The American Rescue Plan (ARP) Act includes a historic expansion of the Child Tax Credit (CTC), which will help an estimated 1.1 million Kentucky children and lift an estimated 69,000 Kentucky kids above the poverty line, reducing child poverty by 49%.[i]
Childhood, and especially early childhood, is a critical period of human development that is especially susceptible to the harms of poverty. A broad array of research has shown that cash benefits (such as the CTC) to children have immediate and lasting effects, especially when such benefits are delivered in early childhood. For these reasons, the enhanced CTC should be made a permanent component of America’s investment in children. In addition, the number of kids who benefit should be enhanced through the state helping all qualifying Kentuckians to claim the credit through outreach and tax preparation assistance.
Tax credit boosted, broadened and made fully refundable
The ARP expands the CTC in three major ways: 1) the amount of the tax credit has been increased and made fully refundable, 2) very low-income parents will now qualify for the credit who were ineligible or only received partial credits before and 3) payments will be made to parents periodically throughout the year, as well as through annual tax returns.
A refundable tax credit reduces the amount of tax owed to zero and then pays out the remainder (compared to a non-refundable tax credit which only reduces the amount of taxes owed). Prior to the ARP, parents earning more than $2,500 were able to claim $2,000 per child under 17 years old, and the credit was refundable up to $1,400. The ARP improves on this by increasing the value of the tax credit to $3,600 for children under 6 years old and $3,000 for children age 6-17. It also removes the cap on the refundable amount so that the entire $3,600/$3,000 per child can be sent to families as a cash payment. Finally, it removes the income requirement of $2,500, making the credit available and refundable for the lowest-income families who don’t qualify under the current CTC.
Combined, these changes will help an estimated 421,000 Kentucky children who are currently left out of the full $2,000 credit due to the low wages of their parents. The expanded portion of the CTC will begin to phase out for head of household tax filers earning $112,500 and married couples earning $150,000. Combined, these changes will benefit 86% of Kentucky children.
Additionally, the CTC has been claimed annually when filing a tax return, which has meant the refundable portion was paid out in one lump sum each year. The ARP instead will pay out half of the value of the credit in advance on a periodic basis (for example monthly) between July and December. The other half will then be claimed during the annual tax filing period. In doing this, the United States would be supporting most families with children in a way that nearly all other wealthy democracies do. As of 2018, only the United States and Tukey did not provide some form of routine, direct child benefit out of all the OECD countries (a group of 37 industrialized, democratic countries).
The enhanced tax credit will benefit almost all families with kids and will significantly reduce poverty and improve well-being
This 12-month enhancement of the CTC constitutes a direct investment in families and children of nearly $1.8 billion in Kentucky alone, and will significantly reduce the immediate harms of childhood poverty, setting more Kentucky kids on an improved trajectory in life. The enhancement will be especially beneficial to families with the lowest incomes because, prior to the changes, families among the poorest 20% generally did not receive the full credit amount because they did not earn enough income.
A broad array of research has shown that providing direct income support to families with children has meaningful immediate and lasting benefits in the lives of children. One review of multiple studies on the impact of income support on child outcomes showed that programs like Aid to Families with Dependent Children (AFDC), Temporary Assistance for Needy Families (TANF), the Earned Income Tax Credit (EITC) and other smaller programs led to gains in educational achievement, attendance and attainment, including a higher likelihood of enrollment in college. One study of just the EITC showed that childhood participation led to higher standardized test scores, higher earnings later in life, lower teenage birth rates and improved housing situations. Studies of these income support programs also find they contribute to child health through a lower incidence of low birth weight and higher-quality nutrition.
Congress should make the enhanced CTC permanent, and the state should help increase participation
The expanded CTC is currently only authorized for the 2021 tax year. Given the persistently high child poverty rate in Kentucky and throughout the country and the harms to children now and in the future, the expanded and enhanced CTC should become a permanent part of America’s effort to give kids a strong start in life. In order to prevent a gap in the payments or even allow it to lapse, Congress should act well before the end of the year to make the expanded CTC a permanent program. In the meantime, the state can help to ensure no families — particularly extremely poor families — are left out of the CTC. Because very low-wage parents had previously not received the CTC, and because too many with low wages in general don’t file federal income tax returns, it is likely that some share of Kentucky kids may not receive the credit. After the CARES Act, it was estimated that 209,000 Kentucky adults and children were missed by the automatic $1,200 stimulus checks because they did not file taxes in the preceding years. The state should use a small portion of its $2.4 billion in aid from the American Rescue Plan to pay for outreach and tax preparation assistance for those who need it in order to receive this powerful child anti-poverty tool.
[i] Based on Anne E. Casey’s Kids Count data for the supplemental poverty measure (SPM) in 2015-2017 of 141,000 children in poverty in Kentucky, and the Center on Budget and Policy Priority’s estimate, which uses the SPM, of 69,000 of children in Kentucky lifted above the poverty line by the CTC expansion.
