Celebrating 20 years of family tax relief

Twenty years ago, Congressional Republicans passed and President Clinton signed the Taxpayer Relief Act of 1997. Among its major achievements was the introduction of a $500 child tax credit (CTC) to help families with the cost of raising children.

Last year, American families claimed $55 billion in child tax credits, making it the second largest family-related tax benefit behind the earned income tax credit (EITC). While the history and benefits of the EITC have received lavish attention from scholars and policymakers, very little has been written about the CTC.

{mosads}The 20th anniversary of the CTC is good time to tell you everything you ever wanted to know about the past, present, and potential future of this important family benefit.

Although introduced in 1997, the tax credit traces its origins back much further. In the 1970s, families faced a pocketbook squeeze because of the way inflation interacted with the federal tax code. Neither the value of exemptions nor tax brackets were indexed for inflation as they are now. In refusing to index the tax system, policymakers were allowing inflation to erode the real value of the dependent exemption and increase family tax burdens by stealth.

This led to the anti-tax backlash that soon brought Ronald Reagan into office where the administration made two important decisions that put the country on the road to a child tax credit. First, they indexed the tax system to prevent further erosion of the dependent exemption as part of the 1981 tax cuts. Second, they doubled the dependent exemption to make up for the previous loss of value as part of the 1986 tax reforms.

Both measures were political successes. They encouraged the pro-family right and the anti-poverty left to look for ways to use tax policy as a way to win the support of working and middle class voters in the 1990s.

Congressional Republicans, long exiled from power, decided to make a child tax credit the “crown jewel” of their famous Contract with America. After they swept the 1994 elections, they set about crafting legislation for the $500 child tax credit. With the support of the Family Research Council and the Christian Coalition, Sens. Rod Grams (R-Minn.) and Dan Coats (R-Ind.) navigated countless congressional obstacles to get the bill on President Clinton’s desk, where he signed it at the behest of anti-poverty groups.

Since its introduction, both parties have continued to compete for working and middle class voters by expanding it. President Bush raised the maximum benefit to $1,000 and made it partially refundable in 2003 while President Obama lowered the refundability threshold to encompass more low-income taxpayers in 2009. Despite these improvements, the CTC suffers from two major shortcomings.

First, like the dependent exemption in the 1970s, the CTC is not indexed for inflation. As a result, it has lost 25 percent of its value since President Bush increased it in 2003. Second, the current threshold for refundability still leaves many working class families with onerous payroll tax liabilities, even after they have claimed the CTC. The tax reform process now underway in Congress offers a chance for policymakers to continue to reform the CTC to ensure it provides relief to struggling working class families.

One promising reform idea is the proposal for a $2,500 child tax credit from Senators Marco Rubio (R-Fla.) and Mike Lee (R-Utah). By linking the refundable portion of the tax credit to total payroll tax liability, as they have proposed, working class families will be able to claim a larger credit. Reform should not stop there though. Congress should take two additional steps.

First, consolidating existing family-related tax benefits into a single, larger CTC will simplify the tax code and provide more benefits to middle class taxpayers without ballooning the deficit. Second, indexing the new and improved CTC will safeguard it from inflation-induced erosion in the future.

If history is any indication, a modified Rubio-Lee child tax credit proposal will be a political winner for the policymakers who support it and, most importantly, provide much needed relief to the working class families who have seen their income fall behind and felt ignored by their representatives in Washington.

Joshua T. McCabe is the assistant dean of social sciences at Endicott College and author of The Fiscalization of Social Policy: How Taxpayers Trumped Children in the Fight Against Child Poverty.

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