Will New Child Tax Credit Changes in 2024 Disincentivize Work?

The leaders of Congress’ tax-writing committees, House Ways and Means Chairman Jason Smith (R-MO) and Senate Finance Chairman Ron Wyden (D-OR), recently announced the first major bipartisan tax agreement since 2020. Among other reforms, the deal would make significant changes to the Child Tax Credit (CTC) for 2023-2025.

One proposed change in particular—allowing parents to use previous year income for determining their CTC amount if it is greater than their current-year income—has caused concern among some lawmakers and commenters, including the editorial board of The Wall Street Journal. While the provision contains work incentives and disincentives, the editorial cites a new paper from American Enterprise Institute (AEI) scholars that claims that “over 700,000 parents” could stop working as a result of the proposed rule.

This estimate, however, requires context.

First, the determination that 700,000 parents would leave the workforce is over two years, not one, and is a gross figure, not net. When accounting for parents who would be pulled into the workforce, the net job loss estimate is around 150,000 per year—far lower than 700,000.

Second, the methodology is an outlier among peer research. Last September, BPC released a paper comparing several studies of the employment effects of a permanent expansion of the CTC, similar to that enacted temporarily in the American Rescue Plan Act of 2021. While we found that such an expansion would lead to modest job loss—validating some policymakers’ concerns that, if made permanent, the policy would disincentivize work—one study in particular was an outlier: a 2021 estimate from two of the same AEI researchers that 1.5 million parents would exit the workforce, double the next largest estimate for job loss.

The authors projected a much higher elasticity (a much larger negative effect on workforce participation) than their peers for low-income single mothers. This methodological outlier is repeated in their paper on the proposed CTC income lookback, with the authors estimating triple the responsiveness of low-income single mothers to changes in tax policy compared to other scholars.

Finally, the change must also be measured against other changes to the CTC proposed in the deal that would increase work incentives for many households, such as the enhanced phase-in for parents with multiple children and the increased refundability of the credit. Increasing the phase-in for the CTC and enhancing its refundability are two ways to increase work incentives for taxpayers subject to the phase-in, especially those lower on the income ladder. The Wyden-Smith deal does both.

Regardless of the work incentives and disincentives generated by these potential changes to the CTC, the proposal must be evaluated for its complexity and for its temporary nature, as raised by experts at the Tax Foundation and by AEI’s Kyle Pomerleau. It must also be evaluated against the realities facing working parents; it strains imagination that hundreds of thousands of parents could or would effectively game the system—choosing to forego jobs paying tens of thousands of dollars per year—just to receive a few extra thousand dollars of CTC.

In short, the proposed CTC changes require comprehensive analysis. Studies that isolate one provision against many others in current law (and in the proposal) may fall short.