Child Tax Credit & TANF
read more about solutions for American families
The American Rescue Plan – the Covid relief package passed in March 2021 – temporarily expanded the Child Tax Credit to $3,600 for children five and under and $3,000 for children ages six to 17. It also made the credit fully refundable, meaning lower-income families could receive the full benefit even if they owed little or no federal income tax.
From July through December 2021, the government distributed up to half of the credit through monthly advance payments of $300 or $250 per child, with the remainder generally claimed at tax filing. Congress allowed these enhancements to expire at the end of 2021.
The One Big Beautiful Bill Act (OBBBA) permanently extended key Child Tax Credit provisions of the 2017 Tax Cuts and Jobs Act that otherwise would have expired after 2025. The law increased the maximum credit from $2,000 to $2,200 per child beginning in 2025, retained the phase-out thresholds of $200,000 for individuals and $400,000 for married couples filing jointly, and made permanent the $500 nonrefundable credit for other dependents. Both the maximum Child Tax Credit and its refundable maximum are indexed for inflation.
The 2021 expanded Child Tax Credit was successful in combating child poverty. The Supplemental Poverty Measure (SPM) child poverty rate fell to a record-low 5.2 percent in 2021, before more than doubling to 12.4 percent in 2022 following the expiration of the expanded credit and other pandemic-era assistance. The number of children in SPM poverty increased by more than 5 million. While the expiration of the expanded Child Tax Credit was an important factor, other pandemic-era tax credits and stimulus payments also ended during this period.
The Center on Budget and Policy Priorities found that the Child Tax Credit lifted approximately 4.1 million people above the poverty line in 2024, including 2.4 million children, based on the Supplemental Poverty Measure. It also provided additional financial support to another 12.2 million people living below the poverty line, including 5.6 million children.
Combined with the Earned Income Tax Credit (EITC) for families with children, the two credits lifted 8.2 million people above the SPM poverty line and provided additional support to another 17.5 million people below the poverty line in 2024. Many low-income families receive little or no benefit from other child-related tax provisions, such as the nonrefundable Child and Dependent Care Tax Credit.
That said, we need to streamline the way we provide aid to American families. In 1996, Congress passed – and President Bill Clinton signed – the Personal Responsibility and Work Opportunity Reconciliation Act, promising to “end welfare as we know it” and transform welfare into “a second chance, not a way of life.”
The legislation replaced Aid to Families with Dependent Children (AFDC) with Temporary Assistance for Needy Families (TANF). Unlike AFDC, TANF was established as a block grant that gave states considerable flexibility over eligibility, benefits, and how federal welfare dollars were spent. It also established work requirements and generally limited federally funded assistance to 60 months over a recipient’s lifetime.
Nearly three decades later, there are serious questions about whether the system is accomplishing what Congress intended. The problem isn’t necessarily how much we’re spending – it’s where the money goes. States have broad discretion over TANF dollars, and much of the money is no longer spent on either basic assistance to poor families or programs that help recipients enter the workforce.
A 2020 Stateline investigation found that states were directing only about 11 percent of TANF funds toward work-related activities, including education and training, with 17 states spending less than 5 percent. States have also used TANF dollars for an enormous range of other purposes, including child welfare, pre-K, college scholarships, drug courts, and programs serving families well above the poverty line.
Even Robert Rector of the conservative Heritage Foundation, who advised members of Congress involved with the original welfare-reform legislation, concluded: “Overall, the states have radically abused the program.” He argued that states had lost sight of one of welfare reform’s central objectives: helping recipients move into employment.
1787’s Plan of Action is to replace the existing Temporary Assistance for Needy Families (TANF) block-grant system with simpler, more targeted programs that provide assistance directly to families, support work, and reduce administrative waste. In other words: Simplify the safety net. Make work pay. Let assistance follow the family. And spend anti-poverty dollars on reducing poverty.
Our plan replaces TANF but preserves the functions that actually work. Rather than continuing to funnel billions of federal dollars through a loosely structured block grant, we can divide TANF’s legitimate functions among programs specifically designed to perform them.
Replace cash welfare with more direct assistance to families. Increase the Child Tax Credit for children under six, when child-care costs are generally greatest, while maintaining a connection to work. The enhanced benefit should be structured so that very low-income working families can actually receive it. Instead of assistance depending heavily on where a family lives and how its state chooses to spend TANF dollars, the benefit will follow the family.
Consolidate child-care assistance under CCDBG. TANF dollars currently used for child care should be redirected into 1787’s expanded Child Care and Development Block Grant (CCDBG). Under our proposal, child-care assistance would be portable – the money follows the child – allowing eligible parents to choose among approved private child-care centers, family child-care homes, nonprofit providers, or participating public or private pre-K programs.
TANF programs that primarily help recipients find and keep jobs – including effective job training, placement, transportation, and other employment support – should be consolidated into existing federal and state workforce programs. This will be facilitated by U.S. Works, 1787’s jobs program.
Create a limited Family Emergency Assistance Fund. A tax credit cannot address every crisis. Families sometimes need immediate help to prevent an eviction, keep the electricity on, repair the car that gets a parent to work, or deal with another temporary emergency. States should retain a smaller, tightly controlled fund for short-term assistance, with benefits generally paid directly to landlords, utilities, child-care providers, or other vendors rather than becoming another system of indefinite cash assistance.
Families with older children who currently depend on TANF cash assistance should also receive an appropriate transition so that restructuring the program doesn’t abruptly eliminate assistance to some of the poorest households.