Politicians are looking for ways to break the deadlock on extending temporary improvements to Child Tax Credit (CTC) and Earned Income Tax Credit (EITC) that have now expired. Today, Republican Senators Mitt Romney, Richard Burr and Steve Daines released a proposal that shows one possible way forward: the Family Security Act 2.0. It’s the latest iteration of an earlier Romney proposal aimed at supporting families and simplifying a range of family-related tax benefits. This report provides a preliminary analysis of the reform package.
We believe the new Romney plan would reduce marriage penalties built into many existing family tax benefits and reduce child poverty by 12.6%. The proposal also reduces the complexity of the tax code by reforming or consolidating five distinct tax benefits – CTC, EITC, Child and Dependent Care Tax Credit, Head of Household, and state and local tax deduction – into just two: a greater child benefit and a simplified EITC.
Net impact of reforms on households
The net impact of the Family Security Act 2.0 would be to lift over 1.1 million children out of poverty, a 12.6% reduction in the child poverty rate.
Table 1: Estimated Poverty Impact of the Family Security Act 2.0
Reform the tax credit for children
The Family Security Act 2.0 plan modifies the existing child tax credit in five ways.
First, the benefit increases, which varies according to the age of the child. Increase the current CTC, which is currently worth up to $ 2,000 per child under 17 $ 3,000 per child aged 6-17it’s at $ 4,200 per child under six. As parents of young children are early in their careers and face additional expenses related to pregnancy and childcare, research suggests that additional support for the families of young children is particularly crucial to ensure adequate development. of child. The benefit would then be phased out for incomes above $ 200,000 for singles and $ 400,000 for married registrants, in line with the existing CTC structure.
Figure 1: Current and proposed structure of family allowances
Second, it shifts administration from the Internal Revenue Service to the Social Security Administration (SSA) and offers families the option of receiving benefits on a monthly rather than an annual basis. This has several potential benefits for ensuring timely and reliable delivery of family allowances to families. The change is possible because, while the existing CTC is based on the income of the current fiscal year and therefore can only be claimed upon filing at the end of the year, the Family Security Act 2.0 plan bases eligibility on the income of the parents of the child. previous fiscal year.
Third, it extends the Social Security Number (SSN) requirement to parents. Under current law, non-citizen families with a tax identification number (ITIN) can benefit from the CTC as long as each declared child has a valid SSN. Under the Family Security Act 2.0, families will be able to receive child benefit provided that at least one parent has an SSN.
Fourth, the plan substantially changes the current income requirements and phasing-in rate for the CTC. Under the Family Security Act 2.0, families must earn $ 10,000 to receive the full benefit – well below the current thresholds – and families can get full credit for up to six children. Below the $ 10,000 threshold, the benefit is proportional to income. Meanwhile, the rate at which such prorated introduction occurs varies with the maximum possible amount a family would get if it crossed the $ 10,000 earning threshold. This effectively accelerates the phasing-in for families with younger or younger children. These changes translate into a notable expansion of benefits to working families whose wages are below the federal poverty line.
Figure 2: The dynamic income needs of the Family Security Act
Figure 2 illustrates the impact on low-income households. For example, the family that earned $ 9,000 last year with two children (both aged six and above) will receive 90 percent of the maximum possible benefits – $ 5,400 in total. By comparison, the current CTC rises after $ 2,500 in earnings with a fixed 15 percent down to $ 1,400 per child. The remaining $ 600 from the CTC is only available to be offset with taxes, excluding households who do not earn enough to pay income tax. As a result, that same family with two children currently only receives about $ 975 to $ 9,000 in income, not receiving the full benefit until they have earned about $ 32,000.
Finally, the plan makes families eligible to receive benefits sooner. Under the existing CTC, families must wait until the tax season following the birth or adoption of the child to claim the credit. The Family Security Act 2.0 allows parents to receive part of the benefits starting four months before the birth of their child. This change would provide expectant parents with additional resources to prepare for their baby’s arrival, helping to support prenatal health.
Reform the Earned Income Tax Credit
The Romney-Burr-Daines Plan also undertakes a significant rebuilding of the EITC. The proposed changes are divided into three phases.
First, it shifts most of the EITC’s dependent child allowance to the new dependent child allowance mentioned above. This shift puts the United States more in line with other countries’ best practices. For example, most countries typically have separate child benefits, designed to help parents with the cost of raising children, and work benefits, designed to ensure low-wage families are better off working than receiving benefits. unemployment.
Second, it substantially reduces the marriage penalties built into the existing EITC, the structure of which causes many working-class families to lose benefits if a parent marries their partner. Marriage penalties in the tax code arise when the combined value of tax credits and deductions for two individuals arbitrarily decreases when those same individuals marry and file taxes jointly. While other proposals effectively double marriage sentences in the EITC, the Family Security Act 2.0 reconfigures the phasing in / phasing out thresholds to reduce marriage penalties for childless couples and single parent families.
Figure 3: Current and proposed EITC parameters (1 child)
Finally, it greatly simplifies benefit amounts and introductory and phasing out rates based on income and family status. The existing EITC is plagued by high error rates, which studies say are driven by the complexity of the rules regarding claiming a child. The need to repay overpayments or risk an IRS audit creates large administrative burdens for households. The Family-Security Act 2.0 simplifies several components to reduce compliance costs and confusion.
Figure 4: Current and proposed EITC parameters (no children)
In short, under the Family Security Act, the portion of the EITC benefit that varies according to the number of children is passed on to the extended dependent child benefit, simplifying earning credit and roughly doubling the maximum EITC for adults. no children.
Simplifying the family benefits maze even further
In addition to the consolidation discussed above, the Romney-Burr-Daines plan eliminates the Head of Household’s Deposit Status (HoH), Child Care and Dependent Tax Credit (CDCTC), and tax deduction state and local (SALT) and redirects their funds to the more generous child allowance that replaces the CTC. This consolidation builds on the CTC reforms included in the 2017 tax law, which shifted benefits down the income ladder by consolidating the relatively regressive employee exemption into a larger CTC that reached more working-class families.
HoH filing status provides a larger standard deduction to a single individual with at least one child than a single individual without one. Married couples do not receive this child bonus. HoH filing status is the most regressive tool for providing child benefits in the federal tax code. As the following figure illustrates, it provides generous benefits to high-income families, but little or no benefit to low-income families.
Figure 5: Deposit allowance of the head of household (Individual income tax only)
The HoH filing status benefit is perhaps the most regressive source of marriage penalties in the U.S. Tax Code, offering greater benefits as income increases not only on the personal income tax side but through others as well. components of the tax code, including long-term capital gains. The Family Security Act 2.0 follows the British experience, in which policy makers in 1998 eliminated a similar benefit limited to single parents by integrating it into an expanded child benefit available to all families.
Likewise, the CDCTC is a non-refundable credit linked to paid childcare, excluding the vast majority of low-income families, who tend to rely on family care arrangements or center care paid for with vouchers. Among the lowest-income quintile of households with children, only 0.2 percent say so. Evidence also suggests that, among those who can claim, much of the benefit is passed on to providers through higher childcare prices.
Finally, the SALT deduction allows detailed households to deduct up to $ 10,000 in paid state and local taxes. It does not significantly contribute to the economic security of the family. The vast majority of its benefits go to higher-income families.
Many congressmen have found themselves disappointed by the failure to reach a workable compromise on a permanent expansion of the tax credit for children. The Romney-Burr-Daines Plan offers an innovative solution by addressing long-standing conservative concerns about the potential impact of our family security system on work, marriage and poverty. It deserves careful consideration.
Joshua McCabe is the Niskanen Center’s Senior Family Economic Security Analyst and works on issues related to child poverty and family stability. McCabe previously served as an assistant professor of sociology and assistant dean of social sciences at Encott College.
Robert Orr is a social policy analyst at the Niskanen Center who works on issues related to social insurance policies, health care and labor market issues within the social policy team. He previously worked at the Cato Institute as a research associate and as a graduate researcher for the Mercatus Center at George Mason University.