The American Rescue Plan’s (ARP) expansion of the Child Tax Credit (CTC) represented a major shift in the United States’ family benefit policy, causing child poverty to fall to its lowest level on record in 2021. Many commentators and lawmakers hoped that Congress would make the expansions permanent. Those hopes were dashed when the Build Back Better Act failed in Congress. In addition to opposing the bill due to its cost, some lawmakers expressed concern that parents would spend their child tax credit payments, “on drugs instead of providing for their children.” Evidence indicates that this concern is unfounded.
A growing body of research on CTC spending can shed light on how low-income families spend their benefits. A recent working paper from the National Bureau of Economic Research examined the spending patterns of recent CTC recipients, finding that families spend the extra money responsibly and direct most of it toward food and shelter. The researchers could not study illegal drug expenditures using CES responses, but they found that families did not spend their higher income on substances like alcohol or tobacco.
Using Consumer Expenditure Survey (CES) data, collected by the Bureau of Labor Statistics, the authors examine families’ responses to CTC payments in major expenditure categories, as well as in child-related expenditure categories in particular. The data lets researchers avoid a common criticism in surveys of benefit recipients: If survey respondents are asked about how they spent their CTC payments in particular, they might give answers that paint their consumption in a positive light; overestimating how much they spent in categories like child enrichment or food and underestimating expenditure on alcohol and tobacco. By tracking changes in family spending in general, that can be avoided.
There is one disadvantage to this approach. Because the CES focuses on expenditure data, it does not provide precise data on how much a given family received from the CTC. It only began asking families whether they had received the child tax credit after October 2021, and it never asked the precise amount they received. So, the researchers had to estimate how much every family would be eligible for based on their earnings and family size. Using these estimates, they then compared families who received the CTC to similar families’ CES data in 2019, tracking differences in spending patterns between the two groups.
The authors estimate that families spent $75 dollars for each $100 they received in child tax credits. Of that $75, families spent $28 on food, $31 on housing, and $15 on child-related goods and services (See figure 1). Looking more closely at child-related spending, the authors estimate spending increases in children’s clothes ($7), school items ($2) and childcare ($3). The researchers estimate no increase in spending on alcohol and tobacco. The authors did multiple tests of these results, including adjusting for inflation and household size, but the results were consistent across all variations.
Figure 1: Increase in major expenditure categories per $100 of monthly CTC income
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The authors conclude that lower income families spend their child benefits even more responsibly. Among recipients making $50,000 or less, families spent $85 of each $100 received compared to $75 overall, with greater spending on food and housing than those making over $100,000.
The authors assume that all CES respondents that qualified for the CTC received it, so the study didn’t exclude families that may not have noticed the CTC payment in their bank accounts. This raises the concern that the analysis will include too many families that didn’t receive the CTC. When the researchers restricted their dataset to only include families who reported receipt of the credit, however, they found no statistically significant changes.
Another limitation is that the researchers compare similar families across time, they may be tracking changes in spending that occurred due to the pandemic or other social trends, not the CTC. However, the researcher’s results coincide with the broader literature. Surveying this research in 2021, Sam Hammond and Audrey Xu found that child benefit programs without conditions are usually allocated towards spending on food and housing. That’s exactly what the most recent NBER paper found.
The authors of this paper found that parents spent expanded CTC payments exactly how we would expect any parent to spend it: on food, housing, and their children. Despite the paper’s limitations, it backs up other evidence that parents spend money to improve the quality of their family’s lives. Ultimately, the evidence indicates that lawmakers need not be concerned that parents who receive the CTC will spend it irresponsibly.