Child Poverty

Why Changes to the Tax Credits Are Critical Before Congress Adjourns

December 4, 2020 | National

Before Congress leaves for the holidays, critical changes are needed to adjust how our tax credits are calculated for next year’s tax filing season. Unfortunately, neither the bipartisan framework nor the McConnell stimulus package includes changes to the tax credits, and that’s a problem for children and families. Here’s why — 

It is no secret that the COVID-19 pandemic is hitting our children and their families hard with significant losses in household income, academics, and food security. According to the last Census pulse survey released this week, 45 percent of households with children had a difficult time covering basic household expenses. Four in 10 children live in a household without enough food to eat or are behind on the rent. Millions of people have lost their jobs or are experiencing reduced hours at work, which means their employment income has changed dramatically over the past year. 

Tax Credits help boost family income and support children’s healthy development. 

Many of these families who have lost jobs or have reduced hours work in low-wage jobs and count on tax credits every year. The refundable tax credits, commonly known as the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC), provide a much-needed income boost to families, especially low-income and Black, Brown, and Indigenous (BIPOC) families. As research demonstrates, the tax credits not only help in the short-term, with child care expenses or paying off a loan, but in the long-term as well. The tax credits support children’s healthy development and success, boost educational attainment, and provide families with needed income. While the amount of the credit depends in part on household composition and earnings, as a family’s income rises, the benefit amount also rises and phases out a certain level. In 2020, the CTC, on average, provided a benefit of $2,380 for most families. In 2020, the EITC provided an average benefit of $2,476 for most families. In 2019, both tax credits lifted four million children out of poverty

COVID-19 threatens the income boost from tax credits. 

As a result of the devastating economic turmoil of the COVID-19 pandemic, millions of parents have lost income, and schools and childcare centers are closed. Take, for example, Sierra Phillips of Columbus, Ohio. According to a Washington Post report, she “is a mother to two young children who is struggling to get back into the workforce. She lost her job nannying for two families in the spring. Her employers laid her off after they started working from home and opted to watch their own children to save money. And Phillips, 25, cannot return to work until she finds suitable child care for her children.” Her story, like so many others, is sadly not unique. Sierra’s significant drop in income this year means she may get thousands less from her EITC and CTC refund simply because the pandemic has diminished her income. 

That is why the flexibility related to how earnings are calculated for the tax credits is critical during a pandemic or economic downturn. Congress should absolutely give families the flexibility to use either their 2019 or their 2020 earnings to calculate their tax credits in 2020, known as a “look-back” provision. The “look-back” provision would help offset income loss to families who are actively experiencing income volatility and are making much less this year. If Congress fails to include this critical change, millions of families with children could receive less in their tax credits. Making this change to help families with income volatility must be done before the end of the year and likely cannot be done retroactively next year during tax filing season. Unless Congress takes this step before they wrap up their legislative business for the year, families who get less from their tax credit refund will be even worse off financially and emotionally.

“Look-back” proposals have bipartisan support. 

Earlier this year, Senators Brown and Cassidy and Representatives Higgins and Kelly introduced S.3542/H.R. 6762, the COVID-19 Earned Income Act. This bill would provide a special rule to allow families whose income has changed this year to use their 2019 wages when filing for the 2020 EITC and CTC. Even better, this bill’s cost is small – only three billion, which is very little compared to even Senator McConnell’s small COVID-19 bill. And make no mistake, this proposal isn’t something new to policymakers or the public. Congress has previously included similar changes in disaster relief packages to help mitigate income loss due to wildfires, hurricanes, and more. Most recently, Congress included a similar look-back provision in the CARES Act this spring, giving businesses flexibility around interest deductibility. Congress must do the same now and not leave children and families behind, as they have so often done in the past. They must allow families the flexibility they so readily give businesses and corporations on a daily basis. 

In any year-end package, Congress minimally needs to include the income changes for our refundable tax credits. Even better, as the Children’s Defense Fund has long advocated, robust changes to strengthen and expand the CTC and EITC should be included to fight for racial justice and against child poverty. Without long-term changes to who qualifies and the credit amount, the lowest-income children and families will continue to lose out. 

The COVID-19 pandemic is far from over. The winter months have just begun and we will undoubtedly lose more jobs and livelihoods, while children continue to fall farther behind in school and in development. Politicians must live up to this moment and include the changes to the look-back provision before they adjourn for the year. It is simply a matter of political will.