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The child tax credit could 'make or break' the Republican tax plan

Vox.com logo Vox.com 10/3/2017 Anna North
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Trump says the Republican tax plan will help working families. This tax credit might be the only way it can.

“We're targeting relief to working families," President Trump said last week of the just-announced Republican tax plan. "We will make sure benefits are focused on the middle class, the working men and women, not the highest-income earners."

But the plan, at least as it stands now, looks like it would benefit the wealthy far more than the poor or middle class. That could be a deal breaker for some members of Congress, not to mention a problem for a president who prides himself on his ability to speak to a working-class base.

Enter the child tax credit. It hasn’t gotten much attention yet, but this part of the Republican tax plan is one to watch in the months to come. That’s because in order to pass their tax reform plan, Republicans will probably need to include a real benefit for working families, not just corporations and high earners. And expanding the child tax credit, long supported by religious groups on the right, may be the easiest way to do that. As Samuel Hammond, a poverty and welfare analyst at the Niskanen Center, put it, Republicans have somewhat inadvertently made the child tax credit “the center focus of tax reform.”

The Republican plan would increase the child tax credit.

Right now, parents can get a tax credit of up to $1,000 per child under the age of 17, according to the Urban-Brookings Tax Policy Center. If they owe more than that in taxes, it reduces their tax liability. If they owe less, they can get back the credit as a refund — in that case, they get no more than 15 percent of any earnings over $3,000.

That means to get the full $1,000 for a single child, a family needs to make about $9,700 a year. To get the full credit for three children, they need to make even more. Families making under $3,000 a year get nothing from the credit.

Families with high incomes don’t get the credit either. It starts to phase out at $75,000 annual income for single parents and $110,000 for married couples.

The Republican tax plan would increase the credit by an amount yet to be specified. It would also raise the income level at which the credit starts to phase out, meaning higher-income families could get more benefit from the credit.

The increase won’t be much help to low-income families

The clearest winners from the proposed changes to the child tax credit are single-parent families making more than $75,000 or two-parent families making more than $110,000. It’s not clear exactly how the Republican plan will change the income ceiling for the credit, but it is clear that some higher-income families will “go from getting a partial credit or no credit to getting a full credit,” said Elaine Maag, a senior research associate at the Urban-Brookings Tax Policy Center.

Meanwhile, some low-income families won’t benefit from the plan, at least the way it looks now. The plan doesn’t change the amount of the tax credit that’s refundable, said Hammond, who’s working on a campaign to expand the child tax credit. That means that families that make enough money to owe taxes could see their liability reduced by more than $1,000, but families who don’t owe any taxes won’t get more than $1,000 back from the credit.

To really help low-income families, Maag said, lawmakers would have to make more of the credit refundable to poor families. They could do that by changing the refundability formula — say, by lowering the earnings threshold from $3,000 to $0, or by increasing the 15 percent phase-in rate (or both). About 11 million children are part offamilies with at least one working parent that don’t qualify for the full credit today, she said. And even increasing the amount families could potentially get as a refund won’t matter much to people who aren’t earning enough to get $1,000 per child now.

Earlier this year, Sens. Marco Rubio (R-FL) and Mike Lee (R-UT) released a tax reform plan that tied the child tax credit to the payroll tax, making it refundable from the first dollar of income and increasing the refundability rate above 15 percent. They are likely to push for greater refundability in congressional negotiations, said Joshua McCabe, a sociologist at Endicott College who specializes in taxation.

Republicans might have to change the child tax credit if they want their tax plan to pass

For both political and policy reasons, tax reform is unlikely to pass without changes to the child tax credit, said Hammond, who has worked with Rubio on his plan. On the policy side, there’s a general sense that in a tax reform this major, “you can’t have people just abjectly left out,” Hammond said. And the Republican plan “does nothing for the 35 to 50 percent of households that only pay payroll tax,” he said. “It’s just leaving out half the country.”

On the politics side, Trump “has always talked about the forgotten American worker,” Hammond said, and “the places where he has the base of his support are the sorts of places where people pay the majority of their taxes to the payroll tax system.” A plan that helps working families that don’t make enough to owe income tax would be a much easier sell for him than one that only benefits higher-income people.

Moreover, “every single major Republican tax reform has included a pro-family component,” Hammond said. Religious groups on the right have long supported the child tax credit, McCabe explained. If that credit isn’t generous enough in the Republican plan, Hammond predicts, “they will end up alienating their base” not just of working-class people but also of the religious groups that already support expanding the credit.

“I think the child tax credit will make or break” the Republican tax plan, McCabe said. Democrats won’t like provisions in the overall tax plan like removing the estate tax — which, as Vox’s Dylan Matthews points out, is “the most progressive component of the federal tax code, only paid by extremely rich estates.” But if Republicans can show their tax plan would truly benefit families, some Democrats “might hold their nose and vote for it.”

Upping the child tax credit alone may not be enough to get many Democrats on board. The Republican tax plan as a whole looks like “a very, very big giveaway to the richest Americans” that will either drastically reduce government revenue or greatly increase the deficit, either of which will harm economic growth, said Rep. Lois Frankel (D-FL), the chair of the Democratic Women’s Working Group in the House. Slowing growth would be bad for working families, she added. While she doesn’t oppose an expanded child tax credit in principle, she doesn’t want to see it as part of a “poison package.”

Instead, she supports the Child Care for Working Families Act, a measure introduced by Democrats earlier this month that would increase wages for child care workers and provide federal subsidies to child care centers.

But at the very least, tax reform advocates will have to get their own party in line. According to Russell Berman at the Atlantic, Republicans plan to try to bypass Democrats and pass tax reform using reconciliation, which would allow them to pass a bill with only a simple majority. But that tactic hasn’t worked particularly well with Obamacare repeal, at least so far. And even some Republicans might hold out for a bigger child tax credit before supporting the bill.

Ultimately, Republicans — including Trump himself — are already promising that their tax plan won’t shift the burden from high-income to low-income families. As Dylan Matthews notes, it’s not clear how they’ll measure that, or what they’ll consider a success. But an expanded child tax credit will probably be an integral part of how they get there.

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