The two most important pieces of the 2001-2011 tax cuts for low-income families were the reduced refundability threshold of the Child Tax Credit (CTC) and the 2 percentage point cut in payroll taxes. The American Taxpayer Relief Act of 2012 (ATRA) extended the former for 5 years and dropped the latter entirely. This, in sharp contrast to many provisions benefiting higher income families that were made permanent.
Prior to 2001, the CTC was $500 per child. Only some families with at least 3 children could get receive a refundable CTC. The 2001 act doubled the CTC to $1,000 per child and broadened its refundability. All families could receive 15 cents of their credit for each dollar of earnings over $10,000. (The threshold was indexed for inflation and would be about $13,000 in 2013.) Stimulus legislation in 2009 reduced this threshold to $3,000 – a critically important change for low-income families.
Of the $38.3 billion in total child credits that the Tax Policy Center estimated families claimed in 2012, about one-fifth came from the reduced refundability threshold. Most of the 2001 increase (that was made permanent in ATRA) went to families in the middle income quintile and higher. In contrast, benefits from the 2009 changes (which remain temporary) went largely to families in the lowest income quintile.
The two percentage point reduction in payroll taxes was, no doubt, expensive and poorly targeted. But it was rooted in a much more targeted tax credit, the Making Work Pay tax credit (MWP). MWP provided a credit of 6.2 percent of earnings, up to $400 for singles ($800 for married couples). It phased out at higher incomes, with no credit available once earnings reached $95,000 ($190,000 for couples). Congress and the President could have opted to revive this credit. Instead, they let the benefit expire for everyone, in spite of the fragile economy low-income families still face.
Let’s hope the next round of tax policy debate takes it a little easier on struggling families.