The Child Tax Credit (CTC) exists to provide working families with children some tax relief. It has undergone many changes since it was first enacted in 1997, most recently during the pandemic.

Currently, Congress is considering a tax package that would extend some of the expiring provisions of the 2017 Tax Cuts and Jobs Act. Part of the negotiations are on changes to the CTC that will provide more relief to working families, especially during this time of high prices and general unaffordability. The CTC expansion is coupled with important pro-growth tax policies for businesses.

It’s important to remember that the CTC is not meant to be another handout that creates government dependency and disincentivizes work. Households are required to work to receive the benefit. However, some policymakers on the left would prefer to entirely reduce work requirements and turn the CTC into a form of universal basic income. That is not defensible, but changes similar to those implemented during the 2017 tax cuts are understandable.  

There are many claims about what the latest changes to the CTC would do and who they would impact. Unfortunately, not all of them are true. We’ll tackle them below,

First, a little background on the CTC.

The Child Tax Credit was created in 1997 as a $400 credit and raised to $500 in 1998. It was available for children under 17 years of age with a taxpayer ID. The CTC evolved to become a $1,000 refundable credit. 

The 2017 tax cuts increased the maximum amount per child to $2,000 and required the taxpayer ID for covered children to be a work-authorized Social Security Number. These changes are scheduled to be in effect until 2025.

In 2021, the American Rescue Plan Act (ARPA) boosted the CTC in ways that turned it into an entitlement and disincentive to work. ARPA increased the maximum amount available per child (up to $3,600), made the credit fully refundable, increased the eligibility age to include 17-year-olds, and featured direct, advance payments in the form of monthly checks for six months. 

The current changes under consideration resemble those in the 2017 tax cuts rather than the 2021 changes. The CTC would be kept at its TCJA credit level of $2,000, plus an inflation adjustment going forward, and the refundable portion stands at $1,600. 

Here are five facts about the Child Tax Credit that you should know:

  1. The CTC is a conservative policy. As an element of the Contract for America, the CTC was proposed as a $500-per-child tax credit that became law in 1997 under a Republican-led Congress.
  2. The CTC encourages work. The refundable portion of the CTC, the amount of credit people can receive above their tax liability, is only available to households that report earned income of at least $2,500. While the current tax proposal would increase the proportion that is refundable, the changes generally preserve the credit’s work incentives and may even strengthen them. The Joint Committee on Tax concluded in a recent report that “the proposed expansion of the child tax credit on net increases labor supply,…” Other scholars suggest the same as tax expert Ryan Ellis explained, writing “They do not result in substantial labor-market changes (so says the tax expert at AEI, as well as the Tax Foundation).”
  3. The CTC is given annually; it’s not another monthly check. The CTC is given as a tax credit claimed on an annual return. Parents must file to claim the tax benefit. However, in 2021, for the first time, it was distributed monthly for six months as direct, advance payments to provide up-front financial support during the COVID-19 pandemic. Those payments were an exception, not the rule. Don’t expect any surprise payments timed to coincide with the November elections.
  4. The ÇTC is only available to those with a Social Security Number. The 2017 tax cuts required that a Social Security number be provided to claim the credit. That requirement is still in place, so anyone here illegally should not be able to claim the CTC.
  5. The CTC helps middle-class and low-income households. While the goal of this tax credit is to benefit low-income families, many high-income families benefit from the tax credit as well due to phaseout levels having been raised. For example, a family with an income of $150,000 and three children under the age of six today qualifies for $10,800 in CTC payments. This is an area for correction.

The CTC is far from perfect. It has been susceptible to abuse or has led to tax problems, particularly in 2021. 

My colleague, Hadley Heath Manning, pointed out the complications that arise when the tax credit follows the child:

But throwing a monthly cash payment to any adult who claims to provide for the child is problematic for a variety of reasons.

First of all, any time money follows a child we should pay attention. This is the kind of system that could create bad incentives for abuse.

…

Keeping track of who might be eligible for these benefits would be an administrative nightmare for the IRS…

To make things even more complicated, the proposed redefinition of “child” would only apply to the CTC and not the myriad other tax benefits and government programs aimed at children.

And as former fellow Kimberly Pinto wrote several years ago:

advance child tax credit payments became at best a headache and at worst a new financial hardship for many families this tax season, as many either received a much smaller refund than they had previously been accustomed to receiving or actually owed—or owed more than anticipated—when they filed their return.

That said, the proposed changes to the CTC under consideration do not mirror the expansive changes of 2021 nor would they be counterproductive to the goal of getting Americans to work. They will provide some tax relief at a time when families need it.