Advancing Child Tax Credit Payments Makes Good Sense, But The IRS Will Need Funds To Pull It Off

The plan to expand the Child Tax Credit (CTC) proposed yesterday by House Ways & Means Committee Democrats included an important new feature—the IRS would distribute the refundable credits monthly or quarterly so that cash-strapped families would not have to wait until they file their next tax return before receiving the support. Senator Mitt Romney (R-UT) has suggested a similar idea, though he’d have the Social Security Administration distribute the payments.

Advancing these tax credits makes sense, but it won’t be easy. The IRS (or the Social Security Administration) will need more resources and time to create an efficient system for distributing these payments.

Families with low incomes, particularly with their work opportunities still limited in the midst of the pandemic, struggle with cash flow. Food insecurity among households with children has doubled during the pandemic from 14 percent to 28 percent. Roughly one in five families with children are behind in rent.

Enhanced Credits

President Biden and House Democrats would increase the credit from $2,000 to $3,600 for each child under age 6 and to $3,000 for older children. In addition, 17-year-olds would qualify for the credit, which is now limited to those age 16 and younger. And, crucially, the credit would be fully refundable for even very low-income households.

These changes could cut child poverty in half. But could the government get the assistance to families in a timely way?

Typically, families receive refundable tax credits (those that go beyond offsetting federal income taxes) when they file their income tax returns. For many low- and moderate-income families, tax time represents their largest financial transaction of the year, and one that can substantially boost incomes. A family with two children and earnings of $18,000 in 2020 could receive over $8,200 in tax credits (about $5,900 from the earned income tax credit (EITC), the rest from the CTC).

This added income can support purchases or even increase savings. In a typical year, these refunds help pay off debt. A small study of 115 EITC recipients found the families interviewed spent 25 percent of their tax refunds paying debts or bills.

Bad timing

But because the payments are delivered annually, they have only limited ability to help families meet ongoing needs, such as food or rent.

This would be a particular problem with a bill that Congress passes in, say, March because families would have to wait nearly a full year before getting enhanced benefits.

This problem could be addressed if the credit is paid monthly—or even quarterly—rather than just at tax time. But there is a cost to this important reform. Making payments more frequently will increase the administrative burden for the IRS and for individuals who would need to claim benefits differently than they do today.

Some families such as those who share custody of a child, might even have to repay the credit when they settle up at tax filing season. Similarly, if a child moves between homes throughout the year, it may be unclear which parent ultimately qualifies for the CTC – a benefit that is annual in nature and cannot be split among multiple caregivers.

Few takers

Before 2011, families could choose to have the EITC paid in advance. But few ever participated. The program was administered through employers, rather than the IRS, which may have discouraged some people from enrolling. Some evidence suggested neither employers nor employees even knew about the option.

The IRS will face its own challenges implementing advance payments. The IRS does not generally deliver monthly payments to households today. Social Security does send out monthly payments, of course, but it has no experience with the CTC’s complex eligibility rules and has little information about where children live. While the IRS does, it still will need to verify incomes and changes in family circumstances.

More money, and more time

This will be a new program that will require new systems. And asking the IRS’s antiquated technology to do more always is a challenge. The largely successful delivery of the CARES Act’s recovery rebates and the second round of rebates happening now certainly provides some confidence the IRS can manage this new task. But delivering one-off benefits (even two or three times) to people who don’t need to meet complex eligibility rules is very different from distributing monthly checks to people whose circumstances can change and where eligibility requirements can be complicated.  

The House Ways & Means committee bill would authorize about $400 million for the IRS to develop an advanceable credit. At first glance, that will be quite helpful. But while the bill calls for advanceable credits to be paid as soon as July, it also acknowledges the technical challenges by granting the agency some leeway to get the program up and running. 

The IRS can make an advanceable credit succeed, but not without substantial additional resources.

My Tax Policy Center colleague Elaine Maag co-authored this column