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Friday, May 31, 2013

The Child Tax Credit: Economic Analysis and Policy Options

Margot L. Crandall-Hollick
Analyst in Public Finance

At the beginning of 2013, Congress enacted the American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240), which made certain modifications to the child tax credit enacted in 2001 and 2003 permanent, while extending other modifications made in 2009 temporarily for five years (through the end of 2017). In light of these legislative changes, policymakers may be interested in understanding the economic impact of both the permanent and temporary changes in order to determine future modifications of the credit.

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. Prior to 2001, the child tax credit was a $500-per-child nonrefundable tax credit which generally benefited middle- and uppermiddle- income 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 of 2009 (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). At the end of 2012, ATRA made the EGTRRA changes to the child tax credit permanent and extended the ARRA changes for five years, through the end of 2017.

This report provides an economic analysis of the current credit, focusing on the credit’s impact on fairness (also referred to as “equity”). The report then turns to an analysis of the 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 2017.

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: May 14, 2013
Number of Pages: 21
Order Number: R41935
Price: $29.95

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