Four Things to Know About the Child Tax Credit

For the first time since 2021, lawmakers are seriously considering modifications to the Child Tax Credit (CTC). Here are a few things to keep in mind about the CTC from BPC’s Economic Policy Program:

• The deal makes changes to the refundability of the credit and the phase-in for the credit—these are distinct changes. “Full refundability” means the full credit is available to parents regardless of federal income tax liability. The elimination of the CTC’s earnings threshold would mean the full credit would be available to parents regardless of earnings, but this agreement does not eliminate the earnings threshold. (More on the difference here.) This agreement brings the CTC from 85% refundability ($1,700 per child) under current law to full refundability by 2025. Additionally, the CTC would still phase in beginning at the earnings threshold of $2,500, but it would do so simultaneously for multiple children in a family (rather than one child at a time under current law).
• The changes will have the greatest impact on families living below the federal poverty level. These changes are designed to retain earnings requirements in the CTC while expanding the credit for low-income families, especially those with multiple children. For example, a family of four earning $20,000 in 2023 (67% of the federal poverty level) and taking the standard deduction during this tax season would receive $3,600 in CTC instead of $2,625.
• The changes should not have a significant effect on work/employment in the economy. BPC recently assessed five academic studies that attempted to measure the work/employment effects of a permanent American Rescue Plan (ARP) CTC. The academic consensus is that an expanded CTC with no earnings phase-in would lead to a modest decline in employment alongside reductions in poverty. Given that the recently revealed bipartisan agreement maintains earnings requirements and phase-ins for the CTC, and actually enhances the incentive to work for some parents, we do not anticipate the CTC changes will have significant effects on work/employment.
• The changes should not have a meaningful impact on inflation. The deal reportedly provides around $35 billion in CTC expansions over three years, roughly $12 billion per year on average. In a $19 trillion per year consumer economy, these modest changes to the CTC are unlikely to have a meaningful impact on inflation.