Center for American Progress

Making CTC and EITC Expansions Permanent Would Reduce Poverty and Grow the Economy
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Making CTC and EITC Expansions Permanent Would Reduce Poverty and Grow the Economy

The child tax credit and earned income tax credit benefit low-income and working families, help families get back to work, and promote future work, while lifting children out of poverty and alleviating hunger.

Children pick up free lunch at a middle school in Arlington, Virginia, March 2020. (Getty/Andrew Caballero-Reynolds/AFP)
Children pick up free lunch at a middle school in Arlington, Virginia, March 2020. (Getty/Andrew Caballero-Reynolds/AFP)

After almost two years of a global pandemic and recession eviscerating the financial stability of millions of Americans, one thing has become clear: Government programs do help prevent poverty and can reduce racial disparities. U.S. Census Bureau data provide some clear evidence that historic levels of federal aid—including the expanded child tax credit (CTC) and earned income tax credit (EITC)—have worked to reduce poverty for millions during a time of significant economic precarity.

The EITC and CTC are financial lifelines for low-income individuals and families. As Congress crafts legislation to guide the economy and country toward recovery and rebuilding, it needs to focus on equitable, long-term solutions that help to alleviate poverty, reduce racial disparities, build financial security, and create opportunities of economic mobility for all. Right now, Congress has an unprecedented opportunity to accomplish all these goals by extending the critical expansions of the CTC and EITC that were enacted for 2021 in the American Rescue Plan Act (ARP)—specifically by:

  • Making the CTC permanently refundable so that the lowest-income families—including many Black and Latino families, rural families, and immigrant children—can benefit
  • Extending the expansions of CTC and EITC under the ARP to at least 2025 to provide families more economic security, especially as they continue to recover from the pandemic
  • Rejecting any undue administrative burdens that make accessing these tax credits challenging for the individuals and families who most need them
The potential impacts of the CTC and EITC are staggering, greatly reducing poverty for working individuals and families and preventing millions of others from being pushed below the poverty line in the first place.

Given that Congress has numerous ways to raise substantial revenue from the wealthy and corporations, there is no reason to set a premature expiration date on these critical expansions that will reduce poverty and grow the economy.

Government programs, including tax credits, can lift people out of poverty

Under the Biden administration’s ARP this year, Congress made vital changes to both the CTC and EITC. The ARP increased the CTC benefit value and eligibility to children younger than 18 and made the tax credit fully refundable so that, for the first time, even very low-income families—who are disproportionately Black and Latino—can receive the full benefit for which they are eligible. The ARP provided for monthly advance CTC payments, which began in July, and expanded the EITC for low-income workers, raising the income thresholds above which the credit phases out, increasing the maximum value of the credit, and expanding the eligible age range for recipients—allowing more low-income workers to access the credit.

The potential impacts of the CTC and EITC are staggering, greatly reducing poverty for working individuals and families and preventing millions of others from being pushed below the poverty line in the first place. Taken together, even before the ARP expansions, the two tax credits lifted 5.5 million children above the poverty line in 2018. Once the CTC was expanded under the ARP, it lifted another 4.1 million children, including Black and Latino children, above the poverty line, reducing the number of children in poverty by more than 40 percent. The expanded credit also provides resources to an additional 27 million children, who are disproportionately Black and Latino and who were previously shut out of the full benefit of the CTC due the program’s design. For the first time in the tax credit’s history, these groups are able to access the now-larger credit in full and on a monthly basis, helping their families better weather the pandemic. Since the CTC has been extended to all low- and no-income families, an additional 23 million children of color will fully benefit from the benefit.

Furthermore, the CTC is helping to improve family finances during a time of severe economic distress. The families of more than 60 million children have received CTC monthly payments since they started in July, and data show that the tax credit is already having a significant impact on family budgets. Families are using the monthly CTC payments to pay for necessities such as food, bills, school expenses, and child care. According to monthly supplemental poverty measure estimates from researchers at Columbia University, the poverty rate for children fell from 15.8 percent in June 2021 to 11.9 percent in July 2021, lifting 3 million children out of poverty in one month, primarily due to the first payment of the expanded CTC. Similarly, the Census Bureau’s Household Pulse Survey shows that following the first round of monthly CTC payments, the number of adults in households with children that reported food insufficiency declined by 2.6 percentage points, or roughly 2.5 million people, while adults in households with children that were having trouble paying for household expenses declined by 2.5 percentage points, or roughly 2.4 million people. More specifically, the survey reported that:

  • 47 percent of respondents spent their CTC payment on food.
  • 28 percent spent it on utilities, including internet.
  • 26 percent spent it on school supplies, tutoring, and other educational expenses.
  • 25 percent spent it on mortgage or rent.
  • 10 percent of adults in households who received the credit, and 17 percent with at least one child younger than age 5, spent it on child care.

Overall, about 68 percent of adults spent their CTC payment on goods or services or used it to pay off debt. The Census Bureau estimates that as a result, the CTC has generated nearly $19.3 billion of additional spending in local economies each month.

Congress should take 3 steps to extend the stronger CTC and EITC

While an infusion of federal aid to many safety net and economic security programs has helped millions weather the worst of the pandemic, there were still 37.2 million people, including 11.6 million children, living in poverty in the United States in 2020, with children of color more likely to experience poverty than their white counterparts.

Even before the pandemic, there was a serious need to reform the CTC and EITC to better serve low-income individuals and families. By strengthening these tax credits in the following three ways, Congress has an opportunity to make significant inroads to recovering the economy and alleviating poverty.

Make the CTC refundability permanent

The most important aspect of the ARP’s CTC temporary expansion in terms of combating poverty is its provision to make the credit fully refundable. Before the temporary CTC expansion under the ARP, the credit was not fully refundable, and the value of the credit was tied to earnings. As a result, the tax credit left out the poorest children. Most children in families in the bottom 10 percent of the income distribution were completely unable to claim the credit, and the majority of children in the bottom 30 percent were only eligible for a partial credit. Black and Latino children—who are already more likely to experience poverty because of deep-rooted structural marginalization—were disproportionately affected, as were rural families. The ARP fixes this fundamental flaw.

Congress now needs to ensure that this refundability is made permanent so that the tax credit can benefit the most low-income and underserved families—even if it extends the other CTC expansions for only four years—for two reasons: First, refundability is the most important way that Congress can use tax credits to help the children who are most in need, and second, because the families of those children have the least influence—either due to immigration status or lack of wealth and resources—and because many conservative members of Congress oppose refundability, this part of the CTC expansion could be most vulnerable to shifting political winds in the future.

Restore the CTC’s ITIN eligibility for immigrant children

In 2017, changes to the tax law under the Trump administration denied the CTC to immigrant children without a Social Security number (SSN) for the first time in the tax credit’s history, leaving 1 million low-income children and their families without this critical benefit. And since many immigrants are ineligible for such federal supports as Supplemental Nutrition Assistance Program (SNAP) or Temporary Assistance for Needy Families (TANF), they have been disproportionately harmed by the pandemic.

Congressional action now can restore the CTC to immigrant children and families—as long as the eligible children have a SSN or individual taxpayer identification number (ITIN)—providing immigrant families with much-needed support to meet basic needs such as health care, food, school supplies, and other necessities that support children’s healthy development. Making the CTC available to immigrant families has the potential to advance racial equity, while ensuring child and family well-being in underserved immigrant communities.

Reject administrative burdens that hinder access to the tax credits

Administrative burdens, such as imposing so-called work requirements on filers accessing the CTC, defeat much of the purpose of this tax credit, as it’s intended to help families deal with the high cost of raising children. Earnings requirements such as those found in the pre-ARP CTC hurt children at the worst and most trying times, such as when a parent loses a job or is struggling to find one. Placing administrative burdens on families to demonstrate that they are looking for work is not administrable, and the practical result is simply to erect unnavigable bureaucratic hurdles between parents who are looking for work and raising children and the aid they and their children need. Raising children is hard work enough—especially for families with low incomes. Congress needs to firmly reject any administrative barriers that make accessing the CTC harder, especially for the lowest-income and more marginalized families.

Conclusion

According to a recent analysis by the Urban Institute, the expanded CTC would reduce child poverty from 14.2 percent to 8.4 percent nationally—a reduction of more than 40 percent, or 4.3 million fewer children, each year. Similarly, without the EITC, millions more children and families would be living in poverty right now. A plethora of research shows that lifting children out of poverty offers a lifetime of benefits, including better health and educational outcomes and lower criminal activity.

By permanently enshrining the EITC and CTC expansions, Congress can make significant strides in reducing poverty, addressing racial inequities, supporting low-income workers and their families, and fostering an economy that works for all. These advances will be one of the most important legacies of the members of the 117th Congress who are currently considering the Build Back Better legislation.

Arohi Pathak is the policy director for the Poverty to Prosperity Program at the Center for American Progress.

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Authors

Arohi Pathak

Former Director, Policy

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