WASHINGTON — One of the cheapest provisions aimed at helping low-income families has become a main sticking point for Republican senators as they negotiate a bipartisan tax package that attracted broad support in the U.S. House.
The reason for the opposition is that a taxpayer could earn no income for a year and still qualify for an expanded child tax credit. Republicans argue that the provision will encourage parents to drop out of the workforce and push the child tax credit toward a “de facto welfare program,” as GOP Sen. Thom Tillis of North Carolina wrote in a recent Wall Street Journal op-ed.
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Supporters of the provision say such gaming of the tax code is highly unlikely, and the intent is to help families whose income dives in one year but rises in another.
The contested part of the legislation — that lawmakers and tax policy wonks call a “look-back” provision — would allow households to claim their previous year’s annual income on their tax return if it was higher than their current year’s earnings.
The idea, proponents say, is to give families a chance to maximize the child tax credit even if a job loss, illness or caregiving duties interrupted their ability to work during the most recent year.
As the legislation is written now, families would only have that option on their 2024 and 2025 tax returns. The temporary look-back to the previous year would cost the government just over $1.5 billion, according to the nonpartisan Joint Committee on Taxation.
In the roughly $78 billion tax package, the look-back provision’s price tag is dwarfed by the bill’s other proposals to temporarily expand the worth of the child tax credit and revive business tax credits.
And a selling point that sponsors tout is that the bill will be paid for by ending a fraud-ridden pandemic-era employment tax credit.
Though Internal Revenue Service Commissioner Danny Werfel told lawmakers the agency could handle changes for the 2023 filing season, some are worried the window of opportunity will close before the Senate acts.
Objections from Crapo
Despite being just a fraction of the package, the look-back provision has become a primary talking point for Senate Republicans, who argue the measure could keep those who claim the child tax credit at home instead of in the workforce.
Sen. Mike Crapo, lead negotiator for Senate Republicans, said in his most recent statement on the bill that he remains concerned the child tax credit proposals “undermine the work requirement and represent a significant shift — described by some Democrats as a down payment — to transform the CTC from primarily working family tax relief into a government subsidy.”
“Allowing individuals to receive a refundable credit when they have zero annual earnings — as the prior year’s earnings provision allows — is a departure from longstanding policy tying the CTC to work,” the Idaho Republican and ranking member of the Senate Committee on Finance said on Feb. 28.
“I understand this provision may have been dropped for 2023 in an effort to gain my support, but it does not change the fact that I objected to its inclusion for 2024 and 2025. I did not agree to its inclusion then, and I do not support it now.”
Crapo is not saying much during ongoing negotiations, but “he is still working toward a bipartisan solution that a majority of Republicans in the Senate can support,” Crapo’s communications director Mandi Critchfield said in an email March 13.
Sen. Chuck Grassley of Iowa, one of the most senior Republicans on the Senate Finance Committee, told reporters in mid-March that though he’s not at the negotiating table, he’s “following Crapo’s lead.”
“I don’t think we should have a federal policy discouraging people from working,” Grassley said.
Sen. Todd Young of Indiana, who also sits on the Senate Finance Committee, told States Newsroom he’s not against the look-back provision but will follow Republican committee leadership.
“I’ve been clear about (the look-back provision). Now, I support Senator Crapo in his negotiations because I think making some concessions for Republicans’ concerns will be necessary to get 60 votes,” Young said. The legislation would need 60 votes to advance in the Senate.
Think tank analysis
The American Enterprise Institute’s Center on Opportunity and Social Mobility reflected Republican concerns in January when a team at the right-leaning think tank published a paper warning that the look-back provision “would have important impacts on the labor market that require further study before being considered for passage by Congress.”
According to the AEI’s analysis, “for the vast majority of families who work regularly, this reform would — every other year — eliminate the Child Tax Credit’s work incentive and lead over 700,000 parents to stop working.”
On the other hand, the every-other-year model would also spark some workforce participation, the authors found in their analysis that assumed parents would perceive the change as permanent and continuing beyond 2025.
“For the minority of families who do not work in any given two-year period, the Child Tax Credit’s work incentive would be doubled every other year and lead 395,000 parents to start working,” wrote researchers Kevin Corinth, Angela Rachidi, Matt Weidinger, and Scott Winship.
The paper’s purpose was to “shine a light on the potential costs of some of these programs in the form of these behavioral changes that will impede upward mobility,” Winship, the Center on Opportunity and Social Mobility’s director, told States Newsroom in January.
Winship was not available for comments in March.
Encouragement to work
AEI also acknowledges other provisions of the proposed child tax credit expansion would encourage parents to work.
For example, the tax legislation would increase work incentives by phasing in the child tax credit at 15% on the dollar per child on any earnings above $2,500, wrote AEI’s senior fellow Kyle Pomerleau.
In other words, the tax credit would phase in at 30% on earnings above the threshold for a family that has two kids.
Under current law, the credit phases in at a fixed 15%, no matter how many children a family has.
But in a Feb. 27 post, as the bill remained stalled in the Senate, AEI’s Center on Opportunity and Social Mobility recommended that senators altogether drop from the bill the look-back provision as well as the accelerated 15% per-child phase-in, citing concerns over the growing national debt and that the provisions “discourage work and marriage.”
Andrew Lautz, senior economic policy analyst for the Bipartisan Policy Center, which aims to reflect policies from both political parties, said his organization doesn’t believe that the look-back provision “either on a standalone basis or in combination with the other child tax credit changes that are being proposed, will have a significant impact on work one way or the other.”
“I think you have to have a pretty sophisticated understanding of child tax credit rules to be able to game the system like some lawmakers fear,” Lautz said.
“These kinds of double-edged sword provisions in the proposed child tax credit expansion lead us to believe that on work incentives it will effectively be a wash.”
The Joint Committee on Taxation’s macroeconomic analysis of the tax bill found that the proposed child tax credit expansion, on net, increases labor supply, but any change is “too small to be significant.”
AEI, meanwhile, says it wants to sound the alarm on the longer-term outlook.
The think tank’s late February post conveyed the conservatives’ fear — echoing Crapo’s “down payment” language — that the provisions would not be temporary, but rather become extended when Congress begins to negotiate new tax policies as the Trump-era tax law sunsets in 2025.
“The outcome of the current legislative fight, then, will shape the compromises to come in 2025, for good and ill. Conservatives, now and then, should resist trading corporate tax breaks for liberals’ preferred down payment on a child allowance without a work requirement,” the team wrote.
‘We’re all working’
Lana Gonzales, a single mother in Boise, Idaho, said she doesn’t have the “luxury of holding out” for expansion of the child tax credit while Congress battles.
“We’re all working. I’m working. You want to come see how much I’m working? Like, don’t worry about that. We’re all working our tails off to make ends meet,” said Gonzales, a program director for a nonprofit that helps people with disabilities find jobs and other resources.
Gonzales takes care of her 14-year-old son with special needs. Her two other children, who recently turned 18, still live at home.
When Congress temporarily expanded the child tax credit in 2021 in response to the pandemic, Gonzales says the increase allowed her to build a cushion in case of emergency.
“Being poor is expensive, and I don’t think that the senator has any clue what that looks like,” Gonzales said, referring to Crapo.
Under the American Rescue Plan Act of 2021, the child tax credit was made available to parents with no annual income, increased to $3,000 per child, and $3,600 for each kid under age 6, and was distributed to parents in monthly installments.
Under current law, the tax credit is $2,000 per child, but most low-income households will only reach $1,600 as a refundable portion — meaning the amount parents can receive in a refund check.
The current tax credit begins to accrue at 15% once a household earns more than $2,500. Money accumulated beyond what the household owes in federal taxes will be available as a refund.
The tax bill senators are currently mulling over would incrementally increase the refundable portion to $1,800 for 2023, $1,900 in 2024 and $2,000 in 2025.
Crapo has also expressed concern about increasing the increasing government cost of refunds after the credits offset tax liabilities.
“More than 90 percent of the bill’s CTC benefits accrue to taxpayers who will not owe a single dollar of federal income tax,” he said in his Feb. 28 statement.
Sen. Ron Wyden, chair of the Senate Committee on Finance and original sponsor of the tax package, said talks are ongoing but wouldn’t get into specifics.
“I’m not gonna comment on where it is. You don’t do that if you want to get it done,” the Oregon Democrat said March 12 when asked about negotiations. “I’m talking to colleagues all the time. We got a full court press, the (2023 tax) filing deadline is coming up, and we’re pulling out all the stops.”
“My timeline was yesterday,” he said. “I mean, it’s been weeks since we got 357 votes (in the House). We’re just pulling out all the stops.”
The Senate is scheduled to go on a two-week recess beginning March 25.
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