Republicans and Democrats come together on tax credits

Parents caring for children under the age of 17 might soon receive a bigger break on their taxes thanks to a rare bipartisan breakthrough on Capitol Hill. The House Ways and Means Committee announced a bipartisan proposal this week to rework some of the tax policies set up in the years before and during the pandemic, including the child tax credit program.

“This bipartisan agreement provides greater tax relief, strengthens Main Street businesses, boosts our competitiveness with China, and creates jobs,” Ways and Means Chairman Jason Smith, R-Mo., wrote in a statement. The bill also has support from Sen. Ron Wyden, the Democratic chairman of the Senate Finance Committee.

The Tax Relief for American Families Act of 2024 includes these changes:

• Raises the maximum refundable child tax credit from $1,600 per child in 2023 to $1,800, ramping up to $2,000 by 2025.

• Retroactively extends tax breaks for businesses’ depreciation and amortization costs.

• Allows research and experimentation to count as tax-deductible expenditures on a year-by-year basis instead of rolling them into a five-year period as currently required by law.

• Extends low-income housing credits at 12.5 percent of costs incurred by select contractors picked by states from 2023 to 2025.

• Stiffens penalties for providing consultation services to fraudulently obtain COVID-19 employment retention tax credits and eliminates the credit altogether at the end of January.

Speaking to a crowd of reporters last week, House Minority Leader Hakeem Jeffries of New York said expanding the child tax credits needed to be “the starting point” of any tax bill.

“The Biden tax credit that was enacted as a part of the American Rescue Plan was incredibly important to improving the lives of working families, middle class families, and low in-come families, reducing child poverty in many communities in half during the last six months of 2021,” Jeffries said.

During the pandemic, the White House’s American Rescue Plan raised the maximum child tax credit from $2,000 to $3,000 per child over the age of 6. That coincided with a drop in the poverty rate down to just 5.2 percent in 2022. In 2019, the child poverty rate was 14 percent, according to the Pew Research Center.

Nicole Hunt, a life issues analyst for Focus on the Family, characterized support for the expanded child tax credit as a pro-life position.

“The next wave of the pro-life movement is really about connecting women to all of the resources available to them, including child tax credits. This is something that is front of mind,” Hunt said.

Having been raised by a single mother herself, Hunt said tax credits make a big difference to families living paycheck to paycheck.

“We know that a lack of financial resources is one of the primary reasons women choose to get an abortion,” Hunt said. “At Focus on the Family, we believe that child tax credit will give families an opportunity for families to meet their specific needs. These deductions are literally putting food in their pantries, clothes on their children’s backs, shoes on their children’s feet.”

But the program—and others like it—carry a steep cost.

Tax policies like the child tax credit were key tools the government used to combat the economic effects of the pandemic. But their expanded use contributed significantly to the nation’s nondiscretionary spending. Between 2019 and 2022, the cost of tax credits costs shot up 155 percent and accounted for 11 percent of the $1.4 trillion increase in the country’s mandatory spending during that time. That makes it comparable to the rising costs of Medicaid and Social Security’s survivors insurance, two other areas that have become significantly more expensive since the pandemic.

Erica York, a senior economist and research director for the Tax Foundation, says tax credits must be evaluated on a case-by-case basis for economic effectiveness. But the temporary nature of the credits in the Ways and Means Committee’s bill add a degree of economic uncertainty for its intended beneficiaries.

“Businesses need certainty in the tax system for tax policy to have a real effect,” York said. “When you can’t plan for what the tax code is going to look like, that makes tax policy less effective than it would be if we’re talking about permanent changes to the system.”

For now, few Republicans have openly opposed the bill. When asked if he felt optimistic about the bill’s changes, Rep. Randy Feenstra, R-Iowa, a member of the Ways and Means Committee, said he expects it to draw support.

“To me it’s a tremendous bill,” Feenstra said. “It’s fabulous for small business, Main Street business, manufacturers, [agriculture] producers. I think everyone is very optimistic. I’m excited to get it passed.”