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Future of child tax credit may be foggy, but its benefits are growing clearer

Despite concerns, early data shows the extra monthly income has gone to support family budgets and has had little effect on the U.S. labor market.
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More than a year after the pandemic took his job working in a Maryland warehouse outside Washington and put his family's plans to buy a home on hold, things are looking up for Warren Copeland.

He found another job working a forklift at a different warehouse. Copeland, 59, and his wife closed on their first house after saving for years, and for the first time they don't feel like they're living paycheck to paycheck.

It's a huge change for a father with one child in college and four at home who are on the autism spectrum, and Copeland credits the expanded child tax credit created via the American Rescue Plan as making the difference.

"I was able to take the kids on a trip to the beach for a couple days, because we hadn't gone anywhere since the pandemic, but a lot of it has gone to clothes for them, housing bills and just about everything else in our budget," said Copeland, who also noted the cost of his children's autism therapies.

Despite concerns that these payments could cause taxpayer dollars to go to waste or discourage people from seeking or returning to work, early data returns appear to show that the extra monthly income has gone to support the immediate needs of American family budgets, like Copeland’s, and has had little effect on the labor market thus far.

Critics maintain, however, that the changes to the child tax credit could create fiscal, economic and administrative hardships in the long term if made permanent.

The child tax credit was changed in three essential ways this year by the American Rescue Plan: The amount grew from $2,000 to as much as $3,600; recipients could sign up to obtain the money monthly rather than annually; and it became fully refundable, which made even the lowest-income Americans eligible.

Monthly payments is a significant change, with the first installment hitting bank accounts July 15 and at the same point each month after. Families receive $300 per child under 6 years old, or $250 per child 6 to 17. The next payment goes out Friday.

Children on a school playground in New York on May 24, 2021.
A school playground in New York in May.Benjamin Norman for The New York Times

Of the historic expansions to the American social safety net created during the pandemic, this is one Democrats hope to cement in President Joe Biden’s social spending bill for at least five more years. Amid political gridlock, there are concerns over the legislation's future and for the Democratic majority if they fail to pass it.

"I'm not sure the current political environment would support sending $2,000 or $3,000 checks to every person every year, but I do think there's political will behind providing more benefits for families raising kids, especially when we saw how hard it is when you have to be home with the kids and home schooling when that was necessary," said Gregory Acs, vice president of income and benefits policy at the Urban Institute, a nonprofit policy research organization.

As of now, this benefit program ends in December despite huge popularity and the appearance of real need.

The Census Bureau has maintained a household survey to probe how recipients are using the child tax credit, and it seems most families are putting it toward their most essential bills.

In the week after the first monthly payment in July, it found that 29 percent of households used the extra cash on food, clothing, utilities, school supplies and books, tuition or their rent or mortgage. An additional 10 percent put it toward a vehicle payment, household debt or savings.

That first group of households spending on food, clothing and more grew to 35 percent in the most recent survey, and those putting it toward debts or savings remained steady at 10 percent.

This money, experts say, has added a buffer to family budgets each month, providing low-income parents and children an opportunity to plan their finances and their future.

"These payments have given parents a sense of financial security and relief," said Jacob Goldin, a law professor and economist at Stanford University, who helped organize a letter to Congress signed by more than 460 economists advocating making the benefit permanent. "There's real reason to believe that this assistance will translate into higher social and economic mobility, make it easier to find jobs, for the parents as well as the children down the road."

Concerns over the costs of the benefit have led Republicans to stonewall making the expansion permanent and debate among centrist Democrats. The Tax Foundation, a right-leaning think tank, estimates that doing so would cause federal revenue to drop $1.62 trillion from 2022 to 2031.

Erica York, an economist at the Tax Foundation, said Congress needs to address these fiscal concerns before it makes the measure permanent. She also noted that the tax credit could discourage work and burden the Internal Revenue Service by having to provide a benefit through the tax code.

"Extending this long term is going to be very costly, and it could crowd out other things that lawmakers want to spend on," York said. "It probably means that eventually we're going to have to think about broader tax increases rather than what's on the table right now if we want to pay for these additional spending measures on a permanent basis as well as take care of the structural deficits we already have."

Many economists argue, however, that the economic benefits outweigh the costs. A study released in August by Columbia University concluded that the program "has a gross cost of about $100 billion, a net cost of only $16 billion and generates about $800 billion in benefits to society." It cited evidence showing that it would increase children’s health, education and future earnings, and decrease health, child protection and criminal justice costs. 

There is also concern that even a few hundred dollars a month could provide enough financial stability to discourage potential workers from entering or re-entering the labor market. This has created a greater degree of economic agitation as the country faces a labor shortage, affecting a number of industries that have relied on low-income workers.

While York and other critics argue that the payments incentivize people not to work, Zachary Parolin, a researcher at Columbia University’s Center on Poverty and Social Policy, published a study this week examining the effects of the tax credit on employment outcomes using the early data returns since the first payment went out.

The researchers write that “our analyses of real-world data do not support claims” that the child tax credit “has negative employment effects that offset its documented reductions in poverty and hardship.”

“If the accounts and models are true that more than a million parents are going to drop out of the labor market, well surely we would see some evidence of that after two or three payments,” Parolin said in a phone interview. “The short answer is you don’t when you go to the data and actually assess what is happening.”

But York, the Tax Foundation economist, maintains that it is too early to truly see an effect.

"We've only had a few months and there's only a couple more payments scheduled before it expires," York said. "I'd expect to seeing changing work incentives in the medium to long term and not necessarily right away."

Advocates and economists note, however, that a positive impact is already evident, pointing to data that appears to show a major dent in the nation's childhood food insecurity and poverty rates since monthly payments started going out in July. Reversing those rates could cause nationwide economic benefits.

An ongoing analysis by Columbia University's Center on Poverty and Social Policy has found that 3 million children were raised out of poverty by the first payment and an additional 500,000 children were lifted out upon the second payment.

That's already a 29 percent reduction in August's child poverty rate compared to what it would have been without the tax credit, the most recent Columbia study concluded.

"We can see it's having an immediate impact on child poverty rates. What's particularly useful is that, at least until for the next couple months, it's a sustained reduction in child poverty," said Parolin, who works on the Columbia study. "It's not just a stimulus check, or a one-time payment, but a durable and stable reduction — at least until the end of this year."

Those beneficial effects could grow further, depending on what Congress decides regarding the benefit's future.

Using 2018 as a benchmark — a year that didn’t have a global pandemic that caused mass unemployment and required historic federal supports — a study conducted by the Urban Institute found that about 4.3 million fewer children would be in poverty. That amounts to about a 40 percent decrease in child poverty.

"A steady source of income helps you meet both predictable and unpredictable needs," said Acs, who worked on the study. "Clearly there are some major destabilizing events for families that throw you into an economic spiral, like being evicted, having your water turned off or losing a job because you couldn't afford a car repair. The question is how much of a stabilizing effect does this create?"