David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: no more extra credit.
When we last talked about the advance child tax credit on the podcast in October, four batches of payments had gone out and Congress was considering making the expansion permanent.
Now, we're coming up on six months since the last payments went out and there's been little to no movement on Capitol Hill on this front. But with the midterm elections around the corner, could we see a resurrected discussion for permanently expanding the child tax credit? What lessons were learned from last year?
Tax Notes contributing editor Marie Sapirie will talk about that more in a minute. Later in this episode, we'll hear from Tax Notes Federal author Omri Marian talking about his recent article explaining why cryptocurrency rewards for staking activity are taxable on receipt.
But first, Marie, welcome back to the podcast.
Marie Sapirie: Thanks for having me.
David D. Stewart: So to start us off, could you give a recap of what the child tax credit is and how the advance child tax credit differed?
Marie Sapirie: The child tax credit was originally designed to reduce the federal tax burden on families raising children. The idea is that if a household is in the child raising stage, their expenses are higher and therefore their ability to pay taxes is lower than the tax paying ability of a household that has an identical income that isn't raising children. It's a mechanism for distributing the tax burden based on ability to pay.
But during the development of the child tax credit, there was also a recommendation from the National Commission on Children to introduce a child tax credit that was $1,000 per child and fully refundable. In 1996, when the credit was first enacted, it was $500 per child, and it wasn't refundable.
Over the years, Congress expanded the credit until the Tax Cuts and Jobs Act (TCJA) in 2017, took it from $1,000 per child to $2,000 per child.
Then in 2021 in the American Rescue Plan Act (ARPA), Congress again raised the amount of the credit to $3,600 per child under age six and $3,000 per child between ages six and 17. That division between younger children and older children hadn't been done before.
ARPA also made two other novel changes to the credit. It made it fully refundable so that families who had previously not had enough income to claim the credit would receive it and it introduced monthly advance distributions of the credit amount.
David D. Stewart: So what is the importance of this credit for families?
Marie Sapirie: The impacts of the ARPA expansion are still being studied — and will be for a while — but there was a big drop in the child poverty rate during 2021 when the credit was fully refundable and half of it was issued through advance payments. That was the expected result from the combination of the credit being larger and the full amount of the credit going to the families with the lowest incomes.
The Center on Poverty and Social Policy at Columbia University found that the advance child tax credit reduced monthly child poverty by close to 30 percent and that it kept 3.7 million children out of poverty in December 2021.
David D. Stewart: So there's clearly been a benefit of this. What about the costs?
Marie Sapirie: The cost of extending the credit is significant and that's one of the major issues for legislators. The two revenue estimators for Congress are the Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT), and both have provided estimates of extending both ARPA and the TCJA changes.
Last December, the CBO estimated that making the 2021 credit under ARPA and the TCJA permanent would cost $1.597 trillion between 2022 and 2031. The JCT has made estimates that the TCJA changes would cost around $85 billion per year for a permanent extension. They're due to expire at the end of 2025.
And they estimated that the ARPA changes would cost around $105 billion in 2021 and 2022. When you combine those TCJA and ARPA estimates, you have a cost of extending the policy in effect for 2021 of somewhere in the vicinity of $190 billion a year.
David D. Stewart: Now, I understand you recently talked with someone about the child tax credit's effect on families. Who did you talk to and what all did you talk about?
Marie Sapirie: I spoke with Elaine Maag of the Urban-Brookings Tax Policy Center, and we spoke about the recent research into the effects of the advance child tax credit, which includes research that she recently participated in on the effects of the expansion on food insecurity and employment.
David D. Stewart: All right, let's go to that interview.
Marie Sapirie: Thank you, Elaine, for joining me today on the podcast to discuss the recent history of the child tax credit in your recent research on it.
Elaine Maag: Thanks so much for having me.
Marie Sapirie: To begin the discussion. Would you take us through some of the recent history of the child tax credit and especially some of the big changes that were made for 2021?
Elaine Maag: Sure. So the tax credit started out as a $400 credit. It quickly moved to $500, and this is way back in the Clinton days. And that tax credit was for families with children under age 17 and it could only be used to offset taxes.
Fast forward a little bit to the Bush tax cuts and the credit has grown to be a $1,000 tax credit. And at this point it becomes partially refundable and what that means is you need to earn some income. And after you jump over this income threshold, you start receiving additional credits and you can use that credit to offset taxes owed, and also receive a tax refund.
The big change comes in the TCJA. When the credit doubles, it's now worth $2,000, it still only covers children up to age 16. You have to earn $2,500 to access the credit.
Every dollar you earn after that, you receive 15 cents of tax credit, and you can receive up to $1,400 of that $2,000 as a tax refund. And the rest of the credit can only be used to offset taxes owed. So this sets up a situation where middle- and high-income families get $2,000 per child.
Low-income families get nothing for each child, if they're very low income or up to $1,400 per child. That means that there's 27 million children living in the United States that don't receive the full value of the tax credit simply because their parents don't earn enough.
Along comes 2021 and it's a big revolution for the tax credit. The first thing that happens that catches a lot of headlines is the tax credit increases in size. So now the credit is worth $3,600 if your child is under age six, or up to $3,000 if your child is ages six to 17. So they've added an additional year of eligibility, but really importantly, they've targeted additional resources at those very low income children.
The second thing that happened is the credit now becomes fully refundable. And what we mean by that is that you can receive the full $3,000 or $3,600 per child even if you have no earnings. This means there's going to be new people brought into the tax system that aren't traditionally required to file a tax return.
And then the final change that's pretty important is the credit was paid out as an advance monthly payment starting in July. So, for many, many families started receiving payments that lasted from July to December, that would total half of the credit they expected to be eligible for.
Marie Sapirie: So now that the dust has settled a little on the monthly advance child tax credit distribution process, which was new for the IRS and taxpayers last year, and most taxpayers have filed their 2021 returns. What is your assessment of how the implementation of the program went?
Elaine Maag: So for the most part, it went really well. There were 61 million children who received credits on a monthly basis, most of them for the full period from July to December. There were about 2.1 million families who opted out of receiving that advance payment.
So after July, they went into an IRS website and they simply said, "I don't prefer to receive my credit this way." Those families received the full value of their credit when they filed their tax return. Families that had received half their credit received the other half when they filed their tax return.
The tricky thing was families with very low incomes, who the IRS had no information on because they're not required to file tax returns. There were a lot of outreach efforts to find these families, and there's some evidence that people signed up for the credit and were able to access it.
But I think there's still some lingering concerns that very low-income families did not get the credit simply because they didn't know they were eligible for it. There's still a lot of community outreach happening to try and find those last children. And of course, that will continue for probably even a couple years.
Marie Sapirie: Your recent study with colleagues at the Urban-Brookings Tax Policy Center assessed how the child tax credit affects employment and material hardship. Would you tell us about your research and the impact that the child tax credit had on key metrics of hardship like food insecurity and employment?
Elaine Maag: Using the Well-Being and Basic Needs Survey that the Urban Institute runs, my co-authors and I looked at: were there differences in people who reported receiving the payments and people who didn't receive the payments? And we looked at them in two points in time.
We looked at them in December of 2020 — so before any payments had gone out — and also in December 2021. We found what many other studies have found: that families who received the child tax credit reported reduced rates of food insecurity. And we also asked this question of, "Were they less likely to go back to work?" So they're receiving payments, does it discourage them from going out and finding a job?
And what we found is there's no difference in the group of people that received payments and the group of people that did not receive payments. Both groups increased employment, relative to December 2020, and there were no significant evidence that people were sitting out of the labor market.
Marie Sapirie: Are there other metrics that are being studied that will help paint a complete picture of the effect of the advance child tax credit and how might those help policy makers to understand the effects of the policy?
Elaine Maag: There's still lingering concerns that a credit like this discourages people from working. And so there's ongoing research to see if that happened in different populations. There's also research that's ongoing that's trying to look at questions related to stress in a household.
Was it reduced by receiving the monthly payments? Did we see child abuse go down in those households? Were ER visits different for families receiving the credit and families that didn't receive the credit? Or did we see changes in mental health and child wellbeing after the payments started relative to before the payment started?
There's a lot of quick evidence that came out that showed food insecurity dropped by as much as 25 percent once those payments started going out. But there's probably other things that were happening in those households too, that might have been good for children.
Marie Sapirie: What conclusions can be drawn from your research and what are the policy implications that Congress should consider in the future in designing changes to the child tax credit?
Elaine Maag: So I think the easy conclusion is when you give resources to parents, by and large, they want to do right by their children. They want to provide school supplies. They want to put them in aftercare programs. They want to provide a safe space for them to be, and we see evidence of all of that happening after the payments started.
We also learned a little bit about monthly payments. We looked at, did people like those monthly payments? There's evidence in the past that families shied away from monthly payments of another tax credit, the earned income tax credit. So we wanted to ask now, how do people feel about the child tax credit?
And we found that the most popular response of the families that received the credits in 2021 was that they preferred receiving a monthly payment. Higher preferences, the lower income you are. Lower preference, if you're higher income.
So I think for Congress, there's not only a question about how big should the credit be? But there's also a question about, should we go back to delivering it largely as a tax refund at one point in the year, or should we do something to try to deliver it throughout the year?
Marie Sapirie: And what other research might be useful in this area? And in particular, what might help assess the impact of longer term code changes since this was a temporary provision?
Elaine Maag: I think that for many years, we will be looking at this group of children that received this extra income in their household and see how that plays out. There was some recent research that showed babies who are born in December, tend to do better than babies born in January and that is attributed to the tax assistance that goes into that household.
So even a one year jump on getting benefits, though the lifetime benefits are roughly the same, helps very young children, and we're seeing that children are being observed in their twenties and you know, a little bit later, and they're looking at their earnings, they are a little bit higher, and the authors attribute that to the child tax credit. So I think now the question will be this short six-month period where families got monthly payments and then this tax year where their credits were significantly larger, in some cases, does that have some sort of long term impact?
And if members of Congress begin to see delivering payments to particularly very young children as an investment, they might change their thinking about tax policy. And so I think that's an area that's really ripe for research. I think this question of employment is also going to remain on the table.
And so researchers will continue to find new ways to look at: did employment decisions change? There's some evidence that people use the child tax credit to actually help them go to work. And so we want to know what factors were work-enabling and what factors were things that potentially suppressed work?
And is it different based on who you are? If you have an infant, do you react differently? If you're a grandparent taking care of a child, do you react differently? And then the final thing that I think a lot of research should happen is in particular communities.
So do infusions of cash mean something on a community level? So does it mean there's enough income in the neighborhood that a grocery store might move in, maybe banking services move in? So there might be an opportunity to look for community changes that started to happen under this advance payment.
Marie Sapirie: Great. Well, we'll look for all of those papers to come out. So to conclude given the expiration of the advance child tax credit at the end of last year and the upcoming midterm elections, what do you think are the prospects for Congress to make any changes to the existing child tax credit this year?
Elaine Maag: It's extraordinarily disappointing to me that the child tax credit has not yet been extended. There's substantial evidence showing that it was good for families and it was good for children.
Does that mean maybe there's an opportunity to do something before midterms? I hope so. Historically, we've never had an expansion of the child tax credit that we then walked back later. And so I still hold out hope that will be true with this policy as well.
Marie Sapirie: Thank you so much for joining me for this most interesting discussion.
Elaine Maag: No problem. Thank you so much.
David D. Stewart: And now coming attractions. Each week we highlight new and interesting commentary in our magazines. Joining me now is Acquisitions and Engagement Editor in Chief Paige Jones. Paige, what will we have for us?
Paige Jones: Thanks, Dave. We're taking a break from the usual this week to announce that there's one week left to enter the Christopher E. Bergin Award for Excellence in Writing. This annual award recognizes superior student writing on unsettled questions in tax law or policy. Eligible students must be enrolled in an accredited undergraduate or graduate program during the academic year. Submissions are due by June 30. Visit taxnotes.com/students for more details.
And now for a closer look at what's new and noteworthy in our magazines, here's Tax Notes Federal Editor in Chief Ariel Greenblum.
Ariel Greenblum: Thanks, Paige. I'm here with Omri Marian, professor of law and the academic director of the Graduate Tax Program at the University of California, Irvine School of Law. Welcome to the podcast, Omri.
Omri Marian: Thanks for having me. I'm very glad to be here.
Ariel Greenblum: We're here to discuss your Tax Notes Federal article titled, "Law, Policy, and the Taxation of Block Rewards." Could you give us a brief overview of your article?
Omri Marian: Yes, sure. I make three arguments in the article. The first one is that block rewards are taxable upon receipt as a matter of law. And this is in response to certain arguments that have been brought forward recently, mostly by the cryptocurrency community, that block rewards should not be taxable until sold.
The second argument questions whether it is good policy to tax block rewards when received and their argument is that, "Yes, it is good policy." And finally, I address a rather confusing issue about the taxation of block reward when received. And this is whether it is good tax planning or not because the cryptocurrency community pushes against taxation when received.
And I argue that this is actually bad tax planning. You want it to be taxable upon receipt.
Ariel Greenblum: Thanks. What prompted you to write about this topic?
Omri Marian: I think it's mostly the Jarrett case (Jarrett et al v. United States of America). A case currently that is running its course through courts where a taxpayer is trying to argue against the taxation of block rewards upon receipt. The arguments have been around for a while — that block rewards should not be taxable at receipt — but I didn't view them seriously until the Jarrett case.
I just think that the arguments are ridiculous as a matter of law and are also advancing bad tax policies. So once it hit the courts, I decided I should probably say something about it.
Ariel Greenblum: Great. Before we let you go, where can listeners find you online?
Omri Marian: They can find me on Twitter @Omri_Marian or on the website of the University of California, Irvine School of Law.
Ariel Greenblum: Thanks for joining us on the podcast, Omri.
Omri Marian: It's been a pleasure.
Ariel Greenblum: You can find Omri's article online at taxnotes.com and be sure to subscribe to our YouTube channel Tax Notes for more in depth discussions on what's new and noteworthy. Again, that's Tax Notes with an S. Back to you, Dave.
David D. Stewart: That's it for this week, you can follow me online @TaxStew. That's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for feature episode, you can email us at podcast@taxanalyst.org.
And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.
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