One Path to a Child Allowance: Reforming the Child Tax Credit

In the American Rescue Plan, President Biden has called for expanding the Child Tax Credit (CTC) for one year as part of a comprehensive package to address the ongoing economic crisis. This week the House of Representatives unveiled legislation that would do just that, while U.S. Representatives Rosa DeLauro, Suzan DelBene, and Ritchie Torres simultaneously reintroduced the American Family Act, which would make these expansions of the Child Tax Credit permanent. In order to ensure that families receive the full benefit from these proposed expansions, however, the CTC needs to be reformed so that it functions more like a child allowance.   

Many other wealthy peer nations, from the UK to Canada, have some version of a child allowance, or a regular cash payment that goes to families based on the number of children in the household. Child allowances are typically universal or near universal in reach, providing support to families with the lowest incomes but also to families well up the income spectrum. The research is clear that families use the additional cash to cover costs associated with raising children, and the policies have been shown to not only significantly reduce child poverty, but also improve children and families’ outcomes.

The U.S. Child Tax Credit provides cash to families with children, but that is where the resemblance to a child allowance currently ends. While the current CTC supports some working families with the costs of raising children, it does significantly less to support families with the lowest incomes compared to wealthier families because it phases in as incomes rise and it is only partially refundable—so families with limited tax liability do not get the full credit. For example, under the current CTC, one parent with one child with no earnings would get $0, while that same parent with $10,000 in earnings would get $1,125, and if the parent earned $200,000 they would get the maximum credit of $2,000 per child. According to analysis by the Institute for Taxation and Economic Policy, more than one-third of children do not receive the full benefit because their families’ earnings are too low. Because of how systemic racism shapes families’ opportunities, this regressive structure systematically disadvantages Black and Latinx families: 48 percent of Black and 46 percent of Latinx children are left behind by the CTC, compared to 36 percent of White children.

In the American Rescue Plan, President Biden has proposed making the CTC fully refundable, so families with no earnings get the full benefit, and increasing the maximum benefit from the current $2,000 per child age 0-16 to $3,600 for children age 0-5 and $3,000 for children age 6-17. These changes would bring the CTC much closer to the child allowances we see in peer nations. According to analysis by the Columbia Center on Poverty and Social Policy of the American Family Act, upon which these reforms are modeled, these changes have the potential to reduce child poverty overall by almost 45 percent and advance racial equity—cutting Black child poverty by 52 percent, Hispanic child poverty by 45 percent, Native American child poverty by 62 percent, Asian American and Pacific Islander child poverty by 37 percent, and White child poverty by 39 percent. But in order to actually reduce hardship and advance equity, the policy needs to be modeled on a child allowance in other ways too.

  • A child allowance is available via regular payments. A hallmark of child allowances in other countries is that they are available on a regular basis. Canada, the UK, and Ireland’s child benefit is available to families on a monthly basis, while Australia’s Family Tax Benefit is available bi-weekly. The regular delivery of these payments is critical in order to provide support to families as they incur the costs of raising their children—from buying diapers to paying utilities to putting food on the table. Receiving support as a lump-sum at the end of the year will not help families with these regular expenses, and they may need to take on debt as a result. Regular payments also help mitigate the income volatility that so many families experience, and that is most severe for families with low incomes and Black and Latinx families.
  • A child allowance is easy to access. Another hallmark of child allowances abroad is that they are easy to access. In Ireland, for example, they may be direct deposited into families’ bank accounts, sent to the families’ local post office where they can collect the cash in person, or sent via check (which can then be cashed at the post office as well). The paperwork is minimal—families need to register their child once at birth or when they welcome them into their home, and then sign a simple form annually attesting that the child remains in their home. Given that a large share of the families who will be newly-eligible for the CTC under Biden’s plan will not have tax liability, and therefore will not have previously filed taxes and may not be in the IRS’s system, it is critical that the administration create a mechanism to get these payments to families easily and with limited paperwork and hassle for families.
  • A child allowance is available to all children, without conditions. Finally, child allowances in other countries are typically available to all children—without conditions like family caps, or work tests. In the United States, we need to be particularly vigilant that these payments go to children in immigrant families, who have been systematically excluded from social supports, and have been excluded from previous rounds of coronavirus relief.

In order for the proposed CTC expansions to provide the needed support to families, the CTC needs to be further reformed so that it functions like a child allowance. Last week, as co-chairs of a newly-established coalition to advance a child allowance, the Center for the Study of Social Policy and the Children’s Defense Fund sent a letter to Members of Congress which outlines, in detail, some of the additional steps that should be taken when reforming the CTC. The legislation that was unveiled this week contains some of some of these recommendations, and we look forward to working together in the weeks and months ahead to improve the policy further and create a child allowance that will provide regular, meaningful, and easy-to-access support to all children in need.