By Marlon Cabrera and Zia Saylor

This tax season, federal policymakers have an opportunity to vote for children to thrive. Just last month, the U.S. House of Representatives passed the Tax Relief for American Families and Workers Act of 2024 with strong bipartisan support, including seven of nine Indiana representatives.  While the bill is currently waiting for a vote in the U.S. Senate, its significance cannot be ignored. If passed in the Senate and signed by President Biden, it would have the potential to lift millions of children out of poverty by expanding the Child Tax Credit (CTC). 

So what is the CTC? The CTC gives taxpayers the ability to claim up to a $2,000 credit per eligible dependent. The CTC was first introduced in 1997 as a nonrefundable credit, meaning it could only offset taxes owed; none of it could be received in the form of a tax refund. Over the years, the amount has steadily increased while also introducing the ability to make the tax credit refundable in some cases. The current CTC maximum of $2,000 was set by the 2017 Tax Cuts and Jobs Act; this same act made the refundable portion $1,600. During the COVID-19 pandemic, the American Rescue Plan enhanced the CTC by raising the maximum amount to $3,600 for children under 6 and $3,000 for children over 6 but younger than 18. While the cap on refundable CTC had previously been $1,600, the pandemic expansion allowed for the full credit amount to be refundable, regardless of how much was paid in taxes. The enhancements from the American Rescue Plan decreased child poverty to the lowest it has ever been (5.2%) in 2021, but expired, and without renewal the maximum credit amount was reverted back to $2,000 ($1,600 cap). 

The regression of the CTC harmed families around the country who had used it to prevent their children from growing up in poverty. With rising inflation, parents are struggling now more than ever to be able to cover their usual expenses. Single parents in particular have been hit hard, with 30% of single parents reporting worse financial situations than average in recent years. In Indiana, nearly one in five children live in poverty, a statistic that ranks the state 20th in the nation for highest child poverty. In our most recent (2023) community needs assessments, Hoosiers expressed difficulties coping with the rising cost of living while raising children:

• "With the inflation rate and cost of living so high, [I'm] working 40+ hours a week to survive, then turn around and give half my paycheck for daycare."
• "I am working, but all my money goes for bills and there are times I barely have enough gas in my car to take my child to school or to doctor appointments that are needed."
• "Prices are rising and it is hard to feed growing kids." 

Many Hoosiers find themselves unable to meet basic needs or afford childcare. On average, it costs $200 a week for childcare for one infant in Indiana. This cost grows for parents of multiple children, leading to difficult fertility choices caused by a constrained budget. Meanwhile, access to the CTC has been shown to improve outcomes multi-generationally, with higher adult earnings for children of CTC recipients. This resource investment thus helps families and our economy thrive.  

Expanding the CTC would improve these outcomes. Currently, the full CTC is not received by over a quarter of low-income children across the nation, as families must make over $2,500 to even qualify for any CTC, and for every dollar they make above the threshold receive $0.15 in benefits. This means that in order to receive the full amount, families must make $15,833.33 in taxable income. At the same time, households with multiple children have to phase in credits for both children above the income threshold, meaning that while $15,833.33 is needed to earn the full CTC for one child, $29,166 would be needed to receive the full benefit for two children. The issue is, however, that the phase-in and $2,500 base rate for income applies for both married and single tax filers, increasing pressure on single parents to earn enough to qualify for the CTC.

The Tax Relief for American Workers and Families Act would help to alleviate many of these issues. Firstly, the expansion would also increase the refundability cap until it was eliminated altogether. If passed, the law would increase the refundability cap from $1,600 to $1,800 in 2023, $1,900 in 2024, and $2,000 in 2025. As a result, lower-income families would receive a larger amount of refundable tax credits than before. The second big change would come from allowing families to use earnings from the previous year when determining the amount of their CTC, which would support families in cases of unemployment due to recessions. Third, the new bill would allow for a steeper phase-in of benefits for families with multiple children, ensuring that multi-child families would reach their maximum benefit at roughly $16,000 in income, rather than almost double that. The last key change introduced by this bill would be the introduction of inflation adjustment in CTC amount calculations, which would protect low-income families from highly inflationary periods by providing an extra income buffer. 

All these provisions, if passed, would do much to help the families who need them most. According to the Center on Budget and Policy Priorities, these provisions would lift 400,000 children above the poverty line and increase funding received by 3 million children and their families. It is crucial that Congress work as quickly as they can to pass this important piece of legislation, as it represents a unique and critical opportunity to invest in our future generations.