Expanded child tax credit could be a game-changer for Pittsburgh families

Gus Faucher is the senior vice president and chief economist of The PNC Financial Services Group. He will be sharing his insights on the regional economy each month.

Many Pittsburgh-area families received a welcome addition to their bank accounts in July: $250 or $300 per child from the federal government, as part of changes to the Child Tax Credit(CTC).

The greatly expanded credit, part of the American Rescue Plan that Congress passed in March, provides aid to all but the wealthiest U.S. households with children. The goal is to help keep children out of poverty and provide assistance to families with their everyday costs. But, as of now, this credit will onlybe available for 2021.

The child tax credit has been around since 1997, but the stimulus bill enacted earlier this year made more families eligible and greatly increased the amount of assistance.

The full credit is $3,600 per child under six and $3,000 per child ages 6 to 17 (up from age 16). Before the expansion, the maximum per child was $2,000. Couples receive the full amount per child if their income is $150,000 or less ($112,500 or less for singleparent families). The credit declines for households with incomes above these limits, phasing out entirely for couples with two children with an income of $480,000 and for single-parent households with two children at $280,000. (The top income level depends on the number of children in the family.)

According to the Congressional Research Service, 96% of families with children will receive the credit in 2021, up from 84% before the expansion.

But two other changes to the program may have even biggerimpacts.

First, the credit is now fully refundable. Previously, much of the credit was only available as an offset to income taxes paid; that is, you could only receive the amount of the credit up to the amount of income tax your family owed. Now, the full credit is available to all families, even those who earn too little to pay any income tax. This will result in a larger credit for low-income families, and many more low-income families receiving the credit. The Treasury Department estimates 26 million more children in low-income families will now receive the full credit with the expansion.

Second, instead of arriving only after a family has filed its income tax return, the government is now paying out half of the credit in six monthly installments in the second half of 2021, with the remaining half to be paid out at tax time. It was the first of these monthly payments that hit families’ bank accounts in July. This will give families immediate assistance, instead of making them wait until next spring to receive their payments. The payments will be sent out automatically to families that file income taxes and those that received stimulus payments, but households that don’t file and didn’t receive stimulus paymentswill need to contact theIRS.

By increasing the payment amounts, expanding eligibility and making the credit fully refundable, the expanded CTC will provide more benefits to more Americanchildren and families.

The nonpartisan Congressional Research Services estimates the expanded CTC will reduce the child poverty rate from13% to 7%.

This drop in poverty does not come cheaply: The Congressional Budget Office estimates the CTC expansion will cost the federal government more than $100 billion due to increased spending andlost revenue.

However, the Center on Poverty and Social Policy at

Columbia University estimates taxpayers will eventually recoup most of these costs through lower spending on health care, higher future tax revenuesand reduced crime.

And the total long-run benefits of the expanded credit, such as higher future earnings and improved health, are almost eight times larger thanthe cost of the program.

Many local families will benefit from the CTC expansion.

The Treasury Department reports more than 2.2 million households in Pennsylvania received CTC checks in July, totaling more than $550 million, with an average amount of $423 per household. This would mean almost $7 billion in income for Pennsylvania households from the CTC over the next year, or about 1% of total household income in the state.

According to the American Community Survey from the Census Bureau, there are about 246,000 households in the Pittsburgh metropolitan area with children, comprising almost one-quarter of all local households. Most of these households will receive the credit, providing a boost to localincomes and spending.

With most of the money going to local low- and middle-income households more likely to spend it than save it, these local payments will support the near-term Pittsburgh economic

recovery.

The American Rescue Plan only expanded the CTC for 2021. The monthly payments are set to expire in December, with the remaining credit to be distributed in the spring of 2022. After that, the payment amounts and eligibility requirementsare set to return to theirpre-2021 levels.

Congress will need to decide whether to maintain the expansion or let it expire.

Some data will be available about the impact of the payments on household incomes, poverty, consumer spending and labor supply, but given many of the program’s benefits are expected to be longterm, policymakers will have to base their decision on incomplete information.

There is a risk cutting benefits in 2022, while the economy is still feeling the effects of the pandemic, could lead low- and middle-income households to reduce their spending, slowing the recovery.

The price tag for the CTC is hefty, and over the long run, Congress, if it does decide to reauthorize the program, should raise taxes or cut other spending to fund it. But given the way the program is expected to reduce child poverty and its potential large long-term benefits, Congress should seriously consider a permanent expansion.