The $1,000 Tax Hike on Middle-Class Families

W hen Americans file their taxes in the coming weeks, one group will be singled out for a tax hike: middle-class families with children. This April, a family with three children making at least $42,000 will pay about $950 more in (inflation-adjusted) federal income taxes than they paid in 2018 — when the Tax Cuts and Jobs Act went into effect. But what’s to blame? Historically high inflation that has eroded the real value of the child tax credit in recent years.

Think about it this way. Parents whose wages are just barely keeping up with inflation, who are raising three kids on $75,000 per year (the median U.S. household income), will be asked to kick in almost $1,000 more to the federal government than they paid six years ago — at the same time that adults without children will face no tax increase at all. What’s worse is that for every additional kid you have, your tax hike will be about $300 higher.

The vast majority of this tax increase for families has taken place since 2021, when President Biden took office. So much for the president’s pledge that “nobody making under 400,000 bucks would have their taxes raised.”

Why are families with children being singled out for a tax hike?

Because the child tax credit — unlike most of the tax code — is not indexed to inflation. Historic inflation over the past three years has exacerbated this design flaw and put a bigger burden on working families.

In 2018, the child tax credit allowed a family with three kids to take up to $6,000 off their tax bill. Assuming that the family’s wages simply kept pace with inflation, both their wages and tax bill would rise at the same pace, and they would be no worse off. But here’s the problem: The child tax credit has not grown with inflation, and so it offsets a smaller portion of their real tax liability. At the end of the day, a family with three children will pay close to $1,000 more to the federal government and thus be $1,000 poorer in 2023 than in 2018.

The blame for the tax hike on families is bipartisan. Republicans failed to index the child tax credit to inflation in the Tax Cuts and Jobs Act, leaving open the risk that inflation could eventually erode its value and effectively increase taxes on families. Democrats helped make that risk a reality much sooner than anyone could have expected, by pushing through trillions of dollars in unnecessary spending in 2021 that contributed to historic inflation.

Fortunately, there is a simple fix. The maximum child tax credit could immediately be increased by a little over $300 per child and indexed to inflation moving forward. Even in an increasingly polarized political environment, neither party should stand in the way of undoing a tax hike on middle-class families.

As a matter of fact, the United States Senate is currently considering a bill — already passed by the House on a bipartisan basis — that would change the child tax credit starting with the 2023 tax year. There’s only one problem: The bill would do nothing to stop the tax hike on middle-class families this year. Instead, it would increase benefit payments by as much as $3,500 for lower-income families who don’t pay federal income taxes in the first place.

The major beneficiaries of the bill would be families with multiple children earning around $15,000 to $20,000 per year. These families may certainly be struggling, but they are already eligible for tens of thousands of dollars in government support. For example, a married couple with three children with this level of income pays no federal income tax and is currently eligible for $10,000 in refundable tax credits plus over $12,000 from food stamps. By contrast, most middle-class families facing a tax hike this year receive few, if any, of these benefits.

The child tax credit changes are only part of the tax bill being debated by Congress. It would also restore investment incentives for businesses and stop fraudulent payments in the Employee Retention Tax Credit program. The bill’s proponents rightly point to the urgency of encouraging innovation and not wasting money. But they are wrong to blindly tack on thousands of dollars in benefit payments to existing support for lower-income families — in a way that could discourage work and marriage. And they are wrong to ask middle-class families to shoulder the financial burden by allowing their taxes to rise this April.

Proponents of the new bill argue that it represents much-needed tax relief for middle-class families. They have it backwards. Middle-class families are getting their taxes hiked this year, and Congress is doing nothing to stop it.