What is the Child Tax Credit?
The Child Tax Credit (CTC) is one of the most effective tools for helping families manage the rising cost of raising children. The program provides financial relief to American taxpayers with dependent children and has lifted millions of children out of poverty. Congress expanded the program in 2021 to provide up to $3,600 per year for each child under age 6 and $3,000 for each child aged 6 to 17. The expansion allowed many taxpayers to receive some of the credit as advance monthly payments and also eliminated minimum income requirements. This critical change allowed families with the lowest incomes to receive the full benefit for the first time.
Despite studies showing that the expanded Child Tax Credit cut child poverty nearly in half, Congress failed to renew the expansion in 2022. At a time when the costs of basic daily needs like housing, child care, food, and utilities are higher than ever, the families who earn the least will again have less or no access to the credit. Those who retain it will see dramatic reductions.
Why is the Child Tax Credit important?
- Lowers the cost of living for working families. Reaching more than 36 million households, including many essential workers with low income, expanded Child Tax Credits were primarily used for immediate needs like food, utilities, housing, clothing, and education expenses. The tax benefits also support local economies. Every dollar of a Child Tax Credit generates $1.50 to $2 in local spending.
- Dramatically reduces child poverty. Nearly 3 million children were lifted out of poverty in just one year of expansion, resulting in a child poverty rate that fell by 46 percent to a record low. Rolling back the improvements makes the credit eight times less effective at reducing child poverty. In the year following the expansion rollback, almost 4 million children are estimated to have fallen back into poverty. The impact of child poverty, including poor outcomes in health, education, and economic mobility, cost the nation between $800 billion and $1.1 trillion each year.
- Improves rural and racial equity. Before expansion, 27 million children in families with the lowest income – including half of all rural, Black, and Hispanic children received less or no help from the Child Tax Credit. Roughly one in three rural kids were unable to receive the full credit because their families didn’t earn enough to qualify. By eliminating the minimum income requirement, the expansion ensured that almost all children received the full benefit amount for the first time.
- Builds long-term opportunity. Researchers estimate that making the expanded Child Tax Credit permanent would cost about $100 billion per year, while generating $1 trillion worth of societal benefits resulting from improvements in education, earnings, health and reduced costs related to child protection and criminal justice. That’s a 1,000 percent return on investment.
- Ensures kids and families don’t fall through the cracks. Children have no control over their parents’ income, and people without reproductive rights are denied control over their economic futures. As abortion bans take effect across the country, notably in states that spend the least on families and kids, more babies will be born to people already experiencing financial hardships. The expanded Child Tax Credit is urgently needed in states limiting reproductive freedom.
How are Mainers impacted?
- 142,000 Maine families with 229,000 children received the expanded Child Tax Credit in 2021. Almost all families with minor children were eligible for the expanded credit, including an estimated 49,000 children under 17 who currently receive less than the full credit or no credit at all because their families’ incomes are too low.
- When federal and state supplemental assistance like the Child Tax Credit were factored in for the three-year period between 2019 and 2021, Maine ranked among the eight states with the lowest child poverty rates in the nation. In 2021, the expanded CTC led to an estimated 40 percent reduction in Maine’s child poverty rate.
- 88 percent of Maine families with low income use their Child Tax Credit for basic needs like food, utilities, housing, clothing, and education expenses. Following the expansion rollback, six times more families reported food insecurity and four times more families reported difficulty paying for household expenses.
- Maine is one of 12 states that also has its own child tax credit program, the Dependent Exemption Tax Credit, which provides $300 for each qualifying dependent. The Institute for Taxation and Economic Policy estimates that about 153,000 households currently receive this credit. But because families must meet income requirements to qualify, an estimated 50,000 families with low income (including 84,000 dependent adults and 73,000 children) lose out on the full benefits.
What can be done to restore the expanded tax credit?
- On the federal level: President Biden’s 2023 budget proposal includes an enhanced Child Tax Credit based on the 2021 expansion. If enacted, families with the lowest income would receive the most benefit. That would mean an average monthly credit of $335 for the bottom 20 percent of earners (families with income below $27,200). An estimated 181,000 Maine children would benefit if the expanded benefit was restored.
- On the state level: Legislation being considered this year would expand and improve Maine’s Dependent Exemption Tax Credit, increasing the value of the credit from $300 to $350 per dependent and, importantly, removing minimum income requirements so that the estimated 157,000 dependent adults and children in families with the lowest incomes can receive the full credit for the first time. The Center on Poverty and Social Policy estimates the improvements would lift 3,500 Maine children out of poverty.
Did you know…?
- The Child Tax Credit was first introduced in 1997 as a $400 income-qualifying credit as part of the Taxpayer Relief Act enacted during the Clinton administration. The credit was later increased and expanded under George W. Bush, Trump, and Biden administrations. The current Child Tax Credit exists as a component of The Tax Cuts and Jobs Act of 2017 and expires at the end of 2025.
- The Child Tax Credit’s minimum income requirements mean that a single mom of two making $15,000 per year gets half the credit of a family making $150,000 per year.
- 87 percent of the anti-poverty impact of the expanded Child Tax Credit comes from eliminating the minimum income requirement.
- Only children who are US citizens are eligible for federal Child Tax Credit benefits. About one million children are left behind by this rule, including 500 in Maine.
- Researchers recently looked for evidence that the expanded Child Tax Credit reduced participation in the labor force. They found no evidence that it did and, in fact, analysis suggests that like the Earned Income Tax Credit, an expanded Child Tax Credit may actually help increase labor force participation.
How the Child Tax Credit was spent in Maine | Maine Center for Economic Policy
Census Data Shows Need to Make 2021 Child Tax Credit Expansion Permanent | ITEP
Recovery Package Should Permanently Include Families With Low Incomes in Full Child Tax Credit | Center on Budget and Policy Priorities
Effects of the Expanded Child Tax Credit on Employment Outcomes | Columbia University Center on Poverty and Social Policy
9 in 10 Families with Low Incomes Using Child Tax Credits to Pay for Necessities, Education | Center on Budget and Policy Priorities
Absence of Monthly Child Tax Credit Leads to 3.7 Million More Children in Poverty in January 2022 | Columbia University Center on Poverty and Social Policy
Abortion-Restricting States Do Least for Children | ITEP
Child allowances are a winning investment | Columbia University Center on Poverty and Social Policy
Tax Credits Are Powerful Weapon in Fight Against Poverty | National Conference of State Legislatures
Effective New Investments in Children Start with Understanding Current Public Spending | Urban Institute