Child Tax Credit Improvements Must Come Before Corporate Tax Breaks
Congress faces important choices as it considers year-end legislation. It must decide whether to yield to corporate lobbyists by extending tax breaks that are scheduled to expire as well as whether to extend the child tax credit (CTC) expansions that lifted 2.1 million children out of poverty in 2021. One choice is clear, however: Lawmakers should not extend corporate tax breaks without also extending the CTC.
What is the child tax credit?
The CTC is a tax credit available to families to help pay for the costs of raising children. The 2017 Tax Cuts and Jobs Act (TCJA) increased the maximum value of the credit to $2,000 per child but limited the amount families could receive as a refund to $1,400 per child ($1,500 in 2022 as a result of indexing for inflation). As a result of the new cap and the credit’s phase-in rules, low-income families who owed little or no federal income taxes were unable to receive the full benefit of the credit. At the same time, the 2017 law expanded availability of the full CTC to more higher-income families by increasing the income level where the credit begins to phase out to $200,000 for single parents and $400,000 for married couples.
To cushion the impact of the pandemic-induced economic downturn, the 2021 American Rescue Plan Act (ARPA) made temporary changes that enhanced and expanded the credit, including making it fully available to low-income families.
CTC improvements have benefited children and parents across America
The expanded CTC helped drive an unprecedented reduction in child poverty
Child poverty, as measured by the supplemental poverty measure (SPM), declined to a historically low level of 5.2 percent in 2021—down from 9.7 percent in 2020—according to recently released data from the U.S. Census Bureau. The SPM is a broader measure of poverty that better reflects the effects of policy-reducing policies than the official poverty measure because it includes cash and noncash benefits, such as tax credits and certain food and housing benefits, and subtracts necessary expenses such as medical costs. The 4.5 percentage point—or 46 percent—drop in SPM in 2021 marks not only the lowest level seen on record since the census began using this particular measure in 2009 but also the lowest level since 1967 according to historical data from Columbia University.
The temporarily expanded CTC accounted for the largest share of the reduction in the child poverty rate: 4 percentage points, which is equal to 2.9 million children. The 2021 changes to the CTC alone accounted for the majority of this reduction, lifting 2.1 million children out of poverty.
The magnitude of the impact of the CTC was due to three major changes: 1) an increase in the size of the credit, 2) expanded access, and 3) changes to the structure of the credit. ARPA increased the maximum amount of the credit from $2,000 to $3,000 for children ages 6 and above, extended the credit to 17-year-olds, and increased the credit for children under the age of 6 to $3,600. In addition, the credit was made fully refundable, allowing families with low or no income to gain access to the full credit. Lastly, the 2021 changes made half of a family’s credit available as monthly payments from July through December 2021, with the rest paid to the family upon filing their tax return.
91 percent of low-income families used their monthly CTC payments to cover the cost of basic necessities to ensure that their children had healthier, more stable environments.
Indeed, the enhanced CTC provided a lifeline for families as the economy emerged from the economic downturn caused by the pandemic. Census Bureau surveys found that 91 percent of low-income families—those with incomes below $35,000—used their monthly CTC payments to cover the cost of basic necessities such as food, housing, utilities, clothing, and education to ensure that their children had healthier, more stable environments. This allowed households to lower their reliance on costly credit cards and payday loans, afford higher-quality food for their children, and improve their financial stability.
The CTC substantially reduced Black and Hispanic child poverty
The expanded CTC was also responsible for substantial reductions in Black and Hispanic child poverty, reducing the child poverty rate for both demographic groups by 6.3 percentage points. This translates to 716,000 fewer Black children and 1.2 million fewer Hispanic children in poverty, substantially narrowing persistent racial poverty gaps.
Yet despite strong support among the Senate majority, families, and policy experts, the CTC enhancements were allowed to expire at the end of 2021. The end of monthly payments led to an immediate increase in child poverty, especially for Black and Hispanic families, as well as a rise in the number of families reporting difficulty affording basic expenses.
However, Congress has an opportunity to improve the credit going forward, including by making it more accessible to lower-income families who need it most. In doing so, Congress can ensure that the dramatic reduction in child poverty continues, while also helping middle-income families afford the costs of raising a family.
Learn more about the CTC expansion
Expanding the Safety Net During a Recession Prevents Worsening Economic Pain
Expanded Child Tax Credits Have Been a Lifeline for Many
Lobbyists are pushing to block corporate tax increases included in the 2017 tax bill
The 2017 TCJA gave massive tax cuts to corporations by slashing the corporate tax rate from 35 percent to 21 percent and made other changes that favored the wealthy. In order to enact the TCJA through Congress’ budget reconciliation process, the authors of the bill needed to design it in a way that limited its official cost, as estimated by congressional scorekeepers, to $1.5 trillion over 10 years.* To do that, they included various provisions that would raise revenue, offsetting some of the costs of the tax cuts. But unlike the corporate rate cut, which went into effect immediately, many of these revenue-raising provisions were designed not to take effect for several years.
One of these provisions, which took effect starting in 2022, took away a special tax break by requiring corporations to amortize the cost of research and experimental (R&E) expenditures—also referred to as “research and development,” or R&D—over five years, rather than deducting or expensing those costs all at once. The Joint Committee on Taxation forecast that the shift from upfront expensing to amortization would raise $120 billion from fiscal year 2022 through fiscal year 2027.
Corporate lobbyists are pushing hard to have their proverbial cake—the corporate rate cut—and eat it too.
Corporate lobbyists are also seeking to overturn portions of the tighter limits on interest deductions that the TCJA imposed beginning in 2022, which raised revenue and helped reduce the tax code’s bias toward corporate debt financing. Taken as a whole, the TCJA’s interest deduction limits were estimated to raise $253 billion from FY 2018–2027. Together, these two provisions offset nearly 4 percentage points of the 14 percentage point reduction in the corporate rate.
But now, corporate lobbyists are pushing hard to have their proverbial cake—the corporate rate cut—and eat it too by delaying or eliminating the modest revenue increases that helped to partially pay for it.
R&D is already highly subsidized
The federal government has a long history of support for research and development, both through direct expenditures and the tax code. In particular, federal support for basic and applied research enables lifesaving breakthroughs in medicine, while federal investment through the Defense Advanced Research Projects Agency (DARPA) and other programs has led to foundational advancements in computing and related technologies.
Recent initiatives, including the CHIPS and Science Act, will invest $52.7 billion to support next-generation semiconductor research, manufacturing, and workforce development. Likewise, the landmark Inflation Reduction Act provides more than $70 billion to promote research, manufacturing, and adoption of products that will transform energy markets and help the United States meet its carbon reduction goals. While direct federal support—through grants and other investments—is most effective at promoting the basic research that drives overall innovation, tax incentives often subsidize the translation of research into marketable products in ways that benefit individual firms but do not have broader spillover benefits.
Businesses invest in research and development to boost productivity and develop new products. The ability to immediately write off or expense investments in R&D is considered a special tax break because standard accounting and income tax principles hold that investments should be deducted over their useful life. By its basic nature, R&D is a long-term investment that is intended to generate profits over time as products become commercially viable and go to market. The tax code provides other preferential treatment for R&D—most notably, the research and development tax credit, which provided a $20 billion subsidy for “qualified” business research costs in 2022. Even with the change to R&E amortization, the tax code still heavily subsidizes corporate R&D.
Corporate lobbyists are seeking to extend temporary tax breaks included in the TCJA, even as corporate profits continue at historically high levels
The TCJA also allowed companies to immediately deduct the full cost of new equipment and machinery, rather than depreciate those costs over time, from 2018 through 2022, with the amount of the deduction phased down through 2026 with a return to pre-TCJA law in 2027. Even before the TCJA’s changes, tax laws allowed businesses to deduct the cost of equipment over a shorter period than its useful life. Accelerated or “bonus” depreciation is one of the major reasons why many large corporations pay so little corporate tax. The ability to deduct the entire cost of investments in the first year—also known as 100 percent bonus depreciation or “expensing”—is the most generous form of accelerated depreciation.
An extension of 100 percent bonus depreciation would both increase the unfunded cost of the TCJA and undermine the purposes of the new CMT for many of the largest and most profitable corporations.
While prior versions of the new corporate minimum tax (CMT) would have limited the ability of large, very profitable corporations to use accelerated depreciation to offset the new minimum tax, the version ultimately included in the Inflation Reduction Act allows accelerated depreciation deductions to reduce the amount of tax owed. An extension of 100 percent bonus depreciation would both increase the unfunded cost of the TCJA and undermine the purposes of the new CMT for many of the largest and most profitable corporations.
Notably, the recent push for corporate tax cuts comes at a time when after-tax profits are at historically high levels as a share of the economy. Despite strong profits over the past decade, U.S. corporate taxes remain far below those of most other large economies: The United States ranked 36th among the 38 Organization for Economic Cooperation and Development (OECD) countries in 2019—the most recent year for which data are available.
Moreover, leaders of the effort to secure expensing include large profitable firms that have exploited special treatment to pay a fraction of the 21 percent corporate rate. Northrop Grumman, for example, paid an average of 11.5 percent of its profits in corporate taxes from 2019 to 2021, while Amazon paid just 7.9 percent during that span.
A Corporate Minimum Tax Would Ensure Large Corporations Begin To Pay Their Fair Share
Addressing Tax System Failings That Favor Billionaires and Corporations
Congress has an opportunity to ensure that child poverty remains at historically low levels by restoring improvements to the CTC as part of any year-end legislation. To pass, this legislation will require bipartisan cooperation in the Senate; and some Republican lawmakers have voiced support for improvements to the CTC, creating the possibility of a potential compromise that includes enhancements to the CTC. At the same time, congressional champions of the CTC have argued against extending corporate tax breaks unless the CTC is also expanded.
Simply put, a failure to act on the CTC will mean millions more children living in poverty. The choice is clear: Improvements to the child tax credit must come before corporate tax breaks.
*Authors’ note: Soon after the TCJA’s passage, the Congressional Budget Office re-estimated its cost at $1.9 trillion over the original 10-year budget window of fiscal years 2018–2027. That estimate assumes that all of the tax cuts for individuals and estates expire after 2025—which was the main way the bill’s authors kept most its official costs down—and that all of its delayed revenue-raising provisions take effect. If Congress now extends all of the tax cuts and delays the revenue-raising increases, it would add several hundred billion dollars to the cost of the bill every year.
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