The least we can do

The pandemic created a unique political environment where, for a brief period of time, there was a working consensus that the government should try to help people. This resulted in a historic expansion of the Child Tax Credit (CTC) in 2021. 

The CTC was increased from $2,000 per child to $3,600 for each child aged 5 or younger and $3,000 for each child aged 6 through 17. (The credit phased out for couples making $150,000 or more and individuals making $75,000 or more.) Further, the CTC was made fully refundable, regardless of income. Previously, the lowest earners were not able to take advantage of the full credit. Finally, instead of forcing families to wait until they filed their taxes to receive the credit, the CTC was paid as a monthly benefit to eligible families from July 2021 to December 2021. 

The impact of the expanded CTC was extraordinary. The child poverty plunged to 5.2%, a record low. 

The Biden administration had proposed extending it and proposed a number of mechanisms to pay for the extension, including a modest increase in the corporate tax rate, the elimination of a tax loophole for private equity managers, and a surtax on billionaires. 

The extension of the CTC, however, was opposed by corporate lobbyists. The U.S. Chamber of Commerce spent millions lobbying against the expanded CTC extension, deriding it as "large amounts of transfer payments that are not connected to work." Their arguments swayed every Senate Republican and Senator Joe Manchin (D-WV).

The expanded CTC expired at the end of 2021. In 2022, child poverty spiked to 12.4%. As a result of Congressional inaction, 5.28 million additional children were plunged into poverty. 

This month, Senate Finance Committee Chair Ron Wyden (D-OR) and House Ways and Means Committee Chair Jason Smith (R-MO), released a plan to help America's poorest children by expanding the CTC again. Wyden and Smith's proposal is far more modest than the CTC expansion in 2021. It would primarily benefit larger families with very low incomes. 

Here is how the new proposal would work. Under current law, families are eligible to receive the child tax credit as a refund in an amount equal to 15% of their earnings above $2,500. So, a family earning $2,500 would not receive any of the credit as a refund, and a family earning $12,500 would receive $1,500 of the credit as a refund. Regardless of income, the total amount of the CTC that can be received as a credit is capped at $1,600 per child. The Wyden and Smith proposal would allow larger families to increase the portion of their earnings above $2,500 used to calculate their refund by another 15% per child. So, a family with three children could collect 45% of their earnings above $2,500 as a refund. There are some other minor changes in the proposal, which will allow families to benefit slightly more over a three-year period. After 2025, the entire package expires. 

Although the expansion of the CTC proposed by Wyden and Smith is small and technical, a lot of children would benefit. The Center for Budget and Policy Priorities (CBPP) estimates that "16 million children in families with low incomes would benefit from the expansion in the first year." These are mostly children "who currently receive less than the full credit, or none at all, because their families’ incomes are too low." In other words, some of the children who need the most help. CBPP projects when the proposed expansion is fully in effect, it would lift "500,000 or more children above the poverty line." This is both a small fraction of the number of children harmed by allowing the 2021 expansion to expire and a large number of children whose lives would be meaningfully improved. 

The Wyden and Smith proposal is supported by some corporate lobbying organizations that opposed extending the expanded CTC in 2021. They have been enticed by a package of lucrative corporate tax breaks that are included in Wyden and Smith's plan. Wyden and Smith's package was approved by the House Ways and Means Committee on a 40-3 vote, with all Republicans supporting it. (A handful of Democrats opposed the measure on the grounds that the CTC expansion does not go far enough.) Nevertheless, it is far from certain that Wyden and Smith's proposal to modestly expand the CTC becomes law. 

More tax breaks for companies that already pay very little in taxes

The proposed expansion of the CTC has been paired with extensions to business tax cuts established in 2017 that had expired or were close to expiring.

The tax breaks expand tax deductions for corporations. Under the legislation, companies will be allowed to immediately deduct the full amount of domestic research costs, rather than spreading the deductions out across “a five-year period.” The legislation will also allow companies to immediately deduct capital expenses such as purchasing new property and equipment. It also allows for more deductions on corporate interest expenses. The corporate tax breaks are estimated to “cost $32.8 billion over a decade.” This matches or exceeds the cost of the CTC expansion, depending on the estimate.

The Institute on Taxation and Economic Policy has critiqued the inclusion of corporate tax breaks, stating that they would “benefit profitable companies… that already pay too little in taxes.” According to Bloomberg Intelligence, the tax cuts could “boost the stocks of US companies with large capital and domestic research expenditures,” such as Boeing, General Motors, Microsoft, Apple, and Amazon. Other companies that stand to benefit include Google and Meta.

The Business Roundtable, a group representing many top CEOs, has announced its support for the legislation, stating that it is “an important step toward restoring three pro-growth tax policies essential to America’s competitiveness.” The group did not mention the CTC. The Business Roundtable notably spent hundreds of thousands of dollars lobbying against Biden’s proposal to extend the CTC in 2021. 

For some, very little is still too much

Despite substantial bipartisan support, Wyden and Smith's proposal may not have enough votes to become law. Senator Chuck Grassley (R-IA) said that the chance of passing the legislation in January “is pretty nil,” due to “legislative and substantive objections.” Grassley added that House Republicans are unlikely to “want to attach the package to any spending bills that already face dissent from the far right.”

House Speaker Mike Johnson (R-LA) has reportedly not “made up his mind about whether to support” the legislation. Senator John Thune (R-SD) said that expanding the CTC is a “really hard issue[],” stating, “You’re not going to get Republicans to agree with a lot of that.” 

Some economists have also announced their opposition to the legislation. A fellow at the Hoover Institution, a conservative think tank, argued that the CTC might drive up inflation, and that “there’s already substantial fiscal stimulus driving up economic activity.” But according to Bloomberg, “the inflation risk is… low” because the “additional money spent each year in the proposed program” is only “0.04% of gross domestic product.” Additionally, Bloomberg states that some families will save the money or use it to pay off debt instead of spending the sum right away. 

An op-ed by the Wall Street Journal Editorial Board argues that the legislation “contains bad tax and social policy buried in the details of the child-credit expansion” and “will serve to more deeply entrench a costly ‘cash welfare’ program.” The Editorial Board argues that changing the income requirements for the CTC to include lower-income families will “undermine[] the incentive to work in return for the credit.” This argument in the op-ed perpetuates the myth that families are living in poverty because they lack the motivation to work.