Democrats Make Politically Risky Bet on Monthly Child Tax Credit
(Bloomberg) -- Democratic lawmakers are betting that an expanded child tax credit, paid out monthly for the first time, will prove to be a successful campaign message in the 2022 midterm elections, but the policy also has political risks that could alienate some taxpayers.
Starting July 15 and going through year-end, parents will begin receiving monthly direct deposits or checks for as much as $300 per child. The move was part of President Joe Biden’s $1.9 trillion pandemic-relief bill from March.
The shift to monthly payments -- rather than a lump sum distributed after tax deadlines next spring -- is designed to help lower- and middle-income families better meet their regular living costs, especially amid the enduring pandemic. The credits are also fully refundable, flowing to families including those that don’t file taxes.
The potential trouble is that the new distribution method means some people won’t get the refunds in the spring that they’d otherwise expect -- and could even have to pay the IRS back if their incomes end up being too high.
That disappointment, even if illogical given the expansion in the tax credit this year, could prove politically awkward next year. Most Americans -- almost 80% -- prefer to overpay their taxes if it means a refund in the spring, according to a poll commissioned by the New York Times in 2019 that looked at the impact of the 2017 tax cuts enacted by Republican lawmakers and then-President Donald Trump.
Economists largely agree that sending the tax credit payments in smaller monthly chunks, rather than in one big lump sum, is good policy because it allows family more consistent access to cash throughout the year. Finance experts are also quick to point out that receiving a large tax refund isn’t necessarily a good thing -- it means the IRS was withholding too much from a worker’s paycheck throughout the year.
Democrats who designed the new payment mechanism “want to prevent people from making short-term bad decisions,” said Bob Kerr, a former Internal Revenue Service official who now consults on tax administration. “I don’t think that’s bad science or bad math -- but that doesn’t meet people where they are. They want the refund they want.”
Most taxpayers got at least a modest tax cut from the 2017 overhaul, but many might not have realized it because the Treasury Department revised the withholding formula so people had less taken out of their paychecks through 2018. The result was that when taxpayers filed, they found smaller-than-expected refunds or even an IRS bill -- feeding resentment over a law that was already seen as benefiting the wealthy more than the middle class.
Biden’s March pandemic-aid package expanded the child tax credit to $3,600 for children five and under and $3,000 for older ones, which translates to $300 and $250 a month.
The credit was also made fully refundable, so the entire amount can be paid out even if a family owes less in tax than the credit amount.
Advocates for the monthly distributions say the recurring payments mean households will be more easily able to pay for unexpected bills and handle financial emergencies.
“This matches how families pay bills and pay expenses every month,” said Ashley Burnside, a policy analyst at the Center for Law and Social Policy. “You can use the child tax credit payments to meet those rather than wait for months to get the annual lump sum at tax time.”
Democratic lawmakers have been touting the benefits to their constituents. Senate Majority Leader Chuck Schumer on Thursday urged eligible New York residents to take advantage of the expanded credit.
“It does great things for our economy, pumping money into it,” Schumer said at a news conference with other lawmakers from his home state. “Most of all, and what we’re so proud of, is that it takes half the kids in New York out of poverty.”
Progressive Representative Alexandria Ocasio-Cortez said at the same event, “These payments represent the largest anti-poverty program in a generation.”
So far, the polling is mixed on how the public views the changes. A bare 51% majority of voters support making the credit fully refundable, a Hill-HarrisX poll from June found, with some opponents arguing that some eligible families don’t need the help. A bigger share, 54%, said they opposed increasing the credit amount and 53% said they didn’t like the monthly payments.
The IRS estimates that approximately 39 million households -- covering 88% of children -- will benefit from the credit. The new monthly disbursements will only apply to half of the credit for 2021, given the July start, with rest being applied to any outstanding tax liabilities or added to the tax refund when people file next spring, something that could reduce any disappointment next year, said Kyle Pomerleau, a resident fellow at the American Enterprise Institute.
Biden has highlighted a proposed extension of the expanded credit through 2025 as a key priority among his American Families Plan proposals, and is pressing for Democratic lawmakers to push forward without Republican support for the legislation.
“There is some risk -- the reality of getting monthly payments is you may take a hit later,” said Brad Bannon, a Democratic political consultant. “But next year the economy may be in better shape. We are talking about cash payments now. People can use that to climb out of debt and that money will flow through the economy.”
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