Federal Tax Credits in 2021 Lifted More than 2 Million Children Out of Poverty, Says New Report

WASHINGTON — The temporary expansions of the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) as part of the American Rescue Plan Act of 2021 reduced child poverty in the United States by nearly half, lifting more than 2 million children above the poverty line, says a new congressionally mandated report from the National Academies of Sciences, Engineering, and Medicine, coauthored by Research Professor V. Joseph Hotz. The report provides a comprehensive assessment of the temporary tax credit expansions’ impacts as well as alternative policy options to reduce child poverty.

The largest poverty reductions from the EITC and CTC expansions occurred among children in single-parent households, large families, and families with parents with lower educational attainment or who were employed part time. Hispanic children and children in families with mixed citizenship status also experienced poverty reductions, though eligibility restrictions limited the size of their gains. Analyses relied on the Supplemental Poverty Measure and the TRIM3 microsimulation model to capture how the EITC and CTC influenced child poverty during the pandemic.

Created in 1975, the EITC increases the income of low-wage working families and is fully refundable, meaning families can receive a refund even if they owe no income taxes. The American Rescue Plan Act of 2021 (ARPA) temporarily expanded benefits for workers without children, but it left unchanged the structure of benefits for families with children. The CTC, enacted in 1997, initially provided a nonrefundable tax credit to primarily middle-income working families with children, but it has expanded over time to both lower- and higher-income families. In 2021, the legislation made the CTC fully refundable, extending eligibility to those families with little or no earned income. It also increased the maximum benefit to $3,600 for children under 6 years of age and $3,000 for children ages 6-17, and it introduced monthly advance payments.

“From diverse perspectives and backgrounds, our study committee came together and reviewed a vast amount of data and information to present the comprehensive assessment laid out in the report, which finds that the tax credit expansions in 2021 helped reduce child poverty by almost half and had little effect on employment,” said V. Joseph Hotz, research professor, Harris School of Public Policy, University of Chicago, and chair of the committee that wrote the report.

Employment Effects

The economics literature indicates that EITC and pre-ARPA CTC would tend to increase incentives to work since benefits required earnings, while the ARPA-expanded CTC does not include such work incentives by providing benefits to families with no earnings. Extensive research shows that such changes in incentives affect parents’ employment decisions, although the magnitude of their impacts is uncertain. Because the ARPA expansions to the EITC and CTC were temporary, their impact on employment in 2021 was muted, although permanent expansions would likely have larger effects on parents’ employment decisions, especially for families with very low earnings. Accounting for employment responses to the EITC and CTC changes is important to better understand the tax credits’ isolated effects on child poverty, the report notes.

Takeup of Tax Credits

In 2021, not all eligible families received benefits from the EITC or CTC, especially since many did not file a tax return to claim them, the report says. Administrative records estimate participation rates of above 80 percent for both credits, but takeup rates were lower among Hispanic families and lower-income households. In some cases, measurement challenges made it difficult to determine eligibility, while in others, there was limited understanding of the expanded 2021 credits and how to claim them through tax returns.

Alternative Policy Options

As part of its charge to consider policy options that could further reduce the number of U.S. children in poverty, the committee analyzed the potential impacts of 16 alternative policy options. The report focuses in depth on seven options that reflect trade-offs, such as the link between benefits and work, support for families with no or very low earnings, credit generosity, and cost. All options were evaluated using data from 2018 to help mitigate the influences of the pandemic and the various policy responses to it.

The most generous expansions achieve the largest reductions in child poverty, but at a substantially higher fiscal cost, the committee found. However, the fiscal costs can be mitigated somewhat with faster phaseouts of credits for high-income groups. While some of these options would increase incentives to work if enacted, most would reduce them, thereby diminishing the impacts of these options on child poverty. Nonetheless, the committee found that even after accounting for such employment effects, all of the policy options considered were estimated to reduce child poverty by more than current policy does.

Other Pandemic-Era Supports

During the COVID-19 pandemic, expanded unemployment insurance, stimulus checks, nutrition assistance, and other temporary supports helped reduce child poverty in 2021, says the report. The presence of these programs complicated efforts to isolate the effects of the EITC and CTC during this period. Nonetheless, the committee found that the 2021 versions of the credits substantially reduced child poverty, even with the other supports in place.

Future Research Needs

Further improvements in data and methods are critical to accurately assess the impacts of existing policies and inform future policy design. Priority areas include more accurate measurement of takeup and noncompliance; evaluation of impacts on specific subgroups such as immigrant families; stronger evidence on employment responses to permanent expansions; and assessment of long-term outcomes on children’s health, education, and well-being.

The study — undertaken by the Committee on Federal Policy Impacts on Child Poverty — was sponsored by the Bainum Family Foundation; Doris Duke Foundation; Foundation for Child Development; Office of the Assistant Secretary for Planning and Evaluation, U.S. Department of Health and Human Services; Russell Sage Foundation; William T. Grant Foundation; National Academy of Sciences W.K. Kellogg Foundation Fund; National Academy of Sciences Cecil and Ida Green Fund; National Academy of Sciences Independent Fund; National Academy of Engineering Independent Fund; and the National Academies of Sciences, Engineering, and Medicine Presidents’ Circle Fund.

The National Academies of Sciences, Engineering, and Medicine are private, nonprofit institutions that provide independent, objective analysis and advice to the nation to solve complex problems and inform public policy decisions related to science, engineering, and medicine. They operate under an 1863 congressional charter to the National Academy of Sciences, signed by President Lincoln.