wealth tax

Expanded Child Tax Credits Have Been a Lifeline for Many

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The coronavirus pandemic and its concomitant recession created economic pain for millions of U.S. households. Several large-scale policy interventions helped to ease that pain, reduce hunger and poverty, and put the economy on a stronger footing. These interventions included expanded child tax credit (CTC) payments distributed in the second part of 2021, enacted through the American Rescue Plan Act (ARPA) in March 2021. The payments both caused a dramatic reduction in poverty and hunger and acted as a middle-class stabilization tool: The expanded CTC helped families across income levels, racial and ethnic groups, and education levels pay their bills and build a cushion for future emergencies amid an ongoing pandemic, providing crucial financial security for millions of families across the income spectrum. But with these payments ending in December 2021, many families will experience more financial hardship.

How the expanded CTC helped families

The ARPA aimed to help families and businesses cope with the pandemic and to accelerate the flagging economic recovery. In pursuit of those goals, Congress increased the size of the CTC per child; made it refundable, independent of people’s federal tax liability; and allowed people to receive half their estimated CTC in monthly installments during the second half of 2021.

A married couple with an adjusted gross income of $45,000 and two children over the age of 5 could now receive a combined CTC of $6,000 for 2021 rather than the $4,000 before the ARPA went into effect.

The expanded CTC increased the amount of money that families, especially lower-income ones, could get in two ways. First, families could receive larger credits than before. For instance, a married couple with an adjusted gross income of $45,000 and two children over the age of 5 could now receive a combined CTC of $6,000 for 2021 rather than the $4,000 before the ARPA went into effect. The law also provided an additional $600 for each child under 5. Second, the families with the lowest incomes were made eligible for the full tax credit for the first time, thanks to the ARPA’s provisions to make the CTC fully refundable for 2021. This change allowed families to receive the full CTC regardless of whether they had federal income tax liability that year. In practice, this was especially important for Black, Latino, and rural families—about half of whom could not claim the full CTC previously. Many very low-income families do not have federal income tax liability during the years they are raising children, though they pay many other kinds of taxes such as federal payroll taxes or state and local sales taxes.

The families with the lowest incomes were made eligible for the full tax credit for the first time, thanks to the ARPA’s provisions to make the CTC fully refundable for 2021.

At the same time, higher-income families received no or only small additional payments under the ARPA. The additional CTC amounts phase out with higher incomes, starting at $75,000 for single filers, $112,500 for heads of household, and $150,000 for married couples who file joint tax returns. Therefore, families with incomes just above those amounts received part of the benefit of the increase, but higher-income families received no increase. The pre-ARPA expansion CTC still phases out above $200,000 for single filers and heads of household and $400,000 for married couples. Under the law, families above the phase-out for the ARPA increase may have had half of their CTC advanced to them, but they did not receive a bigger payment. For example, a couple with two older children making $200,000 would be eligible for a $4,000 CTC both before and after ARPA—but they would have received $2,000 of that advanced to them in monthly payments in 2021, unless they opted out.

How families used their expanded CTC payments

The U.S. Census Bureau’s Household Pulse Survey has collected information on families’ financial security during the pandemic, including data on those who received CTC payments and how they spent the money from July through December 2021. In the survey, people indicated whether they primarily used the expanded CTC to spend, save, or pay down debt, with each category of use making up about one-third of survey responses.

The expanded CTC was not just an anti-poverty program; it was also a middle-class stabilization tool.

The expanded CTC payments proved to be a crucial financial lifeline to millions of families across the country; a wide range of families across income levels, racial and ethnic groups, and education levels received and benefited from these payments in 2021. Middle-income families, white families, and those without a college degree made up larger shares of recipients than low-income families, families of color, and those with a college degree. (see Figure 1) This distribution largely reflects the population distribution in general, suggesting that the CTC was a broadly shared benefit. The expanded CTC was not just an anti-poverty program; it was also a middle-class stabilization tool, and it aided families regardless of income, race/ethnicity, or education.

Figure 1

The data require additional information to properly put them in context. First, some high-income families received checks, but that was largely a feature of advanced payments rather than expanded benefits. They got money sooner than they otherwise would have, but they did not necessarily get a tax cut.

Second, before the ARPA, 27 million families—mostly Black and Latino—were not eligible for the full benefit of the CTC, largely because of a lack of refundability. With the expanded CTC under the ARPA, the overall racial and ethnic breakdown of CTC recipients roughly matches the composition of the population of parents. So, even if families of color are roughly proportionately represented among those who received CTC checks, they disproportionately benefited from the expansion—especially the refundability of the credit—because they were severely underserved under the original design of the CTC.

Third, households headed by somebody who does not have a college degree also disproportionately benefited from the expanded CTC. These households make up more than two-thirds of CTC recipients, which is roughly in line with their population distribution. Yet because many lower-income households—which often do not have a college degree—were previously excluded from the CTC, the final distribution of those who received the expanded credit will likely include more households without a college degree. The bottom line is that CTC checks benefit a wide range of middle-class families, but the expansion especially helped lower-income households of color because they were more likely to be shut out of the full CTC before the ARPA.

Analysis of how families across income, race/ethnicity, and education who received CTC payments spent these payments underscores the point that the expanded CTC helped many families with their financial struggles during the pandemic. Families primarily spent their CTC checks on necessities such as food, clothing, housing and utilities, and child care. It is reasonable to assume that the fact that many families immediately spent rather than saved their money indicates that they otherwise would have had encountered some difficulties paying all of their bills. Families with incomes from $35,000 to $99,999 made up 42.4 percent of families who received the expanded payments and 44.3 percent of those who used the payments primarily for spending rather than for saving or paying down debt from July to December 2021. For example, 81.9 percent of households with incomes from $35,000 to $99,999 who received and immediately spent their CTC payments during that time did so on food and clothing. Moreover, white CTC recipients…

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