The new expansion of the child tax credit won’t disincentivize work

The child tax credit deal reached by Rep. Jason Smith (R-Mo.) and Sen. Ron Wyden (D-Ore.), the chairmen of Congress’s two tax-writing committees, would provide relief to low-income families. Some conservative organizations in Washington have expressed concern that such a significant societal change for children and families comes with a price — a disincentive for parents to work. But if anything, the tax package is designed to ensure a proper and continued connection between the child tax credit and employment.

The Smith-Wyden package incorporates two recent proposals from the Tax Policy Center (see Options 2 and 3) that would reduce poverty among families with children while preserving strong work incentives.

First, it eliminates the separate cap that prevents low-income families from claiming the full $2,000 per-child credit if they lack sufficient income-tax liability. (That limit was $1,700 per child in 2023.) In theory, repealing the separate cap could even increase work incentives by allowing affected families to continue receiving additional credit as their earnings rise, while also giving those families greater resources.

Second, the package phases in the credit at a faster rate for families with more than one child. This expansion would be a sensible reform with a significant impact for larger families. It would work by changing the limit of 15 percent of earnings to 15 percent of earnings per child. Thus, it would preserve the credit’s phase-in rate at 15 percent for families with one child but boost the phase-in rate to 30 percent for families with two children, and so on.

Larger families require greater resources to escape poverty, so differentiating the earnings requirements based on family size targets benefits efficiently. In addition, receiving an extra 30 or 45 cents per dollar earned is a stronger work incentive than receiving only 15 cents, making this provision pro-work as well. And this sort of variation has precedent; the Earned Income Tax Credit phase-in rate increases with the number of children.

Even with the inclusion of the “look-back” provision, the proposed reform still incentivizes employment. This provision allows families to use their prior-year income to determine credit eligibility if that amount provides a better result than current-year income. As Kyle Pomerleau of the American Enterprise Institute explains, concerns that the look-back provision will discourage work are unwarranted. To take advantage of this, a person would have to work one year on, one year off. This means parents who want to game the provision would have to decide to quit their jobs in, say, January 2024, in anticipation of a credit they would receive when they file their taxes 15 months later (and which they would still receive if they continued working). Ryan Ellis of the Center for a Free Economy notes that for low-income families living paycheck to paycheck, leaving the workforce for a year and then returning the following year because they will receive a couple thousand dollars more than a year later doesn’t make any sense.

According to a recent report by the Bipartisan Policy Center, the legislation’s child tax credit improvements — refundability of the full amount, increasing the earnings phase-in for larger families, the one-year look-back and indexing the credit to inflation — should not have significant impacts on work, employment or inflation.

Even worthy policy improvements have a cost, however, and I agree with the Committee for a Responsible Federal Budget that if it’s important enough to enact into law, it’s important enough to fund without increasing the deficit. As my colleague Andrew Moylan has explained, the pandemic-era Employee Retention Credit has ballooned in cost since its inception and has seen hundreds of thousands of fraudulent claims by unscrupulous promoters. At present, businesses have until April 2025 to make claims, despite the pandemic being long over — and despite a rising number of these claims being fraudulent.

Shutting down waste, fraud, and abuse in Employee Retention Credit claims and channeling those funds to working families is pro-family, pro-work, anti-fraud and fiscally responsible. Smith and Wyden have threaded the needle on this one. Legislators on both sides of the aisle — including conservatives — stand to win with their constituents by supporting these reforms to the child tax credit.

George Callas is executive vice president of public finance at Arnold Ventures LLC. He was formerly senior tax counsel for then-Speaker Paul Ryan and chief tax counsel for the House Ways and Means Committee.