Child tax credit’s extra help ends, just as COVID surges anew

For millions of American families with children, the 15th of the month took on a special significance in 2021: It was the day they received their monthly child benefit, part of the Biden administration’s response to the pandemic.

The payments, which started in July and amounted to hundreds of dollars a month for most families, have helped millions of American families pay for food, rent and child care; kept millions of children out of poverty; and injected billions of dollars into the US economy, according to government data and independent research.

Now, the benefit — an expansion of the existing child tax credit — is ending, just as the latest wave of coronavirus cases is keeping people home from work and threatening to set off a new round of furloughs. Economists warn that the one-two punch of expiring aid and rising cases could put a chill on the once red-hot economic recovery and cause severe hardship for millions of families already living close to the poverty line.

“It’s going to be hard next month, and just thinking about it, it really makes me want to bite my nails to the quick,” said Anna Lara, a mother of two young children in Huntington, West Virginia. “Honestly, it’s going to be scary. It’s going to be hard going back to not having it.”

Lara, 32, lost her job in the pandemic, and with the cost of child care rising, she has not been able to return to work. Her partner kept his job, but the child benefit helped the couple make ends meet at a time of reduced income and rising prices.

“Your children watch you, and if you worry, they catch on to that,” she said. “With that extra cushion, we didn’t have to worry all the time.”

The end of the extra assistance for parents is the latest in a long line of benefits “cliffs” that Americans have encountered as pandemic aid programs have expired. The Paycheck Protection Program, which supported hundreds of thousands of small businesses, ended in March. Expanded unemployment benefits ended in September and earlier in some states. The federal eviction moratorium expired over the summer. The last round of stimulus payments landed in Americans’ bank accounts in the spring.

Relative to those programs, the rollback in the child tax credit is small. The Treasury Department paid out about $80 billion over six months in the form of checks and direct deposits of up to $300 per child each month. That is far less than the more than $240 billion in stimulus payments issued on a single day last March.

Unlike most other programs created in response to the pandemic, the child benefit was never intended to be temporary, at least according to many of its backers. Congress approved it for a single year as part of the $1.9 trillion American Rescue Plan, but many progressives hoped that the payments, once started, would prove too popular to stop.

That didn’t happen. Polls found the public roughly divided over whether the program should be extended, with opinions splitting along partisan and generational lines. And the expanded tax credit failed to win over the individual whose opinion mattered most: Sen Joe Manchin, who cited concerns over the cost and structure of the program in his decision to oppose President Joe Biden’s climate, tax and social policy bill. The bill, known as the Build Back Better Act, cannot proceed in the evenly divided Senate without Manchin’s support.

To supporters of the child benefit, the failure to extend it is especially frustrating because, according to most analyses, the program itself has been a remarkable success. Researchers at Columbia University estimate that the payments kept 3.8 million children out of poverty in November, a nearly 30% reduction in the child poverty rate. Other studies have found that the benefit reduced hunger, lowered financial stress among recipients and increased overall consumer spending, especially in rural states that received the most money per capita.

Congress in the spring expanded the existing child tax credit in three ways. First, it made the benefit more generous, providing as much as $3,600 per child, up from $2,000. Second, it began paying the credit in monthly installments, usually deposited directly into recipients’ bank accounts, turning the once-yearly windfall into something closer to the children’s allowances common in Europe.

Finally, the bill made the full benefit available to millions who had previously been unable to take full advantage of the credit because they earned too little to qualify. Poverty experts say that change, known in tax jargon as “full refundability,” was particularly significant because without it, one-third of children — including half of all Black and Hispanic children, and 70% of children being raised by single mothers — did not receive the full credit. Biden’s plan would have made that provision permanent.

“What we’ve seen with the child tax credit is a policy success story that was unfolding, but it’s a success story that we risk stopping in its tracks just as it was getting started,” said Megan Curran, director of policy at Columbia’s Center on Poverty and Social Policy. “The weight of the evidence is clear here in terms of what the policy is doing. It’s reducing child poverty and food insufficiency.”

But the expanded tax credit doesn’t just go to the poor. Couples earning as much as $150,000 a year could receive the full $3,600 benefit — $3,000 for children 6 and older — and even wealthier families qualify for the original $2,000 credit. Critics of the policy, including Manchin, have argued that it makes little sense to provide aid to relatively well-off families. Many supporters of the credit say they’d happily limit its availability to wealthier households in return for maintaining it for poorer ones.

Manchin has also publicly questioned the wisdom of unconditional cash payments and has privately voiced concerns that recipients could spend the money on opioids, comments that were first reported by The Wall Street Journal and confirmed by a person familiar with the discussion. But a survey conducted by the Census Bureau found that most recipients used the money to buy food, clothing or other necessities, and many saved some of the money or paid down debt. Other surveys have found similar results.

For one of Manchin’s constituents, Lara, the first monthly check last year arrived at an opportune moment. Her dishwasher had broken days earlier, and the $550 a month that she and her family received from the federal government meant they could replace it.

Lara, who has a 6-year-old daughter and a 3-year-old son and whose partner earns about $40,000 a year, said the family had long lived “right on the edge of need” — not poor but never able to save enough to withstand more than a modest setback.

The monthly child benefit, she said, let them step a bit further back from the edge. It allowed her to get new shoes and a new car seat for her daughter, stock up on laundry detergent when she found it on sale and fix the brakes on her car.

“None of the dash lights are on, which is amazing,” she said.

Some researchers have questioned the policy’s effectiveness, particularly over the long term. Bruce D Meyer, an economist at the University of Chicago who studies poverty, said that whatever the merits of direct cash payments at the height of the pandemic-induced disruptions, a permanent policy of providing unconditional cash to parents could have unintended consequences. He and several co-authors recently published a working paper finding that the child benefit could discourage people from working, in part because it eliminated the work incentives built into the previous version of the tax credit.

“Early on, we just wanted to get cash in people’s hands — we were worried about a recession; we were worried about people being able to pay for their groceries,” Meyer said. Now, he said, “we certainly should be more focused on the longer-term effects, which include likely larger effects on labour supply.”

Analyses of the data since the new child benefit took effect, however, have found no evidence that it has done much to discourage people from working, and some researchers say it could actually lead more people to work by making it easier for parents of young children to afford child care.

“There’s every reason to believe that in the current labour market, the child tax credit is work-enabling, and no evidence to the contrary has been presented,” said Samuel Hammond, director of poverty and welfare policy at the Niskanen Center, a research organisation in Washington.

Hammond said the child benefit should also have broader economic benefits. In a report last summer, he estimated that the expansion would increase consumer spending by $27 billion nationally and create the equivalent of 500,000 full-time jobs. The biggest effect, on a percentage basis, would come in rural, mostly Republican-voting states where families are larger and incomes are lower, on average.

Some Republican critics of the expanded child tax credit, including Sen. Roy Blunt of Missouri, have argued that it has essentially done too much to increase spending — that by giving people more money to spend when the supply chain is already strained, the government is contributing to faster inflation.

But many economists are sceptical that the tax credit has played much of a role in causing high inflation, in part because it is small compared with both the economy and the earlier rounds of aid distributed during the pandemic.

“That’s a noninflationary programme,” said Joe Brusuelas, chief economist at accounting firm RSM. “That’s dedicated toward necessities, not luxuries.”

For those receiving the benefit, inflation is an argument for maintaining it. Lara said she had noticed prices going up for groceries, utilities and especially gas, stretching her budget even thinner.

“Right now, both of my vehicles need gas, and I can’t put gas in the car,” she said. “But it’s OK, because I’ve got groceries in the house, and the kids can play outside.”