Background

Beginning in the early 1990s, the federal response to family and child poverty began to shift away from an entitlement welfare policy that provided a small cash stipend to low-income parents with children to a package of policies that required labor force participation for receipt. One central policy of this shift was expansion of the Earned Income Tax Credit (EITC), a refundable tax credit started in 1975 designed to supplement low-wage earnings of parents and caregivers with children. By 2022, the EITC was worth up to nearly $7,000, and it delivers thousands of dollars in tax refunds annually to working families. The significant expansion to the EITC in the early 1990s and subsequent expansions since have firmly established the EITC as one of the largest anti-poverty policies in the United States, lifting an estimated 3 million children out of poverty annually.¹

In 1997, the Child Tax Credit (CTC) was added to federal tax policy and created as a small, non-refundable credit to help offset taxes for middle-class families with children. By 2001, CTC eligibility was expanded to allow some low-income working families to access the credit. Subsequent legislation further expanded CTC eligibility to lower-income families and introduced a refundable portion of the credit (i.e., additional child tax credit or ACTC), allowing low-income families to receive a portion as a tax refund. In 2017, the maximum CTC amount was increased to $2,000 per child and the ACTC to $1,400.²

Annually, the EITC and CTC together lift over 10 million people out of poverty, including over 5.5 million children. About 30 million workers and families benefit from the EITC, benefiting significantly more than the 900,000 families who participate in the remnants of the U.S. cash welfare policy through the Temporary Assistance for Needy Families (TANF) program.

“I try to make sure that I use it [CTC] for [the kids], whatever they needed. If it was food, clothes, shelter, whatever. It was for them.”
– Cecilia, 44, office worker, 3 children, <$25k annual income

The EITC and CTC jointly have significantly reduced poverty. However, at their current wage-earning thresholds, they fail to adequately respond to the needs of very low wage-earning families and families that primarily rely on other income sources such as retirement, veterans, social security, and disability benefits. The American Rescue Plan Act of 2021 (ARPA) temporarily eliminated the wage-earning requirements for the CTC—expanding eligibility to very low-income families and families with these types of income—and increased the maximum credit amount to $3,600 per child. Emerging research has shown that the ARPA expansion of the CTC helped reduce child poverty to a historic low³ and reduced food and material hardships⁴ without reducing employment among working parents.⁵

“When that check started hitting, I was like, this is a blessing because I could do something with this. I feel like [the CTC monthly payment] was very life changing because I became a business owner.”
– Lu, 33, self-employed, 6 children, <$10k annual income

Yet, the federal government failed to renew the expansion, so in 2022, the maximum credit amount and eligibility requirements reverted to pre-pandemic rules. Under these rules, the credit is ineffective at addressing poverty for very low-income families and families that primarily rely on income from unearned sources. This resulted in many caregivers who work part-time or stay home to care for children, like grandparents and stay-at-home moms, losing a resource that was essential for creating a thriving environment for the children they care for. In addition, many people in low-wage jobs who aren’t required to file taxes make the logical decision to avoid the pain of filing taxes, since they don’t know how much they might be eligible for in tax credits or whether they will end up paying.