This article was originally published in Newsweek on January 16, 2024.
Congress may be on the verge of a bipartisan deal that could pair an expansion of the child tax credit with several business deductions. If it succeeds, it would represent an authentic return to bipartisanship for lawmakers on both sides of the aisle after years of polarization around the child tax credit. And it would be a big win for families.
The credit, which currently provides up to $2,000 per child to help parents raising a family, has grown considerably since it was first introduced in 1997. Support for the expansions was strongly bipartisan for most of the credit’s history. That changed with the temporary expansion in 2021 under a Democratic trifecta. The American Rescue Plan Act increased the value of the maximum credit, but eliminated the earnings requirement that has been a core part of the credit since its introduction. This made it available to nonworking families for the first time, amid skyrocketing unemployment during the COVID-19 pandemic.
Recognizing the impact of this change in reducing child poverty, many Democrats pushed to make it permanent. Republicans balked over concerns that dropping the earnings requirement would adversely impact work incentives, and lead some parents to drop out of the labor force. Congressional Democrats pushed on with their efforts to pass it along partisan lines but ultimately failed when conservative Democrats like Joe Manchin (W.V.) also balked. Despite calls to reach across the aisle to make a bipartisan deal, advocates and lawmakers showed little interest in meeting Manchin in the middle.
Similar efforts to pair an expansion of the child tax credit with business deductions sputtered out last winter when it became clear Democrats were still not ready to compromise on dropping the earnings requirement. Republicans were increasingly wary of stealth efforts to drop it, and partisan polarization seemed inevitable.
However, a small group of congressional leaders on the House and Senate tax committees led by Rep. Jason Smith (R-Mo.) and Sen. Ron Wyden (D-Or.) came together this winter in an effort to reach a compromise that would keep earnings requirements to address Republicans’ concerns while looking for ways to expand the credit’s reach to the working poor to address Democrats’ demands. The reported deal would make several incremental changes to the credit, the most important of which was phasing it in faster for larger families and automatically adjusting it for inflation going forward.
Currently, the credit phases in at the same rate regardless of how many children the parents claim. As a result, it phases in more slowly, and larger families need more income to claim the full credit. By shifting from a per-family to a per-child phase-in rate, the credit phases in much faster for low-income working families. A family with three children where one parent works full-time at the federal minimum wage of $7.25/hour would see their total credits rise from $1,800 to $5,400 when they get their refund this April. That extra $3,600 would go a long way for hard-working families struggling to make ends meet.
Unlike most other credits and deductions, the current credit is not indexed for inflation. A family’s standard deduction increases yearly to account for inflation while its child tax credit is stuck at the same $2,000 that was established in 2017. If the credit had been indexed, it would be closer to $2,400 today. Indexing the credit going forward would prevent further erosion of its value by inflation. This is crucial for helping middle-class families deal with the soaring cost of groceries, child care, and rent over the last few years.
If it passes, the deal would be a significant victory for families and a defeat for political polarization—but that is still a big “if.” Ideological extremists in both parties threaten to undermine a tenuous compromise. Some progressives have taken an all-or-nothing approach and will settle for nothing less than eliminating the earnings requirement. Many Republicans are content with the “nothing” part of that approach.
If the more reasonable members of both parties do not step up and voice support for this compromise, families will again be left behind.