Note: This post refers to legislation currently pending in the US House of Representatives. A separate bill has been introduced in the Senate and varies slightly from the House version, notably by allowing families earning up to $1 million to claim the Child Tax Credit.
The GOP tax plan, currently pending in the US House, would increase the child tax credit (CTC) for working parents from $1000 to $1600 per child. (Unlike deductions, which reduce the amount of income on which you are taxed, tax credits directly reduce the amount of tax you must pay). The existing credit is only partially “refundable”, meaning that families due a tax refund, or who owe less the amount of the credit, only get a fraction of its face value, not to exceed 15 percent of their income over $3000. As a result, families living in poverty are already less likely to benefit than those in the middle class.
The additional $600 in the GOP plan is not refundable. Families with no net tax liability (e.g. a single mother working at minimum wage) will see absolutely no additional benefit. At the same time, the plan allows married couples earning as much as $230,000 to receive the full value of the credit, a big increase from today’s $110,000 income limit.
The expanded CTC does not grow over time, so each year it will lose value relative to the ever-increasing cost of child care. The bill also adds a $300 credit for each parent and non-child dependent in a household, but that provision phases out in five years and is also non-refundable, again meaning that its benefit will go primarily to middle to upper income earning families. Combined, these two factors are the reason most analysts show that any tax reduction enjoyed by working families turns into a tax increase within a few years:
According to a new analysis, the increased child tax credit would provide no relief to the parents of 388,000 Ohio kids, and provide only a fraction of the full benefit for another 430,000 kids in the state.
In its plan, GOP leaders ignored Ivanka Trump’s proposed solution, crafted with Sen. Marco Rubio, to increase the child tax credit to $2000 and make it fully refundable. That change could have made a small yet meaningful difference for families struggling to pay the cost of childcare, which in Ohio averages over $11,000 per child. Upon its introduction, Marco Rubio took to Twitter to say the extra $600 does not achieve the President’s goal of helping working families. We agree.
When taken in combination with other changes in the GOP plan, working families are likely to be much worse off. While doubling the standard deduction, the bill also eliminates a number of exemptions and deductions that families currently enjoy including a $4050 per family member exemption, as well as deductions for student loan interest, adoption expenses, state and local income taxes and out-of-pocket medical costs. Families with multiple children, or high expenses in one or more of these categories (beyond the amount of the increased standard deduction) are likely to pay more under the GOP plan.