The Child Tax Credit: Options for Expansion

Key Points

  • This brief compares the Child Tax Credit (CTC) expansion plans in the House tax bill, the Senate tax bill and the Rubio-Lee proposal.

  • The Penn-Wharton Budget Model projects the House CTC plan costs $373 billion, the Senate CTC plan, as passed by committee, costs $557 billion, and the Rubio-Lee proposal costs $742 billion over 10 years.

  • In terms of distributional impact, the House CTC plan increases benefits for middle income families. The Senate CTC plan, as passed by committee, increases benefits for lower income families, doubles benefits for middle income families and increases benefits from $0 to $2,000 for higher income families. However, the Senate CTC plan never reaches its maximum refundable amount of $2,000 due to sunset provisions. The Rubio-Lee proposal reaches $2,250 in 2025 before returning to current law value of $1,000 in 2026.


The Child Tax Credit: Options for Expansion

Introduction

Penn Wharton Budget Model (PWBM) previously reported static revenue projections of changes to the Child Tax Credit (CTC) in the House and Senate tax bills. This brief compares the CTC expansions passed by the House tax bill and the Senate tax bill (as passed by committee), which will be considered by the conference committee. We also examine the CTC expansion proposal of Senators Marco Rubio and Mike Lee.

Child Tax Credit: Three Options

Under current law, taxpayers can receive a credit of $1,000 per qualifying child under age 17. The CTC is refundable (i.e., the CTC benefit is received even if greater than the tax liability) up to 15 percent of income above $3,000. In 2017, the CTC begins to phase out at income of $75,000 for single filers and $110,000 for those married and filing jointly.

All three CTC expansion plans--House, Senate and Rubio-Lee proposal--increase the value of the CTC per qualifying child, increase the benefit phase out thresholds, and increase the amount refundable compared to current law. Table 1 shows the provisions included in each CTC expansion plan.

The House tax bill proposes to increase the size of the credit to $1,600 per qualifying child under age 17. The refundable amount would be indexed to Chained CPI-U and gradually increase from $1,000 to $1,600. The credit would begin to phase out at income of $115,000 for single filers and $230,000 for married couples filing jointly. The bill includes a new non-child dependent credit of $300.

The Senate tax bill, as passed by committee, proposes to increase the size of the credit to $2,000 per qualifying child under age 18. The expanded CTC would be refundable up to 15 percent of income above $2,500. The amount refundable would be indexed to Chained CPI-U to gradually increase from $1,000 to $2,000. The credit would begin to phase out at income of $500,000 for all filers. The bill includes a new non-child dependent credit of $500.

Senators Rubio and Lee propose to increase the size of the CTC to $2,000 per qualifying child under age 18 as well as increase the refundable portion of the credit to 15.3 percent of income. The amount would also be indexed to chained CPI-U to gradually increase from $2,000. The credit would begin to phase out at income of $250,000 for single filers and $500,000 for married couples filing jointly. The proposal includes a new non-child dependent credit of $500.

Table 1: Provisions by CTC Expansion Plan

Provision Current Law CTC House CTC Plan Senate CTC Plan Rubio-Lee CTC Plan
Age of qualifying child Under 17 Under 17 Under 18 Under 18
Value of CTC per qualifying child $1,000 $1,600 $2,000 $2,000
CTC phase out threshold
     Single $75,000 $115,000 $500,000 $250,000
     Married filing jointly $110,000 $230,000 $500,000 $500,000
Refundability $1,000 Increase to $1,600 by Chained CPI-U Increase to $2,000 by Chained CPI-U Increase from $2,000 by Chained CPI-U
Labor income start point $3,000 $1,100 $1,100 $1,100
Phase-in rate (percent of income) 15% 15% 15% 15.30%

Effects on Tax Revenue

PWBM projects that all three proposals to expand the CTC will reduce tax revenues. We project revenue losses relative to the new tax base contained in the new tax bill in which the particular CTC provision would fall, as shown in Table 2. The House CTC plan costs $373 billion, the Senate CTC plan costs $557 billion, and the Rubio-Lee proposal costs $742 billion over 10 years.

Table 2: Child Tax Credit Proposal 10- Year Effect on Tax Revenue

(Billions of $)
Relative to the House Tax Bill Relative to the Senate Tax Bill
Years House CTC Plan Senate CTC Plan Rubio-Lee CTC Plan
2018-2027 -$373 -$557 -$742

Who Benefits from CTC Expansion

Income levels are an important determinant of the benefit amounts for all three Child Tax Credit plans. Under each CTC plan, lower income households receive a lower level of benefits because each plan limits benefits to a certain portion of income. All three plans phase out the CTC benefit for higher income households but differ on phaseout threshold levels.

Table 3 shows the CTC benefit amounts in 2018 for three types of families with two children. Under the Senate and Rubio-Lee plans, the benefits double for middle class families, and increase from $0 to $4,000 for high earning families. The Rubio-Lee plan also eliminates the minimum income threshold for the CTC benefits, which increases the benefits for families with lower incomes.

Table 3: Child Tax Credit Amount for Types of Families with Two Children in 2018

Child Tax Credit Amount
Earnings Current Law CTC House CTC Plan Senate CTC Plan Rubio-Lee CTC Plan
Single parent family $14,500 $1,725 $1,725 $2,025 $2,519
Middle earner family $65,000 $2,000 $3,200 $4,000 $4,000
High earner family $400,000 $0 $0 $4,000 $4,000

Sunset Provisions

All three proposals increase the refundable portion of the CTC, from it’s current value of $1,000 per qualifying child, by indexing that value to chained CPI-U. The value of the refundable portion continues to increase until it reaches $1,600 under the House plan and $2,000 under the Senate plan. Under the Rubio-Lee plan the refundable portion jumps directly to $2,000 and is indexed from there.

Under the Senate tax bill, the CTC expansion ends or “sunsets” after 2025. Table 4 shows that if the CTC expansion sunsets in 2025, then the Senate plan does not reach its maximum refundability of $2,000. Rather the value of the CTC returns to $1,000 in 2026 after reaching $1,200 in 2025.

Table 4: Value of Refundable Portion of CTC by Expansion Proposal in Year

Value of Refundable Portion of CTC per Qualifying Child
Year Current Law CTC House CTC Plan Senate CTC Plan Rubio-Lee CTC Plan
2018 $1,000 $1,100 $1,100 $2,000
2019 $1,000 $1,100 $1,100 $2,000
2020 $1,000 $1,100 $1,100 $2,050
2021 $1,000 $1,100 $1,100 $2,050
2022 $1,000 $1,100 $1,100 $2,100
2023 $1,000 $1,100 $1,100 $2,150
2024 $1,000 $1,200 $1,200 $2,200
2025 $1,000 $1,200 $1,200 $2,250
2026 $1,000 $1,200 $1,000 $1,000

Conclusion

Penn Wharton Budget Model’s static analysis projects that the House CTC expansion plan is less costly than the Senate plan. However, compared to the House plan, the Senate plan expands CTC benefits for lower and middle income families and extends benefits to higher income families. The Rubio-Lee proposal further extends benefits to lower income families compared to the House and Senate CTC plans.