading and math test scores improve. And in studies of teenagers, kids are more likely to finish high school. They’re more likely to attend college. Children who are subject to the EITC when they’re young, as adults also earn more money.
Alexander Morse 13:30
So you started off with the EITC. The study saying that the effects are nearly uniformly positive and that they get a lump sum amounts to about $1,000 and 63 percent of families use that to pay down debt. Now we know debt accumulates interest throughout the year, so the child tax rate is going to be monthly payments, right? Do you think that’s going to be more beneficial to families?
Leigh Wedenoja 15:03
Absolutely. And we do have evidence that that’s true. Right now there is a program where families can receive the EITC in four advanced payments. But the take-up of that is less than 1 percent. A lot of that has to do with the difficulties of filing taxes, which is why one-in-five don’t take up the EITC. However, there was a pilot program in Chicago a few years ago, that paid all EITC people with advanced payments. And two studies of that program have shown that these families accumulate less debt, they have fewer delinquent bills, and they actually report less stress, and have fewer biomarkers of stress related to not coming up short at the end of the month. So coming up short at the end of the month is a serious problem for families living in poverty or low-income families living near the poverty line. At the end of the Food Stamp season, families report more hunger, they report more food insecurity, more trips to food pantries. Coming up short can also result in the necessity of taking out payday loans or defaulting on bills, which racks up fees and interest that then need to be paid back. Resulting in a cycle of debt and potentially leading to even worse outcomes such as bankruptcy and eviction.
Alexander Morse 16:26
Just to use your word the ‘cycle of debt,’ even when you’re paying down only interest, you’re not ever paying the principal. What is what is one to do? Leigh, you mentioned earlier that some states have their own EITC programs in addition to the federal government. Tell us about New York.
Leigh Wedenoja 16:41
So New York has one of the most generous EITC benefits. It’s one of 29 states that has their own program. The way state programs work is very similar to the federal program that includes New York is the exact same requirements. It just basically adds a multiplier. New York matches 30 percent of the federal EITC benefit. And if you live in New York City, New York City matches an additional 5 percent. So what that means in practice is that the maximum payment a family living in New York City can receive is nearly $9,000, its $8,991, as the combined federal, state, and city EITC, which is quite a bit higher than the $6,600 available to families that can only receive the federal benefit. One of the nice things about the state benefits, particularly in New York, is that there isn’t any additional filing requirement. So if you file New York State taxes, and if you file for the EITC and your federal taxes that automatically gives you the state multiplier or the state and city multiplier if you live in New York City. Currently, there’s no plan to match the child tax credit in New York and New York does not match the standard child tax credit either. But it’s a recognition that families may need additional support and the state does step up to do that.
Alexander Morse 18:07
Great, so one more time, where can families go to make sure that they’re getting all the money that’s available to them?
Leigh Wedenoja 18:14
If you’re unclear about your eligibility or if you’re unclear about whether or not you’re already signed up, you can visit benefits.gov or the IRS website, both of which will have guides for how to receive this. If you’ve already received a COVID-19 relief payment in any iteration, you should already be signed up unless you’ve recently had a child. Even just googling “child tax credit” should help you find the relevant place to file for nonfiler status. If you are a nonfiler, you should google that. You should search “nonfilers” and “child tax credit,” which should be the easiest way to get to where you need to be.
Alexander Morse 18:53
Listeners take Leigh’s advice, google “child tax credit,” find out if you’re eligible, get the money that’s available to you. Leigh, thanks for joining us today.
Leigh Wedenoja 19:02
Thank you so much for having me.
Alexander Morse 19:13
Thanks again to Leigh Wedenoja for joining today. If you want to learn more about the child tax credit and how it can help families, you can check out her blog, “The Expanded Child Tax Credit Looks Like the Earned Income Tax Credit: That’s Great News,” on our website at rockinst.org. Thanks for listening. I’m Alex Morris. Until next time.
Alexander Morse 19:39
The Policy Outsider is presented by the Rockefeller Institute of Government, the public policy research arm of the State University of New York. The Institute conducts cutting edge nonpartisan public policy research and analysis to inform lasting solutions to the challenges facing New York State and the nation. Learn more at rockinst.org or by following RockefellerInst on social media. Have a question, comment, or idea? Email us at [email protected].
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