Factors Affecting the Cost of Extending the Expanded Child Tax Credit

Factors Affecting the Cost of Extending the Expanded Child Tax Credit

INSIGHTi

Factors Affecting the Cost of Extending the
Expanded Child Tax Credit
February 7, 2022
As Congress has considered legislation extending the expanded child credit, questions have arisen about
the potential budgetary effects of such legislation and the factors that affect its projected cost.
The Congressional Budget Office (CBO) and the Joint Committee on Taxation (JCT) provide Congress
with information about the projected budgetary effects of specific legislative proposals, typically in the
form of cost estimates. These estimates are required to measure the budgetary effect of a legislative
proposal in relation to projections of revenue and spending levels that are assumed to occur under current
law, typically referred to as the current-law baseline. Changes to refundable tax credits can affect both
revenue and outlays. The portion of a refundable tax credit that reduces taxes owed (i.e., reduces positive
tax liability) is scored as a decrease in revenue, while the portion of the credit that is greater than taxes
owed (i.e., increases negative tax liability) is scored as an increase in outlays.
A variety of factors could affect the estimated budgetary effects of legislation that extends the expanded
child credit, including
 the details of the policy being extended,
 the duration of the extension,
 other changes to the tax code that could affect child credit payments, and
 economic and demographic projections.
Each is briefly discussed below.
The Details of the Policy Being Extended
The estimated budgetary effects of a proposal depend in part on what is being extended. For example, is
the legislation extending the 2021 child credit or is it extending a modified version of the 2021 credit?
Some modifications—like those that expand eligibility—would increase the cost of the extension, all else
being equal. Other modifications—like extending a smaller credit, limiting or eliminating full
refundability, or reducing the income level at which the credit begins to phase out—would reduce the cost
of an extension.
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The Duration of the Extension
A shorter extension would generally be expected to have a lower budgetary cost than a longer extension.
A longer extension’s cost may also be affected by temporary tax provisions that, after they are scheduled
to expire, would no longer be considered part of the current-law baseline.
This may be especially relevant to an expanded child credit extension, because the expanded credit is the
result of temporary changes made by two laws which were both in effect in 2021—the Tax Cuts and Jobs
Act (TCJA; P.L. 115-97) and the American Rescue Plan Act (ARPA; P.L. 117-2). (For more information
on these changes, see Table 1 in R45124, The Child Tax Credit: Legislative History.) Each law
temporarily expanded the credit, in terms of both the amount of the credit and eligibility, compared to the
credit amounts under permanent law, as illustrated below.

Upon the expiration of the ARPA expansion at the end of 2021, the credit has reverted back to levels
under current law, as expanded by the TCJA, through the end of 2025. Beginning in 2026, the TCJA
changes are scheduled to expire and the credit will revert to its permanent-law levels. In other words, if
the expanded child credit in effect in 2021 were to be extended permanently, the annual budgetary cost in
2026 and beyond would appear higher than the annual cost through 2025, since the changes made by the
TCJA were already assumed in the current-law baseline through 2025 (i.e., “current cost”), as illustrated
in the figure below.

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The total cost of the child credit (the pink, green, and grey bars in the figure above) ultimately reflects
both the current-law baseline and any applicable changes to current law in that year.
CBO estimates making the 2021 credit permanent (including both the ARPA and TCJA changes) would
cost $1.597 trillion over 10 years (FY2022-FY2031). Prior JCT estimates suggest the TCJA changes to
the child credit would cost about $85 billion a year if permanently extended, while the ARPA changes
could cost about $105 billion per year if permanently extended. Taken together, this means that, beginning
in 2026, the cost of extending the 2021 policy would score at approximately $190 billion per year, versus
$105 billion per year when TCJA is part of the current-law baseline. Hence, a shorter extension of one or
two years would have a lower budgetary effect not only because it is in effect for fewer years, but because
it will be in effect when the TCJA changes are part of the current-law baseline.
Other Changes to the Tax Code That Affect Child Credit Payments
If other changes to the tax code were included in a legislative package extending an expanded child
credit—especially those that affect a taxpayer’s income tax liability—they might directly affect child
credit amounts and ultimately the projected cost of an extension. This could occur, for example, if the
expanded credit extension was limited for lower-income taxpayers, which some have proposed.
Under current law, the child credit is structured so that the total amount is the sum of the credit that
reduces income tax liability (the nonrefundable portion of the credit) plus the amount that is greater than
income tax liability (the refundable portion of the credit). The refundable portion is limited to $1,400 per
child. If a tax law change were to reduce income tax liabilities, and the refundable portion was limited in

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a proposed extension, the overall amount of the credit could fall for some low-income taxpayers. In other
words, changes to the income tax could, in certain cases, directly affect credit amounts and hence the
overall cost estimate of an extension. (The Build Back Better Act [BBBA; H.R. 5376]—which would
extend the expanded credit for one additional year—does not limit the refundable portion of the credit.)
Policymakers could also consider other changes to tax and spending provisions, which may not directly
affect the costs of the child credit extension, but could offset the cost of an overall legislative package that
included an extension.
Economic and Demographic Projections
The cost estimate for any child tax credit modification will also depend on projections of future economic
and demographic outcomes. Relevant economic factors to a child tax credit cost estimate include (1) the
distribution of household income, as a tax filer’s income determines both eligibility for the credit and
amounts that may be claimed; (2) projections of future inflation, which will determine the rates at which
households are pushed out of full and partial eligibility for the credit; and (3) the likelihood of future
negative economic shocks, which generally tend to increase credit eligibility. Demographic projections of
the number of households with qualifying children will also determine the projected cost of the credit, as
the population of qualifying children will change over the course of the 10-year budget window (e.g., 9-
to 17-year-olds eligible for the credit in the first year of the expansion would not be eligible by the last
year of a 10-year budgetary window).

Author Information

Margot L. Crandall-Hollick
Grant A. Driessen
Specialist in Public Finance
Specialist in Public Finance

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