The 2021 Child Tax Credit: Implications For Health

KEY POINTS:

• The Child Tax Credit is a near-universal benefit for families with children. Each year, it lifts millions of children out of poverty. Adding income to low- and middle-income families has been shown to improve their health.
• In 2021 the credit was temporarily made fully refundable, allowing the lowest-income families to receive the full value of the credit even if they did not owe taxes. Before this change such families could not receive the full value of the credit, with Black and Hispanic families being the most likely to be eligible for only a limited credit.
• A second temporary change in 2021 allowed the credit to be paid monthly, rather than annually, as had previously been the case. Monthly payments of the Child Tax Credit in 2021 were correlated with reductions in food insecurity and reduced income volatility. Both of these changes improve health outcomes.
• Making sure very low income families receive the Child Tax Credit is critical to keeping the largest number of children out of poverty. Consideration should also be given to better aligning the credit with the person with whom the children are living in each month.

Research has confirmed the relationship between lower incomes and worse health. Children who grow up in poverty or experience poverty for an extended period experience adverse health consequences ranging from developmental delays and poor health in early childhood to chronic health problems and depression in later life. This relationship between income and health extends across the range of income distribution: people in the lowest-income families are most likely to report being in poor health, followed by people in middle-income families, which are both more likely to report being in poor health than people in high-income families. As such, policies that benefit both low- and middle-income families could have broad health benefits. The federal Child Tax Credit has grown to be one such policy for families with children. In 2021 the Child Tax Credit was temporarily expanded to provide up to $3,000 per child ages 6–17 and up to $3,600 per child younger than six. The credit also was made fully refundable, meaning that even families with incomes too low to owe federal income tax could receive the maximum credit.

Increased income is one clear pathway by which the Child Tax Credit improves health; distributing this income in a steady flow could be a separate pathway to this goal. Some research demonstrates that exposure to stressors such as food insecurity, substandard housing, and income volatility can lead to poorer health. From July to December 2021, the Child Tax Credit was delivered in monthly installments to most families eligible for the credit. After the first payments were delivered, there was a decrease in reported food insecurity.

Whether the 2021 rules will be reenacted in 2022 remains in flux as of this writing. This policy brief explains how the Child Tax Credit works (with and without the extension), provides details about the 2021 changes to the credit, and summarizes research on the health benefits of tax credits. If the 2021 changes to the credit were in place in a typical year, experts predict that child poverty could be reduced by 40 percent and income fluctuations could be smoothed somewhat—and both results could have significant implications for improving health, development, and later life prospects for the beneficiaries of the Child Tax Credit.

How The Child Tax Credit Works

The Child Tax Credit began modestly in 1998 as a $400 per child tax credit that was largely nonrefundable (except for a small number of families with at least three children) and could only be used to offset federal income taxes, which very few low-income families owe. The credit decreased once income reached $75,000 for single parents and $110,000 for married parents. Middle-income households received almost all of the benefits. The credit increased to $500 per child in 1999, and then by 2004 it grew to $1,000 per child as a result of legislation passed in 2001. In 2001, the Child Tax Credit was also made broadly refundable—it began to phase in for families once they earned $10,000, even if they did not owe any income tax. Still, almost all of the benefits continued to go to middle-income families. The income threshold for when the credit began to phase in was legislatively reduced to $3,000 in 2009 and $2,500 in 2017.

The 2017 legislation also doubled the maximum credit to $2,000 per child and increased dramatically the income level at which the credit began to phase out: single parents did not see their credits reduced until they had at least $200,000 in income ($400,000 if married). In addition, the credit became only partially refundable: only $1,400 of the $2,000 maximum credit could be received as a tax refund and the rest could be used only to offset federal taxes owed. The expanded eligibility range meant that many more families with children would receive the Child Tax Credit—however, an estimated twenty-seven million children still lived in families that did not receive the full Child Tax Credit because they earned too little, and thus did not owe enough in taxes to receive the full tax credit. These families were disproportionately Black and Hispanic.

Changes To The Child Tax Credit In 2021

The American Rescue Plan Act of 2021 made several temporary changes to the Child Tax Credit as part of a larger package of reforms supporting economic recovery from the COVID-19 pandemic. The American Rescue Plan Act increased the credit to $3,600 for children younger than six and $3,000 for children ages 6–17, up from the previous maximum per child benefit of $2,000, for single parents with income below $112,500 and married couples with incomes below $150,000 (exhibit 1). After that, the credit began to phase out until it reached the credit that families qualified for when the benefit was up to $2,000 per child. Most important for very low income families, the credit was made fully refundable: even families with incomes too low to owe taxes could receive the full benefit. Between June and December 2021, families could receive up to half of the Child Tax Credit they qualified for in monthly payments before filing their 2021 tax return in the spring of 2022.

EXHIBIT 1 American Rescue Plan Act of 2021 expansion of the Child Tax Credit (single parent, one child, tax year 2021)

Source: Adapted from Tax Policy Center. Tax Policy Center Briefing Book: Key Elements of the U.S. Tax System. Washington, D.C.: Tax Policy Center; 2021 May. 

Notes: Assumes all income comes from earnings and child meets all tests to be a Child Tax Credit–qualifying dependent. Tax filer files as head of household. The $3,000 and $3,600 credits are fully refundable; prior law limited refunds to $1,400 out of the maximum $2,000 credit. The credit first phases out at $112,500 of income until credit reaches the pre-2021 level, and begins the second phase out at $200,000 of income. Only citizen children qualify for the $3,000 and $3,600 credits for children younger than 18.

If the credit were to remain fully refundable, it would reduce child poverty in an average year by about 40 percent, an effect that would be more pronounced among Black children, who would see their poverty rate cut in half. Reducing child poverty could have a profound effect on children’s health.

Making the credit fully refundable delivered benefits to the lowest-income households on par with the benefits received by middle-income households. However, very low income households typically do not owe taxes and are not required to file a tax return. Some research suggests that these households are the most likely to miss out on the newly expanded credit. Increasing participation among this group would increase average benefits.

Using a microsimulation model based on Internal Revenue Service data and the Current Population Survey, the Tax Policy Center estimates that families in the bottom one-fifth of the income distribution will receive an average benefit of almost $4,500, which is about $400 less than middle-income families (exhibit 2). Benefits for the lowest-income families are lower than for middle-income families because the simulation model assumes that some low-income families who have not filed a tax return previously will not receive the benefit. If the credit returns to its pre-2021 rules, middle-income families will continue to receive substantial benefits from the credit—almost $3,000 per year, on average. The lowest-income families will receive an average of about one-third that (exhibit 2).

EXHIBIT 2 Average benefits of Child Tax Credit before and during temporary 2021 changes to law

Source: Adapted from Tax Policy Center. Tax Policy Center Briefing Book: Key Elements of the U.S. Tax System. Washington, D.C.: Tax Policy Center; 2021. Used with permission.

Notes: Includes the $500 nonrefundable portion of the child tax credit, also referred to as the credit for other dependents.

 

The Evidence: Tax Credits Improve Health And Related Outcomes For Children

There are at least two pathways by which tax credits may affect health. First, they raise incomes, which in turn can improve health. Second, if delivered throughout the year, credits may keep some families with very low incomes from experiencing income volatility that results in periodic material hardship.

Increasing Income

Low- and middle-income families with children benefit from two related tax credits: the Earned Income Tax Credit and the Child Tax Credit. The Earned Income Tax Credit, enacted in 1975, is the older of the two and has a much more developed evidence base. Research showing that the Earned Income Tax Credit improves health by increasing income should apply to the Child Tax Credit as well because of the similarities between the two programs. The Earned Income Tax Credit is structured similarly to the Child Tax Credit in 2020: it phases in as earnings rise and then phases out after earnings reach a defined point. This point is much lower for the Earned Income Tax Credit than for the Child Tax Credit. The Earned Income Tax Credit benefits about 40 percent of families with children. Almost all of the benefits go to families in the bottom two-fifths of the income distribution. Although the Child Tax Credit goes to a much broader group, it raises the income of low-income families with children substantially, just as the Earned Income Tax Credit does.

A strong body of evidence shows that children who live in poverty face a lifetime of disadvantages. Researchers observe structural differences in young children’s brains, with statistically significant deficits seen among those who grew up in households with incomes below 1.5 times the federal poverty level and even larger deficits seen among those in households with incomes below poverty. In the US in particular, inequalities in birth weight and income are observed at all income quintiles—the lower the position in the income distribution, the more likely a baby will be born with a low birthweight, which is a primary risk factor for infant deaths and worse health later in life.

Research has shown that the Earned Income Tax Credit reduces the risk for low birth weight, likely by enabling families to seek better insurance coverage, decreasing risky behaviors such as smoking and increasing prenatal care. Increasing income through tax credits has also been shown to improve home environments, nutrition, and educational and economic attainment. Larger credits, as would be the case if EITC recipients also received a Child Tax Credit, lead to larger health improvements. The Child Tax Credit, when it is refundable, alleviates financial strain for low-income families, which can reduce injury and behavior problems. The relatively small body of literature surrounding the Child Tax Credit likely results from the credit initially being targeted to middle-income families who are affected by many other federal income tax provisions, making the identification of effects difficult.

A study that looked at the combination of the Earned Income Tax Credit and Child Tax Credit showed that an increase in tax credits led to a substantial increase in academic test scores. This increase improved the probability that a student would attend college, which is likely to result in them achieving higher lifetime earnings. The Earned Income Tax Credit has also been shown to increase college attendance, likely because parents received substantial tax refunds at the time college enrollment decisions were being made.

Reducing Income Volatility

Increasingly, low-income families experience relatively large income swings throughout the year. Among families with an annual income less than twice the federal poverty level, roughly 40 percent experience incomes swings of at least 25 percent above or below their annual monthly average in at least six months of the year. This volatility has been increasing among low-income families with children, making it increasingly difficult for them to meet their regular needs.

Income volatility leads to reduced education attainment and reduced earnings later in life. Volatility can also lead to negative health impacts. Traditionally, tax credits have been a source of volatility, albeit a positive one. Receiving the credit throughout the year could improve health by allowing low-income families with children to seek health care at the time it is needed rather than delaying care until tax time, when refunds are received.

The novel monthly payment of the Child Tax Credit in the second half of 2021 allowed the Child Tax Credit to become an income source that could be used to smooth consumption. Census Pulse survey data showed that just after the first Child Tax Credit monthly payments were delivered in July 2021, food insufficiency among low-income families dropped by 25 percent. Food insufficiency, which is itself associated with poor health outcomes, dropped the most among families with annual incomes below $35,000.

Areas For Future Work

Looking ahead, the temporary changes in the Child Tax Credit present opportunities to add to the growing evidence base about the relationship between income and health. The program’s temporary expansion also shines a light on several unanswered questions about how to maximize the health benefit of tax credits.

Understanding The Causal Effect Of Income On Health Outcomes

The Child Tax Credit payments delivered in the second half of 2021 were a mostly unexpected source of household income. As such, it could be used in research to more closely understand the impact of regular, predictable payments on the health of families with children. Careful attention will have to be paid to the fact that many families were struggling from pandemic-related issues at the time of these initial payments.

Challenges In Distributing The Credit To Complex Families

Tax credits, although important, can be a blunt tool to distribute assistance. Eligibility for the Child Tax Credit is determined on the basis of annual income of the “tax unit” and is delivered to a single tax unit, which is also determined once for the entire year. However, families and custody arrangements do not always follow a calendar year cycle. As a result, some people who have played a substantial role in caring for a child or provided significant financial support throughout the year are not eligible for the credit, in which case the child may not experience the benefits associated with the addition of income to the household they live in. The number of children in this situation has likely been increasing, as fewer children are born to and live their lives with a married couple.

In an analysis of data from 2008–11, about 5 percent of children change custodial parents each year. Low income is one of several factors associated with a custody change. Shared custody, where a child spends at least 25 percent of time with each parent, has become the most common parenting arrangement after divorce.

More work is needed to understand the extent of parent changes among children and to understand the value in splitting the Child Tax Credit among multiple tax units and whether this might lead to additional health benefits for children.

Understanding Optimal Benefit Delivery

Some debate exists about the best way to pay the Child Tax Credit. Options discussed in the literature include paying the credit mostly at tax time (the common practice before 2021), on a monthly basis in advance of filing a tax return (the practice in the second half of 2021), or on a quarterly basis.

Although early research on delivering the Child Tax Credit monthly showed promise for both helping stabilize low-income families and helping middle-income families make ends meet, it is not yet clear whether downsides to advanced delivery will become apparent at tax time. For example, after 2021, if the Child Tax Credit is extended so that the entire Child Tax Credit could be delivered as an advance payment, tax refunds might decrease for low- and middle-income families. Additional research could more precisely and rigorously analyze whether the benefits associated with monthly payments, such as reducing food insecurity, outweigh the potential disadvantages of the resulting smaller tax refunds. For example, smaller tax refunds may dampen the credit’s ability to encourage college attendance.

In a small demonstration, in 2013 and 2014, a group of Earned Income Tax Credit recipients in Colorado noted that if they had access to their credit on a more regular basis, they could use it to pay past-due bills they were juggling and deal with surprise expenses such as a health care.

Conclusion

The Child Tax Credit provides substantial payments to low- and middle-income families. In 2021 families received a benefit of up to $3,600 per child younger than six and $3,000 for children ages 6–17. The credit was fully refundable—even very low income families who did not owe taxes could receive the full benefit. Before 2021, when only a limited portion of the credit could be received as a tax refund, benefits were concentrated among middle-income families. Making the full credit available as a tax refund in 2021 allowed the lowest-income families to receive average benefits on par with those received by middle-income families. It also made the credit more equitable, as Black and Hispanic children are more likely to be left out of the credit’s full benefits than children who are White. The well-established connection between income and health, particularly among families experiencing poverty but apparent even among middle-income families, makes the Child Tax Credit an effective tool for improving health.

What shape the Child Tax Credit will take in coming years remains in flux. Some proposals would limit the credit to families with lower incomes than the current credit and make receipt of the credit contingent on those families having earnings. But allowing even the very lowest income families to receive the full value of the Child Tax Credit is critical to reducing poverty.