Report: Time to beef up the federal child tax credit
Strengthening the child tax credit would help level the playing field for families, particularly communities of color.
That is one key finding according to new report by the Center for American Progress:
According to CAP’s analysis, the cost of a middle-class living has risen dramatically in recent years—everything from college tuition, child care, retirement savings, and housing—increased by $10,600 between 2000 and 2012 for the typical married family with two children, all while incomes remained flat. These conclusions are derived from data and methodology in the U.S. Commerce Department’s “Middle Class in America” task force.
The authors report that child-related costs are growing at a much faster rate compared to other costs and currently account for approximately 70 percent of the rising costs associated with the middle-class.
This trend is much more pronounced in communities of color.
While real income for a typical household fell by 5.7 percent between 2002 and 2012, in comparison, the typical African American household saw a 10.1 percent drop in real income during this same period of time, and the typical Hispanic household saw a 7.7 percent drop.
And since children of color typically begin life at a more disadvantaged starting point than their white peers, these surging costs put their chances of eventually reaching the middle class even farther out of reach.
The child tax credit, or CTC, was enacted in 1997. Congress established the CTC to address concerns that the tax structure did not adequately reflect a family’s reduced ability to pay taxes as family size increased.
The CTC allows qualifying families to reduce their federal income tax by up to $1,000 per child under age 17. The authors claim that in its current form, the CTC is not large enough to offset the full cost of raising a child and has several key limitations:
- The credit is not fully refundable, preventing it from reaching the lowest-income children, and its minimum earnings requirement excludes many families who experience job loss.
- The credit is not tied to inflation, and its value erodes each year that Congress does not act.
- Parents must wait until tax time to claim the CTC, preventing them from using the credit to meet the continuous costs of child rearing.
- The CTC’s modest benefit does not increase during the stage when a family’s needs are greatest—when children are young and earnings are relatively low.
The report offers proposals to strengthen the CTC in ways that would help families to meet these additional costs:
- Eliminating the minimum earnings requirement and making the credit fully refundable to ensure that it reaches all low-and moderate-income families with children.
- Indexing the value of the credit to inflation so that it does not continue to lose value over time even as the costs of reaching or staying in the middle class are rising.
- Enhancing the CTC with a supplemental Young Child Tax Credit of $125 per month for children under age 3. The Young Child Tax Credit would be made available to families on a monthly basis through direct deposit or the Direct Express card, in recognition of the fact that child-related costs do not wait until tax time.
Critics argue that the federal income tax was never intended to provide offsets for the full financial responsibility of raising children. Pointing out that the decision to have children represents a choice of how to consume one’s income, and therefore the costs of raising children should not be a consideration when assessing income taxes.
However, generally speaking, policy experts on both sides of the political spectrum agree that programs which promote family growth are good for the economy. Social Security and Medicare depend on younger generations of workers to contribute payroll taxes. Non-parents don't have to pitch in for all the diapers, childcare and orthodontics required to raise those workers, yet are entitled to the same benefits these kids eventually pay for.
Robert Stein, an economist and former Treasury official, suggests that fairly compensating parents for what their newborns will contribute to entitlement programs would require a credit closer to $10,000. That would surely be too costly, but Stein suggests a $4,000 credit would be workable.
And, as Bloomberg reports, raising the CTC has a proven track record as a form of anti-poverty policy. In 2013, the child tax credit kept some 3.1 million people out of poverty, including 1.7 million children. Keeping kids out of poverty can also have lifelong benefits in terms of their educational attainment and earnings.