Republicans on the House Ways and Means Committee took another step in their piecemeal approach to tax reform last week. The focus this time was the individual tax code — specifically, the Child Tax Credit.
No big surprise here, I suppose. We know Republicans have decided they need to show they care about the interests of working families. And what could be more family friendly than a more generous Child Tax Credit?
For better-off families, the Ways and Means bill surely is that. But for low-income families, nothing of the sort. Some millions, in fact, could no longer claim it at all.
What Is the Child Tax Credit?
Like the Earned Income Tax Credit, the Child Tax Credit reduces federal tax liabilities for filers who claim it. In the case of the CTC, those eligible are parents with dependent children under the age of 17. Each of the kids is worth a credit of up to $1,000.
Also like the EITC, the CTC phases in and then out. However, anyone with earned income can claim the EITC. For the CTC, the phase-in currently begins at $3,000.
This threshold isn’t permanent law. It was set by the Recovery Act and extended through 2017 as part of the fiscal cliff deal. Without the extension, the threshold would have been about $13,300 last year — and higher this year because the permanent law provides for an annual adjustment to reflect inflation.
The income level at which the phase-out begins depends on whether the filer is a single parent or married — and if married, whether filing jointly or separately.
The phase-out threshold for a single parent is more than twice the threshold for a married couple filing jointly — $75,000, as compared to $110,000. The threshold for a married person filing separately is simply half the joint filer threshold.
The fact that the threshold for a married couple is less than double the threshold for two single parents is sometimes referred to as a marriage penalty. The penalty here, i.e., the ability to claim the full credit, kicks in only when a single working parent marries — and obviously not always then.
Unlike the EITC thresholds, the CTC phase-out thresholds aren’t indexed to keep pace with inflation. But they’re considerably higher. For example, a married couple becomes ineligible for the EITC when its income is less than half the phase-out threshold for the jointly-filing couple claiming the CTC.
What Does the Ways and Means Bill Do?
The bill House Ways and Means Republicans passed would eliminate the so-called marriage penalty by raising the phase-out threshold for married couples filing jointly to twice the threshold for single parents — $150,000.
The higher threshold would be indexed to inflation, as would the threshold for single parents. The maximum $1,000 per child credit would also increase with the inflation rate.
The maximum credit boosts would, of course, benefit only families with earnings high enough to qualify for the full credit. Many already don’t. In 2011, 23% of children with working parents received only a partial credit, according to a Tax Policy Center brief.
But not altogether. The CTC improvements initiated by the Recovery Act would be left to expire. So the threshold set in permanent law would kick in at the end of 2017, with all the inflation adjustments since it was temporarily superseded. And that qualifying threshold will rise — and rise — because there will be ongoing annual adjustments.
How Would the Bill Affect Low-Income Families?
As of 2018, families earning less than about $14,500 wouldn’t qualify for the CTC at all, according to the Center on Budget and Policy Priorities’ analysis of the bill.
A single mother with two children and that $14,500 a year income would lose $1,750. Parents with somewhat higher incomes would lose as well, since their credits would, as now, be calculated on the basis of how much they made over the threshold.
At the same time, a married couple with two children and a joint income at the new phase-out threshold would gain $2,200. And families with considerably higher incomes would still qualify for a partial credit.
Looking forward to 2023, the Tax Policy Center projects that more than two-thirds of the credit, in dollars, would benefit families in the top two-fifths of the income scale.
The refundable Child Tax Credit lifted about 3 million people — more than half of them children — above the poverty threshold in 2012, according to another CBPP analysis.
Without the Recovery Act improvements, roughly 900,000 more people would have been officially poor. This, as I’ve often remarked, is very poor indeed.
One can understand then why no Democrats on the Ways and Means Committee voted in favor of the misnamed Child Tax Credit Improvement Act.
Improvements friendly to better-off families, for sure. But as in the past, Republicans don’t extend their friendliness to families at the bottom of the income scale — not even those who work.
UPDATE: The House Rules Committee added a provision to this bill that would deny the CTC to parents who file using an Individual Tax Identification Number, rather than a Social Security number. These are mostly immigrants. According to recent estimates, about 5.5 million children would lose the credit. All but about a million are U.S. citizens.