A Newborn Tax Credit could be Worthwhile with Sound Administration
The Democratic presidential nominee Kamala has pledged to make permanent temporary increases to the earned income tax credit and child tax credit, which will be enacted in 2021 by the American Rescue Plan Act. Alone, these expansions would provide valuable resources to many low-income families, reducing poverty and material hardships in the short term, as well as improving education outcomes and future earnings in the longer term.
Grabbing the most attention, however, is Harris’s proposal for a larger CTC for families with newborns. Parents would receive $6,000 for their newborn, a $2,400 increase on the $3.600 ARP child credits for children under six years old. The boost could help low-income families, especially if planned and administered well.
Assuming these provisions went into effect in 2025, the Tax Policy Center estimates that reinstating the 2021 expansions of the EITC and CTC plus a larger CTC for newborns would cost $105 billion for that year. After 2025, the cost would increase substantially compared to current law because CTC enhancements enacted through the 2017 Tax Cuts and Jobs Act are scheduled to expire.
Overall, low-income families with children would gain $2,750 on average from the combination of the expanded CTC and the additional credit for newborns.
The families of virtually all newborns in 2025 would receive a larger credit compared to current law, with the largest increases benefiting the nearly 3 out of every 10 newborns whose families’ incomes are too low to receive the full benefit under current law.
Figure 1 shows how a larger credit for newborns would work.
A $6,000 credit would triple the CTC received by most families today. The credit would be larger for low-income households who receive less than the maximum credit amount because they do not earn enough money. Research shows that income supplements given to a child when they are young can have a positive impact on their future health, education and earnings. Families often incur these costs when parental income is falling, as parents are forced to take time off work or reduce their hours in order to care for their newborn child. How would this benefit be delivered if it were to be increased? Policymakers need to take care in establishing a CTC that reaches families in a timely, efficient fashion, minimizing administrative challenges.
Typically, families receive the CTC annually, after they have filed their tax return. In many cases, families have to wait months for any tax benefit after the birth of their children. For example, if a family has a child born in January 2024 they may receive the CTC the following year. This could be as early as late February or March 2025. And for many families who aren’t familiar with the tax system, including immigrant families, filling out a tax return to get the child credit can be a challenge.
Under Harris’s proposal, policymakers would have to decide if they want the $2,400 newborn bonus administered separately from the $3,600 CTC for young children. If so, policymakers could provide $3,600 per month (or provide part of it monthly and claim the rest on a tax form, as they did for 2021), and separate $2,400, such as in a lump-sum payment as soon after a child’s birth. This could be a great way to boost income for families who need to buy large items for their newborns like car seats or cribs. What information would the IRS require, and what infrastructure would allow for quick and accurate delivery of this information to families? How can the IRS assist families who are unfamiliar with filing tax returns?
For certain families, simplified filing tools could be helpful. Some families may benefit from additional assistance using a navigator.
With the focus on administration, including the resources that the IRS would require to issue the CTC accurately and quickly, a newborn tax credit could be an invaluable resource for families at a time when they are most in need.
