In the midst of a baby bust, the last thing Congress should do is make life harder for families. Yet every year, parents see their taxes, in effect, go up because inflation is eating away at the value of the child tax credit, which has already lost 20% of its value since the Tax Cuts and Jobs Act passed in President Donald Trump’s first term.
The current array of tax benefits for families is too complex, and it favors some familial arrangements, such as full-time work and paid child care, over others, such as stay-at-home moms or informal child care.
In the past couple of years, Republicans have found a new passion for promoting family, and the latest GOP offering, an expanded child tax credit proposed by Rep. Blake Moore (R-UT), ought to be a priority for Congress to consider as it debates extending the TCJA’s various provisions.
Moore’s bill would increase the child tax credit from $2,000 to $3,000 per child. It would create a larger $4,200 tax credit for children younger than school age. It would extend the tax credit to include 17-year-olds, who are children but are excluded from the current CTC. Pregnant women would also get a $2,800 tax credit.
The bill would have a work requirement of sorts: A family must earn $20,000 a year in order to earn the full credit. For high earners, the credit would phase out, starting at $400,000 of income for couples.
Some of the money for this larger tax credit comes from consolidating other child benefits into the CTC. For instance, the bill scraps the child and dependent care tax credit.
The existing child care credit is available only for parents who pay for formal child care, such as day care centers or nannies, to work for pay. It is not available for a homeschooling father who hires a babysitter to help with the younger children. It is not available for a stay-at-home mom who needs to go shopping or chaperone a school trip to the zoo.
More importantly, the current child care tax credit is not available to parents who choose anything other than the paid-work-and-paid-child care model. Folding this day care subsidy into a larger child tax credit is a huge improvement. Families can use a larger tax credit to offset the cost of child care or to offset some of the income lost when one or both parents dial back on paid work.
A couple could use a larger child tax credit to help convert the garage into a granny flat and get their child care that way. Some would use the extra money to afford a down payment on a house next door to an older sister on a street full of church friends. A larger child tax credit gives parents more options than does a day care tax credit.
Moore’s bill also frontloads the CTC, with a benefit of $4,200 for the child’s first five years. This makes sense for many reasons.
The first few years of a child’s life are, for most parents, the most costly. Before kids are school-aged, parents are more likely to sacrifice paid work or pay for child care. The medical bills are higher for mothers and babies. Also, amid our baby bust, it’s sensible to shift wealth forward toward the years when couples are trying to build families.
New parents could get $6,000 by the child’s first birthday under this bill, the pregnancy benefit plus the $4,200 credit, compared to $2,000 under current law. That sort of help can make it easier for the parents to have a second child sooner and to build the family they want.
Likewise, Moore’s bill simplifies taxes for families by folding some of the value of the earned income tax credit into the CTC. The EITC was designed as a work subsidy, but it is larger for workers with children. It makes more sense to make the EITC more purely a work incentive and consolidate more family tax relief in the CTC.
At this point, the conservative might object to this whole undertaking: Why should the tax code reward baby-making?
It’s true that the tax code should be about raising revenue rather than influencing behavior. That’s a good argument against tax breaks for mortgages or plug-in cars or borrowing for college — but it’s not an argument against a child tax credit.
The larger child tax credit in the TCJA replaced dependent exemption. The personal and dependent exemptions created, in effect, a safe harbor protecting a household’s first dollars of income from income taxes. This exemption reflected a commonsense notion: In our rich country, a family should be able to get its basic needs taken care of before it has to pay taxes.
Obviously, a household with more people in it will have more needs, so that safe harbor should be larger.
The larger child tax credit is based on the exact same idea. A child tax credit, then, shouldn’t be seen as a child subsidy, it instead is a simple acknowledgment that children are humans and that a particular income for five humans should be taxed less than the same income for one human.
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The biggest difference between the old exemption and the new larger credit is a distributional one: The dependent exemption provided a larger break, dollar-wise, to wealthier families because they are in a higher tax bracket. A child tax credit, in contrast, provides the same assistance dollar-wise to all families between $20,000 and $400,000 in earnings.
As for the low earners, it is true that for a single mother earning $20,000, the $3,000 credit would exceed her federal income tax, but that’s not the whole story. She will pay $1,530 in payroll taxes, and her employer will pay another $1,530. You could understand the CTC as a credit against payroll taxes. If a couple earning $20,000 has a second child and thus $6,000 or $7,200 in child tax credits, well, consider that a thank you for their warding off Social Security’s insolvency.
