The Child Tax Credit Debate Is a Preview of Next Year’s Big Tax Fights

The Washington Post / Jacob Bogage

13:29 JST, March 11, 2024

President Biden in his State of the Union address Thursday laid out broad new policy aims for a second term, with aims to use tax hikes on major corporations and the wealthy to make new investments in child care and eldercare, affordable housing and education.

The speech, and the debates over policy over the course of the 2024 election, signal the start of a massive struggle facing Congress and the White House next year, as trillions of dollars in tax cuts pushed in 2017 by President Donald Trump expire. If Biden wins another four years, Democrats will try to enact Biden’s plans, which, by some measures, are broader than the legislative achievements that have anchored his first term. If Trump wins, Republicans will fight to keep many of those earlier cuts.

Congress is already considering legislation that would mark a first step for Biden’s agenda. A bill to expand the child tax credit (CTC) – a major Biden priority that provides money for working families – and to restore certain corporate tax breaks passed the House in January and is gathering support in the Senate.

The measure could lift hundreds of thousands of children out of poverty, according to nonpartisan projections. It would be a scaled-down version of an earlier expansion of the credit that Biden won but that expired at the end of 2021.

“The child tax credit I passed during the pandemic cut taxes for millions of working families and cut child poverty in half,” Biden said during his address Thursday. “Restore that child tax credit. No child should go hungry in this country.”

Lawmakers have been considering the legislation until recent days under a deadline, saying they had to pass it before filing season ends in April to save taxpayers the confusion of additional paperwork and changing tax policy.

But Treasury Department officials told The Washington Post that the IRS can deliver the child tax credit without any extra work for families. The agency could automatically amend tax returns for individuals who would be newly eligible for the credit or entitled to a larger payment. Roughly 10 percent of all taxpayers would require an IRS adjustment.

“Based on lessons learned through the stimulus payments issued during the pandemic and additional capacity added to IRS resources, the agency would be able to determine eligible taxpayers who have already filed, and issue payments automatically without people needing to take any additional action like filing an amended return,” Treasury spokesperson Ashley Schapitl said.

It would take between six to 12 weeks for the IRS to amend those returns and process the CTC for newly eligible taxpayers, IRS Commissioner Danny Werfel told lawmakers in February.

A much bigger tax debate awaits next year.

Renewing Trump’s $2 trillion tax cut legislation when it expires would add another roughly $3 trillion to the deficit, according to nonpartisan estimates.

In his speech to Congress – and on the campaign trail – Biden has used taxes as a populist device, drawing a contrast between his plan to expand services for the working and middle classes and Trump’s tax law, which mainly benefited the wealthy and corporations. Americans have also viewed Trump’s law unfavorably since it passed in 2017, according to national pollster Gallup.

Thursday’s speech lauded the future “possibilities” of a second Biden term, especially around tax policy – including a proposed 21 percent corporate tax, a new levy on billionaires and ending tax breaks for executive compensation.

Those policies, and new proposals around social benefits and taxes, may factor into Biden’s 2025 budget, which the White House is expected to release as soon as Monday, and could set the tone for parts of his reelection platform.

“Imagine what that could do for America,” Biden said Thursday. “Imagine a future with affordable child care so millions of families can get the care they need and still go to work and help grow the economy. Imagine a future with paid leave because no one should have to choose between working and taking care of a sick family member. Imagine a future of home care and elder care and peoples living with disabilities so they can stay in their homes and family caregivers can finally get the pay they deserve.”

The sparring over a new expansion of the child tax credit is a preview of what could come next year – and some lawmakers want to wait to see who wins the elections this fall before changing tax laws.

The new legislation would expand the credit to allow low-income families to claim the benefit for multiple children; under current law, the lowest-earning families can only receive the credit for one child. Starting in 2025, or the 2024 tax year, the benefit would be linked to inflation, which would add up to a roughly $100 boost next year. And families beginning in 2025 would be able to use the prior year’s tax return to claim a larger credit.

“A big chunk of the families who will get it, are going to get around $1,000. It’s going to make a big difference for them in terms of being able to pay for these necessities like diapers and the school shoes,” said Sen. Ron Wyden (D-Ore.), the bill’s chief Senate sponsor, who co-wrote it with Rep. Jason T. Smith (R-Mo.), chair of the House Ways and Means Committee. “It’s going to make a big difference in their lives but it’s not going to be something where they say, ‘This is all we need to get by.’”

Sen. Mike Crapo (Idaho), Wyden’s Republican counterpart on the Finance Committee, has called for the full tax-writing panel to “mark up,” or revise and offer amendments, to the bill, specifically the child tax credit components. He said in a statement in late February that the legislation needed stricter requirements that forced taxpayers to work before receiving benefits.

Republicans are closely following November’s elections with an eye toward retaking the Senate and writing their own tax legislation that would lean more heavily into extending the Trump-era Tax Cuts and Jobs Act.

“We need a tax code that will help grow a much more robust and strong economy, which the TCJA does,” Crapo told The Post last week.

Sen. John Boozman (Ark.), another Republican whose support Democrats had hoped to win, voiced similar concerns in an interview.

“There’s concern from members that you’re divorcing work from the tax credit,” Boozman said. “That’s the big hang-up right now.”

The legislation is gaining support among Republicans, despite Crapo’s misgivings. Sen. Todd Young (R-Ind.) told reporters that even if Crapo was unsuccessful in securing changes to the tax bill, “we should still move forward.” Young has been bullish on the corporate tax breaks, which would make it easier for firms to claim deductions on interest expenses, research and development expenses, and investments in equipment.

Those provisions have broad support from lawmakers in both parties who see them as important for some of Biden’s economic goals, like unleashing a clean energy boom.

Sens. J.D. Vance (R-Ohio) and Josh Hawley (R-Mo.) each said they are positively inclined toward the legislation, but still uncommitted on voting for it. If all Democrats vote for the legislation, they’d need the support of nine Republicans to defeat a potential filibuster.

“I’d certainly like to vote for it,” Vance said. “I think it’s generally good to actually make some policy here, and I think, by and large, it’s good policy.”

Biden and congressional Democrats expanded the child tax credit in the 2021 American Rescue Plan Act, one of the president’s signature legislative achievements, to great effect. That law increased the amount the credit offered and extended eligibility to millions of poor families who did not previously earn enough to quality. But after pulling millions of children out of poverty, the provision expired amid resistance to extending it from GOP lawmakers and conservative Democratic Sen. Joe Manchin III (W.Va.).

The expanded credit kept 3 million children out of poverty, according to research conducted by Columbia University’s Center on Poverty and Social Policy. The poverty rate for children during the final month of expanded child tax credit payments under the American Rescue Plan Act was 12.1 percent, the center reported. The month after it expired, the rate jumped to 17 percent. It stood at 18 percent in December, the last month for which data is available.

But the legislation’s fate is far from certain, for more than political reasons. The Senate’s calendar has filled with must-pass legislation in recent weeks that has slowed progress on the tax bill. Senate Majority Leader Charles E. Schumer (D-N.Y.) and Minority Leader Mitch McConnell (R-Ky.) united to push a bill with aid for Ukraine and Israel in February.

A March 22 government shutdown deadline may consume the chamber’s energy for the rest of the month. Schumer has also prioritized confirmation votes for Biden’s judicial nominees.

That’s left the tax bill as the odd man out, as Wyden searches for another piece of legislation on which the tax provisions could hitch a ride before mid-April.

“I’m going to pull out all the stops to get it done during the filing season, and that’s why I’m trying to give people a blunt assessment of where things are,” he said. “I think it’s time to say either you want to get to yes, and help these kids and help these small businesses, or you’re in the postponement caucus and you’re not going to help.”

The IRS’s ability to automatically amend those tax returns could relieve some of that time pressure.

But some of the child tax credit’s biggest proponents say the current bill doesn’t do enough. In the House, Rep. Rosa DeLauro (D-Conn.), voted against the measure, saying it did not balance families’ interests with corporate tax relief.

And Sen. Elizabeth Warren (D-Mass.), a leading progressive voice, said she was unsure if she could support the bill without a chance to propose larger CTC benefits.

“We have an opportunity to rewrite the tax laws so that it is less about making working people carry far more than their fair share of keeping this country running and instead holding the billionaires and giant corporations accountable for paying according to their wealth,” Warren said. “ … Our job as Democrats under the leadership of Joe Biden, is to make sure that it is the work of the American people that gets done, not the work of American billionaires.”