Why a permanent child tax credit expansion costs so much — and how to make it cheaper

As part of the American Rescue Plan (ARP) they passed in March, Democrats increased the maximum child tax credit (CTC) parents can claim in 2021 for each of their children under 18 years old to $3,000, or $3,600 for each child under age six, and made the full value of the credit available to families with no income for the first time ever. The expansion lifted three million children out of poverty in its first month alone, which will improve their educational, health and economic outcomes throughout their lives if the policy is continued.

Democrats have made extending this policy a centerpiece of their $3.5 trillion Build Back Better agenda. But despite its success, Democrats are only proposing to extend the expanded CTC through 2025 at the latest because the annual cost of continuing the current expansion will roughly double after related policies from the GOP’s 2017 tax law expire. Fortunately, they can resolve this problem making those related policies permanent.

The GOP tax law temporarily doubled the maximum CTC to $2,000 and made more high-income parents eligible for the credit as part of a broader effort to consolidate family tax benefits. Previously, parents could claim a CTC worth up to $1,000 for each of their children, and all households could reduce their taxable income by $4,050 for each “personal exemption” they claimed for themselves and their dependents.

Taxpayers could also choose to either deduct the cost of specific expenses from their taxable income or claim a “standard deduction” that was the same for everyone. The GOP tax law temporarily repealed personal exemptions but increased the CTC (which replaced exemptions for children), doubled the standard deduction (which replaced exemptions for taxpayers themselves) and created a $500 non-refundable credit for non-child dependents.

To keep their bill from adding to the deficit after 10 years, which would have prohibited them from passing it via the filibuster-proof “reconciliation” process, Republicans scheduled these, and many of their bill’s other provisions, to expire after 2025. Those expirations are what would make a formal score of the cost of the Democrats’ CTC expansion spike after that year.

The official scorekeepers at the Joint Committee on Taxation and Congressional Budget Office score the fiscal impact of all proposals over a 10-year window relative to their “current law baseline,” or the levels of spending and revenues that would occur if Congress did not pass any new laws. Since the GOP tax law scheduled the CTC to shrink after 2025, the gap between the Democrats’ proposed spending levels and current law would grow. The expiration would add roughly $530 billion to the expansion’s 10-fiscal year cost. Should the Democrats’ expanded CTC be made permanent, families in 2026 would be eligible for both the enlarged CTC and the larger per-child exemption that existed in 2017, meaning the tax benefit per child would be even greater than it is today.

Rather than create an unintended bonus benefit that raises the CTC expansion’s cost, Democrats should simply make the changes to personal exemptions and the standard deduction permanent. Based on figures from the Tax Foundation, PPI estimates that permanently repealing personal exemptions while retaining the increased standard deduction and credit for dependents not eligible for the CTC would reduce the net cost of the Democrats’ CTC expansion by more than $100 billion each year after 2025.

As a result, Democrats may need only about $800 billion in additional offsets over the 10-year window to make the current CTC permanent (and even less if they are willing to consider a slightly smaller expansion). Although this figure could be a slight underestimate, since the Office of Management and Budget projects the CTC expansion would cost roughly 10 percent more than Tax Foundation does, the cost of this package is still likely to be only around half the $1.6 trillion cost of making the expanded CTC permanent on its own.

Making these reforms permanent would not only help pay for the CTC expansion but also give Democrats ownership of one of the few progressive components of the GOP’s tax law. The CTC expansion is more progressive than exemptions for dependents because credits directly reduce a taxpayer’s final liability, while exemptions lower their taxable income, which gives a bigger benefit to those in high tax brackets than those in low brackets. Meanwhile, the increased standard deduction only benefits households that do not itemize their deductions, which are disproportionately low- and middle-income households. Making this progressive benefit consolidation permanent now would prevent Republicans from using the continuation of middle-class tax cuts as a vehicle to enact more tax cuts for the rich in 2025.

Democrats do not want their most consequential anti-poverty policy in a generation to expire less than four years from now. When polls show that a majority of voters support the current CTC expansion but are skeptical of continuing it post-pandemic, lawmakers cannot necessarily count on their successors to keep a temporary extension from expiring. Rather than jeopardizing these important benefits to circumvent budget scoring rules, Democrats should protect their policy achievement and help pay for it by extending other family tax provisions in place today along with it.

Brendan McDermott is a fiscal policy analyst at the Progressive Policy Institute’s Center for Funding America’s Future.