Understanding the Child Tax Credit’s History Helps Chart A Path Forward

In 1987, Congress created a bipartisan National Commission on Children tasked with developing policies for the benefit of children and families. Its final report included many policy ideas, including what would eventually become the Child Tax Credit. The Commission suggested a $1,000 refundable tax credit for all children through age eighteen in the place of dependent exemptions for such children—a policy that would “benefit all families with dependent children, regardless of their income or tax liability.” Thus, though administered through the tax code, the Commission’s proposal was structured more like a child allowance, providing a fully refundable cash benefit to high- and low-income families alike. Furthermore, the report noted that the proposal was “neutral as toward family structure and mothers’ employment,” providing equal benefit to working parents and stay-at-home caregivers.

The Commission’s proposal was clearly supported by an intent to deliver a benefit akin to that provided in other advanced economies to reduce child poverty. The report explicitly noted the United States’ unique status among Western industrialized nations in lacking a child allowance policy. Its proposal for a child allowance in the form of a refundable tax credit was framed as a sort of Social Security for children—whereas Social Security had lifted older Americans up from their status as the most impoverished Americans, a tax credit for children could do the same for the nation’s new poorest group. Relative to an exemption, a credit would advance vertical equity, since an exemption offers a larger benefit to households in a higher tax bracket. The Commission’s proposed tax credit was also indexed to inflation, unlike personal exemptions, whose value had eroded over the years.

Congress acted on the Commission’s recommendations with the Taxpayer Relief Act of 1997 (TRA), but the policy it enacted—the Child Tax Credit—was very different from the Commission’s proposal. This first version of the CTC offered a $500 nonrefundable credit to households with up to $110,000 in income. But the nonrefundable aspect of the credit meant that the lowest-income households without positive income tax liability would not benefit at all. An “alternative formula” provided some refundability, but only to taxpayers with three or more qualifying children. 

Proponents of the new CTC framed the credit as a mechanism for middle class tax relief, not child poverty reduction. For example, in his signing statement, President Clinton described the CTC as “designed to give middle-income families the tax relief they need to help them raise their children, save for the future, and pay for postsecondary education.” Lawmakers emphasized the mounting burdens federal income taxes imposed on middle class families. They were also careful to distinguish the CTC from “welfare,” emphasizing that its benefits were solely reserved for working families shouldering present tax burdens. In the words of Representative McCrery during House consideration of the TRA, “If you pay income taxes, you need a tax break, you need the child tax credit. If you do not pay income taxes, you should not get an income tax credit.” On the Senate side, the bill’s findings expressed “the sense of the Senate that America’s middle-class taxpayers shoulder the biggest tax burden and that only those who pay Federal income taxes should benefit…”

How did an idea to provide a universal child benefit to uplift the poorest Americans result in a measure cast as middle-class tax relief? Joshua T. McCabe and Elizabeth Popp Berman find that historical attitudes towards welfare likely played a crucial role. In particular, they note that in the absence of a vehicle for family allowances, lawmakers turned to the tax code—but this ignited debates about who merited tax relief and Republican antipathy towards providing “welfare” through the tax system. Democrats largely relented to the idea of a nonrefundable credit, focusing their energies instead on “stacking”—ensuring that the nonrefundable CTC would be claimed before the refundable earned income tax credit (EITC), thereby preserving the value of the EITC available to be refunded.

Still, some Democrats lamented the limited potential for poverty alleviation with a nonrefundable credit in the legislative history of the TRA. Voting against advancing the bill, then Representative Sanders highlighted the United States’ high childhood poverty rate and argued that as a whole, TRA would widen economic inequality. Senator Moynihan was more optimistic, noting that while the CTC was styled as a “credit,” it would have the same social policy effects as a child allowance—reflecting an enduring desire to use the CTC as an anti-poverty tool.

The first substantial modification of the CTC came with the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA). EGTRRA delivered on President George W. Bush’s campaign promise to lower taxes for individuals. In particular, the Act lowered income tax rates for most taxpayers and temporarily repealed the estate tax for 2010. The CTC provided a vehicle to provide targeted relief to middle class families. For one thing, the size of the credit could be expanded, and EGTRRA doubled the maximum credit amount up to $1,000. Furthermore, Democratic Senators successfully pushed to introduce refundability into the credit, enabling households with more than $10,000 in earned income to claim 15% of earnings above this threshold up to the maximum credit amount as a refund.

Many EGTRRA provisions, particularly estate tax repeal, primarily benefited wealthy households, but its CTC provisions enabled EGTRRA proponents to characterize the Act as providing broadly beneficial tax reform. Argued Senator Baucus, “Does this bill give wealthy people a tax cut? Yes, it does. But that is not the only question we should ask…For example, does the bill help those who are struggling to feed their families and to pay their bills? Yes, it does.” Notably, legislators also frequently cast the CTC in pro-family terms alongside discussion of EGTRRA’s reduction in the marriage penalty and its preservation of family wealth through its temporary repeal of the estate tax.

The refundable aspect of the CTC presented a marked shift from prior policy, criticized by some lawmakers as legislating spending through the tax code, and by other lawmakers as not going far enough by extending the credit to households earning less than $10,000. But for its champions, the refundability provision was all about reducing childhood poverty. Senator Snowe described the credit as providing “hope of a childhood without poverty.” Along with other senators from both parties, she introduced language into the findings of the Senate version of the bill citing an estimate of over 12 million children poverty, and more than 15 million children who would not benefit from the doubling of the CTC amount if it were not also made refundable. In other words, in the view of the Senate, CTC refundability was a direct salve for child poverty.

In the next chapter of the CTC’s history, current events began to shape the credit’s motivations and design. Congress enacted the American Recovery and Reinvestment Act of 2009 (ARRA) as a form of economic stimulus in response to the Great Recession. ARRA enacted numerous policies designed to stimulate aggregate demand in the economy, including grants to states and payments to households eligible for government benefits. The CTC presented an additional lever with which to ease recession hardship and boost household spending; with ARRA, Congress reduced the threshold at which a refundable CTC was available from $10,000 to $3,000 of earnings.

While previous legislative moves towards refundability focused on child poverty, legislators discussing ARRA’s CTC provision framed the expansion of refundability as in furtherance of economic stimulus. In the words of longtime refundability advocate Senator Snowe, expanded CTC refundability would “get additional money into the pockets of those most likely to spend it,” referring to the relatively high marginal propensity to consume of households with low levels of income and liquidity. Elaborated Representative Lee, “The use of this credit will likely provide the most immediate stimulus which is the ultimate goal of this package. Trends show that low-to-moderate income families are more likely to spend the stimulus monies and accelerate the much-needed rebound in our economy.” Thus, ARRA represented the first—but not the last—time that current events would direct the framing of the CTC even as the credit increasingly achieved its original anti-poverty goal.

Much like President Bush before him, President Trump campaigned on tax cuts. He further promised expansive tax simplification, promising to allow taxpayers to file their taxes on a form the size of a postcard. Once again, the CTC was caught in the crosshairs in resulting legislation, the Tax Cuts and Jobs Act of 2017 (TCJA). With regards to tax cuts, the CTC was made available to many more households than before; however, whereas prior expansions focused on low-income households, the TCJA prioritized the other end of the distribution, increasing the threshold at which the credit began phasing out for a married couple from $110,000 to $400,000. On the tax simplification front, the TCJA increased the maximum credit amount to $2,000 while simultaneously repealing personal exemptions, thereby consolidating tax benefits for child dependents.

The TCJA was subject to little debate in Congress, largely hammered out behind closed doors and not dissected in public hearings. The record of how legislators viewed these changes to the CTC and what they hoped would result is accordingly lacking. One important observation that could have been made is that the TCJA brought the CTC substantially closer to a true child allowance than any of its previous iterations, available to almost all households with children, nearly irrespective of household income. This advanced horizontal equity—treating alike all families with children—but at the expense of vertical equity—offering in some cases a larger benefit to a higher-income family. Furthermore, in replacing personal exemptions, the CTC became an even more important vehicle for subsequent tax relief targeted at families.

The second economic crisis during the lifetime of the CTC arose in 2020, brought on by the COVID-19 pandemic. Like ARRA, the American Rescue Plan Act of 2021 (ARPA) was a multipronged approach to kickstarting the economy, combining funds to states and localities, stimulus payments to households, and more. But unlike ARRA, ARPA’s modifications to the CTC were framed much more expansively than mere economic stimulus. ARPA further increased the maximum credit amount up to $3,000, and also made seventeen-year-olds eligible for the first time. ARPA additionally provided a $600 credit for kids under age six. Under ARPA, half of the credit was “advanced” to households, paid out in monthly increments before the second half was claimed on the household’s tax return. And most significantly, ARPA made the CTC fully refundable—the maximum credit amount was available even to families without earnings, and it could be received in the form of a refund. ARPA thus combined various reform mechanisms—an eliminated phase-in, full refundability, advanced payments, and additional benefits for young kids—that child advocates had been urging for years.

Defending these changes, legislators called attention to new challenges faced by household during the pandemic, but also to preexisting concerns over childhood poverty in the United States, echoing calls in earlier legislative sessions to increase the CTC’s refundability. Representative DeLauro harkened back to the original vision of the CTC, comparing ARPA with the Social Security Act given its promise of lifting “millions and millions” out of poverty. Representative Khanna described the Act as “historic because it buries the myth that the cause of childhood poverty is a lack of character, or a lack of hard work, or a lack of love. The bill affirms the simple truth that the cause of poverty is a lack of income to cover basic necessities. No child in America should be deprived of food, of medicine, of clothing, or of education because of the accident of birth. That is what this bill stands for. It represents and marks an ideological revolution on behalf of justice.”

At the same time, ARPA raised concerns from a different group of legislators with a different vision of the CTC. Representative Smith cautioned against expanding the CTC in the context of the pandemic, fearing that doing so would disincentivize workers from returning to an already drained labor force. Senator Manchin subsequently led a debate about whether the CTC should have a work requirement, ultimately sinking efforts to reenact the ARPA version of the CTC beyond 2021 and leaving open the question of how (if at all) policymakers should prioritize work subsidization in future CTC reform efforts.

Looking solely at the section 24 of the tax code where the Child Tax Credit lives, this history of the CTC is a journey from a nonrefundable tax credit towards something more like a child allowance, an unconditional benefit to families with kids in the form of direct cash assistance. This story would suggest that poverty alleviation was only a recent goal of the CTC. However, the complete history of the CTC offers a much more complex picture, demonstrating that while poverty alleviation has only been recently prioritized as a goal of the CTC, anti-poverty rhetoric has been at the heart of CTC debates dating back before the credit’s inception. Meanwhile, administrative priorities and current events invited policymakers to apply the CTC to all sorts of other problems—including economic recessions, horizontal inequities in the tax code, tax complexity, and labor market weaknesses. With clarity about how each of these issues was considered in historical context, policymakers can proceed with sound prioritization moving forward.