The most important part of the new American Rescue Plan Act for philanthropy may be one which provides not a cent to any nonprofit group or a tax incentive to any donor.
The law includes changes in the Child Tax Credit that, according to the Institute on Taxation and Economic Policy, could raise the incomes of families in which 83 million children live. Together with other parts of the plan, such as one-time stimulus payments of $1,400 per person and an extension of SNAP benefits (food stamps), the changes would reduce child poverty by 56 percent, Columbia University’s Center on Poverty and Social Policy concludes.
If that happens, it would be, as then-Vice President Biden said of the Affordable Care Act, a “big f-ing deal.” Fewer children growing up in poverty might mean fewer children with medical, educational, or behavioral problems that government and philanthropic programs have been trying for years to address.
Parents with more income at their disposal may be able to live in better housing, purchase better food, and get better child or health care without as much help from nonprofit organizations. Inequality might decline as well, since Black and Hispanic families, whose incomes are generally lower than those of whites, are especially likely to benefit.
The new Child Tax Credit, in other words, could alter the landscape for philanthropists and charities serving the poor. But will it? For more than 50 years, policymakers, scholars, and advocacy groups have been studying the idea of giving people in poverty money, alongside—or in place of—traditional social services programs. The Biden administration has now moved in the direction of such an “income strategy,” but how successful it will be remains to be seen.
One reason is that the new credit is complicated and temporary. The current Child Tax Credit allows families with children to reduce the amount of Federal income tax they owe by $2,000 per child, 16 years old or younger. Married couples with taxable incomes up to $400,000 can claim it, but lower-income families with earnings can receive a refund of up to $1,400 per child at the end of the year if the credit exceeds the amount of tax they owe.
The new credit increases the amounts to $3,600 for children under the age of 6 and $3,000 for those 6-17. Parents with taxable incomes up to $150,000, or if single with children, up to $75,000, are eligible. (For families with higher incomes, the child tax credit would largely remain at its current level.) Moreover, the new credit is completely refundable, even to families without any earnings. Half of any refund due can be paid monthly, with the rest applied to the family’s year-end tax return.
For example, a couple with two children under 6 and a taxable income below $150,000 will be eligible for total credits of $7,200 this year. If it owes nothing in tax, the family could still receive up to $300 per month in cash and the rest when it files its 2021 tax return. (On top of this, it could also receive other benefits, such as the Earned Income Tax Credit and SNAP.)
According to USA Facts, the average American family paid about $2,400 in Federal taxes in 2018. That means that a large share of families—including those without any earned income—should be getting payments as a result of the new Child Tax Credit.
But possibly only this year. Because it was part of the coronavirus relief package, the new tax credit is due to expire at the end of 2021. However, although the changes in it will cost an estimated $100 billion, Congress is understandably reluctant to end measures that benefit large numbers of voters.
Senator Mitt Romney has also offered a Republican version of the credit. With major tax legislation later this year already under discussion, an opportunity to make the new Child Tax Credit permanent—or end it—seems likely to present itself.
Delivering monthly checks to eligible families will be another challenge. In charge of doing so will be the Internal Revenue Service, which has far more experience collecting money than giving it away. Its record with another refundable credit, the Earned Income Tax Credit (which goes to families and individuals with low wages) has been marked by high payment error-rates, even though the credit is only calculated on year-end tax returns.
Adjusting the refundable amount of the new Child Tax Credit monthly, as recipient incomes (and taxes due) fluctuate, will be much harder. For that reason, Congress included a provision to limit how much families will owe if they receive too much during the year. But we have no way of knowing if it will be sufficient.
Not least important is the question that has bedeviled prior efforts at pursuing an “income strategy”: How will it affect the behavior of the poor? Some have worried that unconditional government payments might induce employable people to work less. Others have feared that providing public support for children could lead to more single-parent families, since fewer earners would be needed in a household. If either of these occurred, rather than reducing poverty, an “income strategy” might increase it.
Enormous amounts of research and analysis, as well as several real-world experiments, have gone into trying to answer this question. Not surprisingly, they have produced a variety of conclusions. The consensus seems to be that providing money to low-income families will result in lower earnings, particularly among secondary workers such as spouses and older children and may also allow families to dissolve. However, how serious these changes are hinges on program design, the amount of the benefits, the length of time the program has been operating, and not least of all, political preferences, among other factors.
Judgments about the family support program created by the New Deal—Aid to Families with Dependent Children—worsened to the point that in 1992, Bill Clinton made “ending welfare as we know it” a central theme of his campaign for the presidency. Four years later, he signed into law a bill doing exactly that and requiring most of those who needed help to work. Breaking with many of his liberal allies at the time, then-Senator Joe Biden supported the change.
Now, as president, he has signed into law a very different kind of family support program, operating through the income tax rather than the social security system. Will it succeed? Or will it contribute to a new set of problems for families in poverty? Either way, the consequences for the philanthropic world are likely to be significant.
Leslie Lenkowsky is professor emeritus of philanthropic studies and public affairs.