Panel Paper: The Tax Cuts and Jobs Act Tax Reform, Child Tax Credit, and Implications for Low- and Middle-Income Workers

Thursday, November 7, 2019
I.M Pei Tower: 2nd Floor, Tower Court A (Sheraton Denver Downtown)

*Names in bold indicate Presenter

Elaine Maag, Urban Institute

Background: The Tax Cuts and Jobs Act (TCJA) doubled the child tax credit (CTC) from $1,000 per child under 17 to $2,000 per child under 17 and added a credit of $500 for children and other dependents 17 and up. But most low- and middle-income families with children saw a much smaller benefit from the law. For some, the new benefits were offset by a reduction in other child benefits – namely, the elimination of the personal exemption for dependents. For very low-income families, the full value of the CTC was left out-of-reach because only $1,400 of the $2,000 CTC was made available as a refund. Despite the total cost of the bill reaching about $1.5 trillion over the next 10 years, low- and middle-income families saw few benefits. This analysis compares family taxation prior to the TCJA and under current law to analyze the net result of the large shifts in tax policy.

Data and Method: This paper uses the Urban-Brookings Tax Policy Center microsimulation model to analyze the impact of children on taxes pre- and post-passage of the Tax Cuts and Jobs Act. The model, based on data from the IRS Statistics of Income, Public Use File, are well-suited to explore the effect of various tax laws and their effect on specific subpopulations.

To examine how the TCJA affected the incidence of taxes on families with children, we calculate taxes for all households using current law parameters, and then assuming the standard deduction, personal exemption, child tax credit, and child care credit rules were set at their pre-TCJA values. This allows us to untangle the effects of the family provisions, as compared to the effect of the whole law, which affected many more parts of the tax system.

Preliminary Findings: In 2018, we find on net, almost all families owe less tax now than they would have if the law had not been changed. But in many cases, the net change in taxes owed from the new law were often far lower than the advertised $1,000 per child increase in the CTC would suggest. For very low-income families, the benefit of the new tax law was as little as $75.

If policymakers want to come closer to delivering a substantial increase in child tax benefits for low-income families, good first steps would be to allow the full $2,000 credit to be received as a refund, start phasing the credit in as soon as a person has earnings, and phase the credit in more quickly than under current law. To increase child tax benefits by at least $1,000 per child using the CTC, policymakers would also need to increase the amount of the CTC to offset tax increases on families with children stemming from cuts to other tax provisions.

Significance: Given that tax credits aimed at families can provide a significant amount of annual income (upwards of 40 percent of all income, for low- and moderate-income families) understanding how this changed is critical to understanding family well-being.