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Tuesday, August 2, 2011

The Child Tax Credit: Economic Analysis and Policy Options

Margot L. Crandall-Hollick
Analyst in Public Finance

Certain parameters of the child tax credit are scheduled to expire in 2012 providing an opportunity to evaluate the economic impact of the current credit and examine policy options for the credit after 2012.

The child tax credit is currently structured as a $1,000-per-child credit that is partially refundable for lower-income families with more than $3,000 in earnings. Originally, the child tax credit was a $500-per-child nonrefundable tax credit which generally benefited middle- and upper-middleincome taxpayers. Legislative changes to the credit, primarily those included in the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the American Recovery and Reinvestment Act (ARRA; P.L. 111-5), expanded the child tax credit’s availability to some low-income taxpayers. Specifically, EGTRRA increased the maximum amount of the child tax credit from $500 per child to $1,000 per child. It also allowed lower-income taxpayers, with little or no tax liability, to claim part of the credit as a refund. ARRA reduced the refundability threshold from $10,000 (adjusted for inflation) to $3,000.These legislative changes, originally scheduled to expire at the end of 2010, were temporarily extended through the end of 2012 by the Tax Relief, Unemployment Reauthorization and Job Creation Act of 2010 (“The 2010 Tax Act”; P.L. 111-312). The child tax credit is scheduled to return to a $500 credit that is nonrefundable for most families at the end of 2012.

Two bills in the 112th Congress, the Child Tax Credit Preservation Act of 2011 (H.R. 508) and Section 105 of the Bipartisan Tax Fairness and Simplification Act of 2011 (S. 727), would permanently extend the EGTRRA provisions of the child tax credit and let the lower refundability threshold established by ARRA expire. Another option, contained in the President’s FY2012 budget, would permanently extend both the EGTRRA and ARRA provisions of the credit.

To evaluate these proposals to modify the child credit, this report first provides a distributional and economic analysis of the current credit, focusing on the credit’s impact on fairness or equity. The report then turns to an analysis of the current impact of the EGTRRA and ARRA modifications to the child tax credit and the potential future impact, on taxpayers with children and on the budget, of extending these provisions past 2012.

Finally, this report concludes with an overview of other possible modifications (aside from EGTRRA and ARRA provisions) to the child tax credit. The impact of these modifications will depend on a taxpayer’s income. Modifications that benefit middle- and upper-middle-income taxpayers include increasing the amount of the credit per child and increasing the phase-out thresholds. Modifications that benefit lower-income taxpayers include reducing the refundability threshold or increasing the current refundability rate. These changes will likely have significant budgetary cost that policy makers may consider alongside their policy goals.

This report does not provide an in-depth examination of the history of the credit. For more information on the legislative history of the credit, see CRS Report R41873, The Child Tax Credit: Current Law and Legislative History , by Margot L. Crandall-Hollick. 

Date of Report: July 25, 2011
Number of Pages: 20
Order Number: R41935
Price: $29.95

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