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Crediting Children and Families

Poverty & Family Economics
Tax Policy

The Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) are tax credits designed to support low income working families and help them meet their children’s basic needs. At the end of 2012, these tax credits require Congressional action to continue in their current forms and face changes that could have devastating effects on the millions of children who currently receive them.

The Earned Income Tax Credit provides working families who have low levels of earned income with tax credits to supplement their earnings and keep them from falling into deep levels of poverty. The EITC was originally enacted in 1975 and was expanded in 1990, 1993, and 2009. Today it serves as the federal government‘s largest antipoverty program for low income working families. According to the latest rules, adopted in 2009, families with dependent children are eligible for larger credits than adults without children and families with more than two children are eligible to receive an enhanced credit in recognition of the particular needs of larger families.

The Child Tax Credit began in 1997 as a part of the 1997 Taxpayer Relief Act and is designed to specifically mitigate the high cost of raising children and ensure children’s basic needs are met. Under the 2009 provisions of the Child Tax Credit, families are eligible to claim credits if they have dependent children under 17 years old living in their household. Originally the maximum credit that could be claimed under the CTC was set at $400 per child, but it has subsequently been raised to $1000 per child. In order to claim these credits, the taxpayer must have an annual income of at least $3,000.

Today, the Earned Income Tax Credit and the Child Tax Credit are governed by rules set by Congress in 2009. The 2009 provisions were originally scheduled to expire at the end of 2010, but Congress voted to extend these rules through the end of 2012. Once we reach the end of 2012, both the EITC and the CTC will revert back to the rules established in 2003. The 2003 rules for the tax credits differ greatly from the 2009 rules and the current provisions expire, millions of children will see their families’ credits significantly reduced or eliminated altogether. For example, the 2009 provisions of the EITC credit for larger families will be lost. In the CTC, the maximum amount of the credit will be cut in half (from $1000 down to $500 per child) and the earned income threshold, or the amount of income a family must make before becoming eligible for Child Tax Credits, will change from $3,000 under the 2009 rules to $13,300 under the 2003 rules – meaning that many of the lowest earning families with dependent children will lose eligibility.

If the 2009 provisions are allowed to expire, it is estimated that 13 million working families and 26 million childrenacross the United States would lose eligibility for tax credits. These numbers are enormous, and could lead to a substantial increase in the number of people living in poverty in the United States. In my home state of Texas, an estimated 1.5 million working families and 3 million children would lose out in the expiration. In a state with roughly 7 million children under the age of 18, this means that roughly 40 percent of children in Texas will lose benefits from tax credits. This huge percentage highlights the devastating effects that could occur in just one state; the impact that could occur across the nation is just as alarming.

Earlier in 2012, both houses in the United States Congress passed legislation concerning the tax credits. The United States Senate has passed Senate Bill S.3412, which further extends the 2009 rules of the Earned Income Tax Credit and the Child Tax Credit. This bill would preserve access to the EITC for 6.5 million families and 15.9 million children and access to the CTC for 8.9 million families and 16.4 million children. In contrast, the United States House of Representatives has passed H.R.8, a bill that maintains the CTC maximum credit amount at $1,000 per child, but otherwise calls for a return to the 2003 tax credit provisions. This bill could cause 12 million families to lose an average of $800 per family in 2013 as a result of changes to the EITC and 6 million families with children to lose an average of $500 per family in 2013 as a result of changes to the CTC. These low income families who may already struggle to support themselves will experience increased financial strain if H.R.8 is adopted or if the 2009 provisions are allowed to expire at the end of 2012.

Many families in America are struggling to make ends meet. According to the United States Census Bureau, over15 percent of people in the United States and 22 percent of children (close to 1 in 4 nationwide) lived in poverty in 2011. By reducing the number of working families and children eligible for tax credits, more people are at risk of falling into poverty. In order to avoid this possibility, we need to urge Congress to maintain the 2009 provisions of the Earned Income Tax Credit and the Child Tax Credit. Together, these programs help to reduce child poverty in the United States, something that we can all agree is a priority.