Will families get more money from the child tax credit? Why businesses should hope so
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Congressional dealmakers appear close to striking a bipartisan compromise that falls somewhere between progressives’ expansive child tax credit hope and a tighter version preferred by conservatives.
The negotiation is all about tax policies and an agreement on the child tax credit is deemed the most likely path to reassert corporate tax incentives that were tightened. Both tax policies have bipartisan support and bipartisan opposition.
At the center of the negotiation are the leaders of Congress’ tax-writing committees: House Ways and Means Committee Chairman Jason Smith, R-Mo., and Senate Finance Committee Chairman Ron Wyden, D-Ore. The two have said the goal is to strike an agreement and get a bill passed before the upcoming tax filing season kicks off Jan. 29.
That means early-bird taxpayers might want to hold off filling out forms to see how things shake out.
Wednesday, House Ways and Means Committee staff walked its GOP members through an overview of the negotiation, said to be 90% done. Punchbowl News reported Tuesday that the tax deal could cost in the $50 billion to $80 billion range.
Both the House and Senate must approve any deal, and both an expanded child tax credit and the corporate tax and business incentives could face significant, though differing opposition.
“We’ve already, I think, prevailed on a crucial issue, which is that there’s going to be equal treatment with working families and business,” Wyden told reporters Tuesday.
The New Republic quoted Wyden, who compared the situation to the movie “Field of Dreams.”
“If you build it, then everybody’s gonna show up,” he said. “That’s not exactly how the Congress of the United States works, but we’re generating a lot of support right now.”
Policy nuts and bolts
The child tax credit has been popular with both parties, but in different forms. The 2017 tax package promoted by former President Donald Trump doubled the credit from $1,000 per year to $2,000. It also increased the amount that was refundable, meaning available even to those who don’t earn enough to owe federal income tax.
An expanded version of the child tax credit was part of the 2021 American Rescue Plan under President Joe Biden. That included a significantly larger tax credit that was fully refundable so families with little or no earnings could claim the full amount. When the expansion expired, the credit reverted to its previous form.
Right now, the credit is partially refundable, but Democrats would like it to be fully refundable again to reach the poorest families. Republicans want work requirements and say full refunds effectively eliminate them.
Should a deal be struck, many details are yet to be worked out, including how much the child tax credit would be. And nothing official has been released publicly. Citing two unnamed sources close to the discussion, The Washington Post reported Wednesday that the deal “would allow the lowest-income families to claim the credit for each child, when the current credit only allows those at the lowest end of the income spectrum to receive payments for one child. And it would permit some recipients to submit the previous year’s tax return to the IRS to receive a larger credit.”
The business provisions being negotiated were part of Trump’s 2017 Tax Cuts and Jobs Act. The legislation let companies claim tax deductions on interest expenses, research and development costs and equipment investment. Deductibility was reduced over time to keep the total budget impact down, since the entire package cost $2 trillion, including a tax cut for corporations.
As part of the 2017 tax law, companies were allowed to write off some research cost deductions immediately. Since 2022, they’ve had to spread them out over five or more years. Per The Wall Street Journal, “Research-intensive businesses have been hit hard and have been lobbying Congress to restore the old system, retroactively and going forward.”
The article said lawmakers “could also reverse changes that limited businesses’ deductions for interest and for capital expenses.”
Some Tax Cuts and Jobs Act reforms, including lowered individual income tax rates, expire at the end of 2025.
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The plan would be paid for in part by “clawing back” funds from the employee retention tax credit started during COVID-19 to help businesses avoid having to let workers go, the duo told the Post. That credit has been roundly criticized for fraud potential and doesn’t seem necessary with unemployment low.
Utah Rep. Blake Moore, a Republican, said the business tax breaks in the negotiation “go directly to helping our economy and Americans from every single industry.” He noted that more constituents have talked to him about the research and development tax credit than any other policy he’s worked on.
“We’re working on both that business side and the individual side,” he said. “I’m optimistic that things are coming together. It’s whether we can get something to function in Congress to actually get it through the system.”
Differing views
Moore told Deseret News that most media coverage of the 2017 tax legislation wrongly frames it as a tax cut for the wealthy. He notes that doubling the child tax credit and the standard deduction benefited lower- and middle-income Americans.
Moore emphasized that the current efforts trace their origin back to Republicans’ doubling the child tax credit in 2017 as part of the Tax Cut and Jobs Act, without a single Democratic vote.
Then during the pandemic, Democrats “expanded it significantly and that wasn’t responsible,” he said.
“What we’re trying to find is, ‘What’s the responsible way forward?’ So, yes, we are supportive of the child tax credit, but we also want to make sure that it’s not done like it was done in the American Rescue Plan — a bill that cost $2 trillion, just on its own, with no offset spending and led to the worst inflation we’ve seen in 40 years. That’s the happy medium we’re trying to navigate in this,” Moore said.
Details matter, experts watching the issue told the Deseret News — and those aren’t publicly known, so there are varied concerns.
“From what I see, they are considering allowing parents to use income from the prior tax year to calculate the child tax credit. I think that is a mistake. It will cost more if they allow high-income earners to use a prior year where they had lower income,” said Angela Rachidi, a poverty scholar at the American Enterprise Institute. “It also doesn’t match the intent, which is to offset child-related costs for that tax year. And it would allow parents to get around the requirement that they have some earned income in the tax year.”
Rachidi said she wants to see how much the proposal costs and how Congress plans to pay for it. “Adding to the deficit shouldn’t be on the table,” she said.
Shawn Fremstad, of the Center for Economic and Policy Research, believes that “ending the exclusion of roughly 19 million kids from the child tax credit should be Congress’ No. 1 priority this year.”
He told the Deseret News that Congress “certainly shouldn’t be extending corporate tax cuts without delivering first for parents and kids. I’m hopeful that we’ll see a bipartisan deal on this, but if it doesn’t include those 19 million kids, then President Biden and congressional Democrats should stand their ground and just say no to extending corporate tax breaks.”
While there’s bipartisan support for the child tax credit, the road divides at work requirements. Democrats emphasize reaching the lowest-income families and say all poor families should get the full child tax credit, earned income or not. Republicans believe parental employment is the surest way out of poverty and should be required.
“These programs all have to be focused on improving people’s lives, upward mobility for all citizens in our nation and I don’t believe you can do that unless you have these types of provisions associated with them,” Moore said of work requirements. He said the COVID-19-era child tax credit expansion “was just not focusing enough on actually lifting people out of poverty.”
Still, Moore thinks fiscal hawks should support child tax credit expansion. “That’s a targeted population that absolutely needs a tax break. That’s what this ultimately is. This is not additional spending. I have concerns about our spending. But giving relief to individuals that would ultimately benefit from this type of tax credit, the conservative sensibility on this is that when you keep taxes low, you drive economic growth.
“If those folks can survive better, they are participating more in our economy ... creating more revenue,” Moore said. “We are definitely supportive of getting tax relief to people that need it and that helps create opportunities for them to have strong families.”
He said strong families create a strong workforce, which leads to an overall good economy. “That’s a simple equation, at least it is in my head,” he said.
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