Last night, Senate Republicans changed their tax bill to expand the child tax credit. That’s a very good change, in my opinion, and one that makes the overall tax reform much more worth supporting. It might be worthwhile evaluating where the bill stands in relation to where we ought to want to go with the credit.
The case for a large child credit (outlined in the above link) suggests that each child should reduce a household’s tax bills by about $3,700. Currently, families in the most common tax bracket — the 15 percent bracket — see their tax liability fall by about $1,600 per child. The Senate bill would make that number $2,000: a solid increase.
Eligibility on the High End
The basic argument for an enlarged credit (again, see the link above, or this one) suggests that affluent parents should in principle be eligible for it. A household making $800,000 with kids is making a fiscal contribution to the federal government slightly larger than a childless household with the same income, and tax policy ought to reflect that fact. But there is no reason to think that it is vital to ensure this. Currently, the child credit phases out for joint filers making between $110,000 and $130,000. Under the Senate proposal, it would begin to phase out at $500,000.
Eligibility on the Low End
The argument for an enlarged credit also suggests that it should apply against both payroll and income taxes. A household with one child should get the full value of the credit so long as it generates $2,000 or more in federal revenues from all sources — even if its income-tax liability is below $2,000. It’s an important point because most households pay more in payroll taxes than in income taxes. Tax relief that does not include payroll-tax relief will reach a much smaller number of Americans.
Applying the credit against payroll taxes has been a hard sell to Republicans. They tend to assume that credits that apply against income taxes are suspect at best, and credits that go to people without income-tax liability amount to giving away money like Hugo Chàvez. The current child credit is partially “refundable,” meaning that it goes to people with no income-tax liability. The Senate bill does very little to expand refundability. Action on this front will almost certainly require Democrats to take the initiative, either now or in the future.
The size of the child credit ought to rise each year to keep up with both inflation and real wage growth, just as tax payments and old-age entitlement programs do. The child credit is not now indexed for either. Its real value drops over time. The Senate bill does not change this.
The expansion of the credit to $2,000 is also temporary. After 2025, per-child tax relief for households in the 15 percent tax bracket will fall from $2,000 back to $1,600 — and that $1,600 will be worth less, against generally larger tax bills, than today.
The automatic expiration of the expanded child credit strikes me as a less important issue than indexing it so it keeps up, at least, with inflation. Protecting millions of families from a tax increase will probably be sufficiently popular to get the expanded credit extended or even made permanent at some future date.
The bottom line is that the Senate bill would make the tax code more family-friendly, reducing an existing bias in federal policy against parents and especially against parents of large families. If the $2,000 maximum value holds in negotiations with the Senate, the next steps for supporters of the credit should be to push for making the credit more widely applicable against payroll taxes and for indexing it to wage growth.