The Impact of a “Fully Refundable” Child Tax Credit

The Impact of a “Fully Refundable” Child Tax Credit

INSIGHTi

The Impact of a “Fully Refundable” Child Tax
Credit
Updated November 24, 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 will 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 had 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
was included in proposed legislation released on September 10 by Chairman Neal of the Ways and Means
Committee. The House-passed Build Back Better Act (BBBA; H.R. 5376) would extend the ARPA
expansion for one year—2022—and permanently make the credit fully refundable beginning in 2023.
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.) Specifically, 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 illustrated
in points ❶-❸ in several figures below.
Full refundability of the ARPA-expanded child credit is illustrated 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,
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$10,000 of income, or $100,000 of income. If instead all the ARPA changes had been adopted except full
refundability, the credit amount would have phased in with earned income for low- and moderate-income
taxpayers, as illustrated 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 illustrated 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

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average because of full refundability (an average credit of $4,550 under ARPA, of which $2,960 is
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. Research suggests that before ARPA about a third of all children lived
in households whose low incomes made them ineligible for the maximum child credit amount ($2,000 per
child at the time). 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 will lift 4.1 million children out of poverty, but without full refundability the credit would lift
a smaller number of children—0.5 million—out of poverty (a difference of 3.6 million). The Jain Family
Institute estimates a similar figure of 3.2 million children who would have remained in poverty if the
ARPA-expanded child credit had not been fully refundable.
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 billion per year of
TPC’s estimated $97.0 billion cost of the ARPA-expansion).
A fully refundable $2,000 per child credit
The budgetary cost of full refundability depends in part on the overall 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], overall benefits would be lower. But low-income families would
still receive substantial benefits if the lower credit amounts were made fully refundable.” Under current

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law, the maximum child tax credit is scheduled to revert to $2,000 per child 0-16 years old from 2022 to
2025, and $1,000 per child 0-16 years old beginning in 2026.
Estimates from the Joint Committee on Taxation (JCT) suggest that making the pre-ARPA credit ($2,000
per child) fully refundable between 2023 and 2025, as proposed by BBBA, would cost an additional $12
billion per year. While the benefits of this policy change would be concentrated among lower-income
taxpayers (as illustrated in the figure below), the antipoverty effects would be smaller due to the smaller
overall 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 million children out of poverty.

A fully refundable $1,000 per child tax credit
The Biden Administration estimates if the credit were to revert to $1,000 per child beginning in 2026 (as
it is scheduled to under current law) and were also fully refundable (which it is not under current law), the
additional annual cost of full refundability would be less than $3 billion a year. The JCT estimates this
additional annual cost would be about $3.5 billion per year.

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Author Information

Margot L. Crandall-Hollick

Specialist in Public Finance

Disclaimer
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