New, expanded child tax credits are back — and they may actually pass Congress (2024)

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WASHINGTON — Congress, which has been setting records for a lack of accomplishments, may be on the verge of actually doing something big: passing a bill that could lift half a million kids out of poverty by next year.

The proposal, which the House could vote on as soon as next week, involves an expanded tax credit for parents of children 16 and younger.

If that rings a bell, congratulations, you’ve been paying attention. The proposed credit is a scaled-down version of a plan that passed during President Biden‘s first year in office but lasted only a year.

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Reviving some version of that has been a top priority of congressional Democrats ever since.

Earlier this month, the chairs of Congress’ two tax-writing committees, Democratic Sen. Ron Wyden of Oregon and Republican Rep. Jason Smith of Missouri, struck a deal to make it happen.

Their proposal then won approval of the Republican-controlled House Ways and Means Committee, 40-3 — the sort of bipartisan vote that’s now rare in Washington.

This being Congress, it’s possible the deal could fall apart. Some House members threaten to oppose it over an unrelated tax issue. In the Senate, some conservative Republicans don’t like expanding the child tax credit on ideological grounds. But the lopsided vote in the House tax-writing committee indicated the bill has a strong chance of approval. That’s a rare advance in a stalemated Congress.

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How the child credit cuts poverty

When the child tax credit first started, back in 1997, it was a small bonus that mainly helped middle-class families.

Taxpayers could take $400 off their income taxes for each child under 17. That helped families with decent incomes and several children, but did nothing for the large number of taxpayers who don’t owe any income tax — currently about 40% of households.

Starting in 2001, advocates for low-income families, led by Rep. Rosa DeLauro (D-Conn.), pushed through a change to allow families to get some of the money even if they don’t owe any taxes. That’s called refundability in tax jargon, and it’s key to making the tax credit work as an antipoverty measure.

Their argument was that if the federal government was going to use the tax code to boost families with children, it should focus on those most in need.

Over the last two decades, DeLauro and other Democrats, including former Speaker Nancy Pelosi and Sens. Michael Bennet of Colorado, Sherrod Brown of Ohio and Cory Booker of New Jersey, made expanding the credit a top party priority.

Step by step, they got provisions into each big tax bill that expanded the amount of the credit — now $2,000 per child — and the amount that could be refundable.

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A short-lived triumph

In 2021, Democratic backers of expanding the tax credit won their biggest victory — a measure adopted as part of Biden’s COVID-19 recovery plan that boosted it to $3,000 per child, made it completely refundable and allowed the money to be paid out in monthly installments, rather than as a lump sum refund.

In effect, those moves converted the tax credit into a universal child allowance similar to benefits in Canada and many European countries. The plan was designed to cut child poverty in half, and in 2022, the number of kids in poverty fell to a modern low of 3.8 million, according to census figures.

But Democrats didn’t have the votes to keep the expanded credit going. Republicans denounced full refundability as a welfare giveaway and said it would allow poor people to stop working. When Sen. Joe Manchin (D-W. Va.) balked at making the plan permanent, it died after one year.

The next year, the Census Bureau estimates, the number of children in poverty spiked back up by roughly 5 million.

In some of those efforts, Democrats struck alliances with Republicans, including Sens. Marco Rubio of Florida and Mitt Romney of Utah, who have seen the tax credit as a pro-family measure.

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The new plan

The deal cut by Wyden and Smith doesn’t go as far as the 2021 plan but would expand refundability to cover most families with at least some earnings. It would guarantee that those who do qualify get the full amount of the credit for each child, eliminating a cap in the current law.

And it would allow families to qualify by counting either their current income or their income from the previous year — a big help for parents, especially single mothers, who have unstable jobs.

Those changes would still leave out the poorest of the poor, those with no income, but it would help most of the roughly 17 million children who currently get less than the full benefit because their families don’t make enough money, according to the Tax Policy Center in Washington. Most of those families earn less than $40,000 a year.

California would have the largest number of kids who would benefit — nearly 2 million, according to an analysis by the Center for Budget and Policy Priorities, a liberal Washington group whose numbers are widely cited by both parties.

The new plan would lift about 400,000 children out of poverty in the first year and reduce poverty for an additional 3 million, according to the center’s analysis.

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By 2025, when the plan would be fully phased in, it would move about half a million children out of poverty and reduce poverty for about 5 million others.

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The deal

Smith and other Republicans signed on because Democrats agreed to back something the GOP wanted: renewal of three corporate tax breaks that are expiring. One allows companies to write off research and experimentation expenses, a second would restore full expensing for capital investments, and a third gives a larger deduction for interest expenses.

To pay for both the child credit and the corporate write-offs, the plan would phase out another tax provision — a COVID-19-era relief measure known as the employee retention tax credit. The IRS says that credit has become a source of widespread fraud and scams.

For Republicans in competitive districts, who increasingly fret that the lack of action in Congress gives them few accomplishments to run on, a tax deal that fulfills some business priorities could be attractive.

The deal would enact “pro-growth, pro-worker, pro-American” policies that will “help sharpen our competitive edge with China,” Smith said on Fox News.

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The deal-making has been easier because the debate has been mostly out of the headlines.

Other issues, such as border policy and immigration, have slaked Congress’ demand for partisan point scoring, allowing tax writers to move ahead without too much partisan squabbling.

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The opposition

Still, nothing’s easy in a closely divided Congress.

Some House Republicans who represent affluent districts in New York and New Jersey say they won’t back the plan unless House leaders agree to fully restore the IRS deduction for state and local taxes, which was slashed in the 2017 Trump tax bill — an issue that’s dear to upper-income taxpayers in high-tax states, including California.

Many conservatives object to letting families qualify by counting income from the previous year.

They say that gives an incentive for low-income parents to stop working. There’s not much evidence that actually happens — the tax credit isn’t enough to live on — but for many conservatives, limiting the tax credit to those who are working is a point of principle.

Finally, there’s the calendar: Congress is having trouble just getting annual budget bills passed to keep the government running.

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Despite all that, there’s a decent chance Congress could send the tax measure to Biden for his signature before the April 15 tax-filing deadline, allowing families to take the expanded credit this year.

“Given today’s miserable political climate, it’s a big deal,” Wyden said in announcing the agreement earlier this month.

It’s also proof that bipartisan deal-making can still work in Washington, at least when the cameras are focused elsewhere.

As an expert on economic policy and legislative processes, I am well-versed in the intricate workings of government initiatives and their potential impact. The article discusses a crucial legislative proposal in Congress that aims to pass a bill potentially lifting half a million children out of poverty by the following year. The proposal involves an expanded tax credit for parents of children aged 16 and younger. My expertise allows me to break down the key concepts mentioned in the article:

  1. Background on Child Tax Credit:

    • The article traces the history of the child tax credit, starting in 1997 as a small bonus for middle-class families.
    • Initially, taxpayers could deduct $400 for each child under 17, primarily benefiting families with decent incomes and multiple children.
  2. Evolution of the Tax Credit:

    • Advocates for low-income families, led by Rep. Rosa DeLauro, pushed for changes to make the credit refundable, allowing families with no income tax liability to benefit.
    • Over the years, Democrats, including prominent figures like Speaker Nancy Pelosi and Senators Michael Bennet, Sherrod Brown, and Cory Booker, worked to expand the credit amount and refundability.
  3. 2021 Expansion and Setback:

    • In 2021, Democrats achieved a significant victory by expanding the tax credit to $3,000 per child, making it completely refundable, and allowing monthly installments.
    • Despite its success in reducing child poverty, the expanded credit faced opposition, especially from Republicans who deemed full refundability as a welfare giveaway.
    • The plan died after one year due to challenges in obtaining sufficient votes for permanency.
  4. The New Proposal:

    • The current proposal by Senators Ron Wyden and Jason Smith doesn't reach the heights of the 2021 plan but expands refundability to cover most families with some earnings.
    • It eliminates a cap in the current law, ensures qualifying families receive the full credit amount, and allows qualification based on either current or previous year's income.
  5. Expected Impact:

    • The new plan is projected to lift around 400,000 children out of poverty in the first year and reduce poverty for an additional 3 million.
    • By 2025, it aims to move about half a million children out of poverty and reduce poverty for around 5 million others.
  6. Deal-Making and Opposition:

    • Republicans, including Jason Smith, support the deal due to Democrats agreeing to renew three expiring corporate tax breaks.
    • To fund the child credit and corporate write-offs, the plan phases out the employee retention tax credit, criticized for fraud.
    • Some opposition exists, particularly from House Republicans in affluent districts, who link support to the full restoration of the IRS deduction for state and local taxes slashed in the 2017 Trump tax bill.
    • Conservative objections include concerns about incentivizing low-income parents to stop working, though evidence supporting this claim is limited.
  7. Political Landscape:

    • Despite challenges in a closely divided Congress, there is optimism that the tax measure could pass before the tax-filing deadline in April.

In summary, the proposed legislation addresses the complex interplay of tax policy, poverty alleviation, and bipartisan deal-making in the U.S. Congress. My expertise allows me to provide a comprehensive understanding of the nuances involved in this significant legislative effort.

New, expanded child tax credits are back — and they may actually pass Congress (2024)

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