INSIGHTi
The Impact of a “Fully Refundable” Child Tax
Credit
September 15, 2021
Congress is currently considering an extension of temporary changes to the child tax credit that were
enacted for 2021 under the American Rescue Plan Act (ARPA; P.L. 117-2). ARPA made three changes to
the child credit that affect the credit amount taxpayers wil receive: (1) extending the eligibility age of
qualifying children to include 17-year-olds; (2) increasing the maximum amount of the credit, with a
larger maximum credit for young children; and (3) eliminating the prior-law formula for the refundable
portion of the credit. This third change is sometimes referred to as making the credit “fully refundable.”
(The law also temporarily changed how the credit is being delivered for 2021.)
The Biden Administration has proposed making full refundability permanent, while temporarily
extending other provisions of the ARPA expansion for four more years, through the end of 2025. A similar
proposal is included in proposed legislation released on September 10 by Chairman Neal of the Ways and
Means Committee.
This Insight provides an overview of what full refundability means in the context of the 2021 child credit
and summarizes recent research examining the impact of full refundability.
What is full refundability?
In the context of the ARPA-expanded child credit, full refundability means the credit is the same amount
per child for low- and moderate-income taxpayers, irrespective of their income. (Higher-income taxpayers
are subject to a phaseout of the credit.) Specifical y, by making the child credit fully refundable for 2021,
ARPA temporarily eliminated the prior-law formula used to phase in the credit for lower-income
taxpayers. Under the prior-law formula, a taxpayer with more than $2,500 of earned income was eligible
to receive a partial benefit from the credit. Their benefit amount was equal to 15% of earned income
above $2,500, subject to a limit of $1,400 per qualifying child. These aspects of the formula are il ustrated
in points ❶-❸ in several figures below.
Full refundability of the ARPA-expanded child credit is il ustrated as a horizontal pink line at the
maximum credit amount of $3,600 per young child in the figure below. A taxpayer with one young child
would be eligible for the same credit amount ($3,600) regardless of whether they have no income,
$10,000 of income, or $100,000 of income. If instead al the ARPA changes had been adopted except full
Congressional Research Service
https://crsreports.congress.gov
IN11752
CRS INSIGHT
Prepared for Members and
Committees of Congress
Congressional Research Service
2
refundability, the credit amount would have phased in with earned income for low- and moderate-income
taxpayers, as il ustrated by the upward-sloping gray dotted line. The lowest-income taxpayers—those
with $0 of earned income—are eligible for the largest increase in the child credit as a result of full
refundability (i.e., the vertical distance between the flat pink line and the upward-sloping dotted gray line
is the largest). As a taxpayer’s earned income increases, the additional benefit from full refundability
declines.
What is the impact of full refundability of the child tax
credit?
The Tax Policy Center (TPC) estimates full refundability of the ARPA-expanded child credit increases the
average credit amount by $1,040 (from $3,270 to $4,310) among taxpayers with children, as il ustrated in
the figure below. According to these estimates, full refundability results in a larger average credit for the
bottom 60% of taxpayers, with larger average increases for lower-income taxpayers. The lowest-income
taxpayers with children are estimated to receive the largest benefits from full refundability. The lowest-
income 20% of taxpayers (i.e., the lowest quintile) receive a credit that is more than twice as large on
average because of full refundability (an average credit of $4,550 under ARPA, of which $2,960 is
Congressional Research Service
3
attributable to full refundability). The remainder of the increase in the average credit is attributable to the
larger per-child credit and expanded eligibility to include 17-year-olds.
Full refundability results in the largest increase in the credit amount for the poorest taxpayers. It also
expands eligibility to the poorest taxpayers—those with less than $2,500 of earned income—who were
previously ineligible for the credit. CRS research suggests that full refundability is a major factor in the
poverty reduction impact of the ARPA-expanded child credit, both in terms of the prevalence and depth of
child poverty. The Center on Budget and Policy Priorities estimates that the ARPA-expanded child credit
with full refundability wil lift 4.1 mil ion children out of poverty, but without full refundability the credit
would lift a smal er number of children—0.5 mil ion—out of poverty.
The budgetary cost of full refundability of the ARPA-expanded child credit is estimated to be about half
of the total cost of the ARPA expansion, according to the Tax Policy Center (about $53 bil ion per year of
TPC’s estimated $97.0 bil ion cost of the ARPA-expansion).
The budgetary cost of full refundability depends in part on the overal per-child benefit amount. As Elaine
Maag of the Tax Policy Center notes, “If Congress keeps full refundability but reduces credit amounts to
pre-ARP[A] levels [$2,000 per child], overal benefits would be lower. But low-income families would
stil receive substantial benefits if the lower credit amounts were made fully refundable.”
TPC estimates that making the pre-ARPA child credit ($2,000 per-child) fully refundable would cost an
additional $24 bil ion per year. While the benefits of this policy change would be concentrated among
lower-income taxpayers (as il ustrated in the figure below), the antipoverty effects would be smal er due
to the smal er overal credit amount. One estimate from the National Academy of Sciences (NAS)
suggests a benefit comparable to a $2,000 fully refundable credit would lift 2.5 mil ion children out of
poverty.
Congressional Research Service
4
The Biden Administration estimates if the credit were to revert to its prior-law level of $1,000 per child in
2026 (as it is scheduled to under current law) and was also fully refundable (which it is not under current
law), the additional annual cost of full refundability would be less than $3 bil ion a year.
Author Information
Margot L. Crandall-Hollick
Specialist in Public Finance
Disclaimer
Congressional Research Service
5
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff
to congressional committees and Members of Congress. It operates solely at the behest of and under the direction of
Congress. Information in a CRS Report should not be relied upon for purposes other than public understanding of
information that has been provided by CRS to Members of Congress in connection with CRS’s institutional role.
CRS Reports, as a work of the United States Government, are not subject to copyright protection in the United
States. Any CRS Report may be reproduced and distributed in its entirety without permission from CRS. However,
as a CRS Report may include copyrighted images or material from a third party, you may need to obtain the
permission of the copyright holder if you wish to copy or otherwise use copyrighted material.
IN11752 · VERSION 1 · NEW