The federal pandemic-era child tax credit expansion lifted millions of children out of poverty in the second half of 2021. But Congress allowed it to expire at the end of that year, and new U.S. census data shows the child poverty rate more than doubled in 2022, erasing the record gains that were made.
“It wasn’t surprising because we knew this was coming,” said Megan Curran, policy director at Columbia University’s Center on Poverty and Social Policy. “But still, when you see the magnitude of the change, and you know how many kids that represents, it’s still shocking.”
Now states are stepping in. Since the federal enhancement ended, several states have launched or expanded their own child tax credits.
Six states have created new child tax credits (New Jersey, New Mexico and Vermont in 2022, and Minnesota, Oregon and Utah this year), while five more have expanded their existing credits, according to the Institute on Taxation and Economic Policy, a nonpartisan tax policy nonprofit. Currently 14 states offer child tax credits, and several others saw bills introduced this year.
“Child poverty has often been thought of as this status quo that can’t change,” said Curran. “But one of the most powerful lessons to take out of the horrible pandemic is that our policy decisions really matter, and we can make a huge difference in a short amount of time.
“We know what works and we know how to do it. This is a solvable problem.”
A new approach
In 2021, the American Rescue Plan Act temporarily expanded the federal child tax credit, increasing the maximum credit to $3,000 per child ages 6-17 and $3,600 per child under age 6. It was a significant bump from the previous $2,000-per-child credit.
The temporary expansion gave the credit in monthly cash payouts to about 6 in 10 U.S. households with children, rather than as one lump sum after taxes. And it made the full credit available to all low- and middle-income families making less than $150,000 for married couples ($112,500 for single parents). The previous credit excluded income earners at the lowest end of the spectrum.
After the payments began, the nation’s child poverty rate dropped by half in 2021 to a historic low of 5%, primarily thanks to the expanded child tax credit, according to researchers at the Annie E. Casey Foundation, a charitable organization focused on child well-being. The expansion helped lift 3 million children out of poverty, according to the U.S. Census Bureau, which found that most parents said they used the credit payments on child care, rent, utilities, food and school expenses.
“You saw this whole host of data coming from all sorts of places, showing these payments were having a positive and immediate effect on families’ basic needs, and how they were able to care for their children,” Curran said. “You were seeing particularly significant gains for families with lower incomes.”
While the federal tax credit expansion did lift children out of poverty in the short term, some analysts argue it could have had negative long-term effects if made permanent.
“What we worry about, with good reason given the evidence, is that a lot of families will receive that extra money and it will cause them to work less or to not work at all,” said Scott Winship, senior fellow and director at the Center on Opportunity and Social Mobility at the American Enterprise Institute, a center-right public policy think tank. Winship said a permanent expanded child tax credit also might discourage marriage and result in more families headed by single parents.
Two pieces of 2021 research from economists at the University of Chicago concluded that if the expanded child tax credit were made permanent, between 1.3 million and 1.5 million workers would exit the labor force. A 2021 analysis of census data from Columbia University researchers found that the temporary expanded benefits during the pandemic didn’t discourage parents from working, but Winship said the results might have been different if people thought the expanded credit was going to be permanent.
“It takes time for a lot of these behavioral changes to develop,” he said. “I don’t think 2021 is a very good test of what would happen in the long run.”
