Ideas and Evidence 2021
Four Ways to Increase the Impact of an Expanded Child Tax Credit
Some estimate that the expansion of the Child Tax Credit, in addition to other policies proposed by President Biden and others, could ameliorate the economic impact of the pandemic and, if made permanent, cut child poverty in the United States in half. But to achieve the promise of these estimates, policymakers should improve the design and delivery compared to the current child tax credit to minimize burdens and barriers for recipients. As Congress debates which provisions can best strengthen an expanded child tax credit, here are our research-backed recommendations:
Clarify who qualifies as a dependent child
For many families, tax time is the biggest check they will receive all year. But the tax system and the factors that determine a refund are deeply confusing, and many who would be eligible do not file at all. Within today’s tax code, different definitions of qualifying children apply for different tax credits. People may erroneously think they do not qualify based on experience with other credits, like the Earned Income Tax Credit. The Child Tax Credit, which people qualify for by having dependent children, is easier to understand than other credits. Even more families would file for the credit if the definition of who qualifies as a dependent child was clarified and harmonized across the tax code and there was clearer guidance to families who share responsibilities for a child across households.
Make it easy to estimate the specific refund amount
When a family knows the exact amount of the tax credit they have coming and can count on its timely delivery, they can include it in how they plan their finances. Field experiments have shown that households with a good estimate of their refund are more likely to save it for needs throughout the year. Financially precarious households “put a name on every dollar” and develop detailed plans to juggle often inconsistent income and expenses.
Under the current system, though, it can be hard to estimate how much cushion a refund may provide. The Child Tax Credit is currently partially refundable, meaning that filers with low tax burden—including low-income households—receive less than its full value. Researchers have documented that tax filers have substantial uncertainty and misinformation about the refund amount and argue that this substantially reduces how effective tax credits are for supporting well-being. For example, in the Earned Income Tax Credit, whether an extra few hours at work translates into more (or less!) of a refund next spring involves dozens of variables and a bit of predicting the future.
If the Child Tax Credit were made fully refundable, families could better estimate their refund. Past proposals to improve the Child Tax Credit suggested that the annual amount per child should be the same for everyone below a fairly high income threshold. Then families would know the precise amount to expect.
Make it a prepaid monthly benefit, not a lump sum
The current Child Tax Credit is provided as an annual lump-sum payment at tax time, but that may not be aligned with a family’s regular ebb and flow of expenses. Many studies have shown that the financial and psychological benefits associated with payments fade as time passes. If made permanent, an expanded, refundable Child Tax Credit could be administered as a prepaid monthly child benefit, rather than as a one-time lump sum. In fact, two legislative proposals recently introduced in the Congress include an option for monthly payment of child benefits. For families who prefer that option, enhanced choice might lead to easier financial planning.
Stretching a one-time refund is both a logistical challenge and a strain on families already navigating regular financial challenges. Data show that households with a large refund regularly carry higher debt loads throughout the year, then pay down debt around tax time. Often the debt is carried on a high-interest credit card or a short-term loan. Families also take on the emotional and psychological cost of juggling bills and payments while waiting for the refund to arrive. Others may prefer the control that comes from having the cash-in-hand from a lump sum payment to allocate as they see fit.
Specific outreach efforts should ensure that those eligible, particularly those with low incomes, file taxes and claim the benefit. Fortunately, children are in existing programs and services that could be used to connect with parents and support timely filing and refund claiming. Early childhood education centers, like Head Start, already offer some tax-time outreach, and schools could do outreach and even co-locate volunteer income tax assistance services in their facilities. Medical providers could also be enlisted to raise awareness about places to safely file taxes and claim refunds.
The pandemic hasn’t been easy for children and families. A well-designed and expanded tax credit could counteract some of the negative effects of this disaster and better meet the needs of families during the recovery.
Clinton Key is a research associate for MDRC’s Center for Applied Behavioral Science, which designs and evaluates evidence-based interventions informed by behavioral science for government agencies and nonprofit organizations.