The American Rescue Plan – the Covid relief package that passed in March 2021 – converted the annual Child Tax Credit into a more frequently issued “child allowance,” amounting to $3,600 for children five and under and a $3,000 credit for those aged six to 17 (equaling $300 or $250 per month). The legislation also made the benefit “fully refundable,” meaning, even if the parents of lower-income families make too little money to pay federal income taxes, they would still get the money.

 

Congress allowed the American Rescue Plan’s expanded Child Tax Credit to expire at the end of December 2021.

 

The One Big Beautiful Bill (OBBB) extended and expanded the Child Tax Credit provisions of the 2017 Tax Cuts and Jobs Act (TCJA) that otherwise would have expired at the end of 2025. The new law made the TCJA’s $2,000 per child base credit permanent and increased it to $2,200 per child effective in 2025. Further, it made permanent the phase-out threshold rate of $200,000 ($400,000 for taxpayers married filing jointly) and the $500 nonrefundable credit for non-child dependents. The bill adjusts the refundable part of the credit for inflation each year.

 

Without question, the 2021 American Rescue Plan’s expanded Child Tax Credit was successful in combating child poverty …so much so that, when Congress let the enhancements expire, child poverty more than doubled between 2021 and 2022, from 5.2 percent to 12.4 percent. This rise in the child poverty rate – which was the largest increase in over 50 years in any age category – essentially wiped out all the record gains we made in our fight against child poverty over the previous two years.

 

The Center on Budget and Policy Priorities, a think tank, revealed that “despite the shortcomings of the Child Tax Credit, the credit has been a powerful tool to help lift families above the poverty line. Census data show that the Child Tax Credit lifted approximately 4.1 million people above the poverty line in 2024, including about 2.4 million children, based on the Supplemental Poverty Measure (SPM); it also provided more financial support to another 12.2 million people with incomes below the poverty line, including 5.6 million children. The credit lifted even more families with children above the poverty line when combined with the Earned Income Tax Credit (EITC) for families with children. The EITC and Child Tax Credit together lifted 8.2 million people above the SPM poverty line and provided more financial support to an additional 17.5 million people in 2024. (See figure above.) Many of the affected families with low incomes are ineligible for other tax-based assistance for children, such as the Child and Dependent Care Tax Credit, which is not refundable.”

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That said, we need to streamline the way we provide aid to American families. 1787 is exploring new ideas in this regard.

 

One idea is to increase the Child Tax Credit benefit for children under six, then eliminate the Temporary Assistance to Needy Families (TANF) program.

 

In 1996, Congress passed – and President Bill Clinton signed – the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, a bill that would, in President Clinton’s words, “end welfare as we know it” and make welfare “a second chance, not a way of life.”

 

The main goal of the legislation was to repeal Title IV of the Social Security Act of 1935, the program then known as Aid to Families with Dependent Children (AFDC). The new version of AFDC is called Temporary Assistance for Needy Families (TANF). TANF assistance has a maximum benefit of two consecutive years (with a five-year lifetime limit) and requires recipients to find work within two years of receiving assistance.

 

We're sure President Clinton’s intentions were good, but the miscalculation was in how the legislation was originally implemented. A major misstep is the way TANF is funded, which is in the form of a “block grant” to states. Clinton’s legislation gave states broad flexibility to carry out their own programs, including how the programs were designed, the amount of assistance recipients received, and the state’s rules for determining who was eligible for benefits. Because states are given few restrictions on how they spend the money, they can spend it for things other than the original intent.

 

As a result, many states routinely channel the money toward things that barely have anything to do with easing the chokehold of poverty. A 2020 investigation by Stateline, a nonprofit news organization, put it this way: “TANF has devolved into a kind of candy store that many states are raiding to plug budget holes and pay for programs that have little to do with moving poor people into the workforce.”

 

The Stateline investigation found that:

 

• States are directing about 11 percent of TANF money to work-related activities including education and training. Seventeen states spend less than 5 percent.

• Some states are playing a paper game in which they’re claiming to meet their own TANF funding obligations by counting donations, services and volunteer hours by nonprofits such as food banks and Boys and Girls Clubs.

• Some states are spending big chunks of TANF money on programs used by families who aren’t in poverty, such as on preschool and college scholarships for middle-class students.

• Many states are using TANF dollars for programs unrelated to work activities, from child welfare to drug courts. Often, those programs already are being paid for by other state agencies, and officials simply count those costs as TANF spending.

• Just 1 in 4 TANF cases close because clients found jobs. Others close because people have lost eligibility, failed to comply with requirements or for other reasons.

 

Robert Rector, a senior research fellow at the conservative Heritage Foundation who advised two members of Congress on the original law, told Stateline, “Overall, the states have radically abused the program. Almost every state government has failed to carry out the principal objectives. Promoting work is the key idea of the act and they do virtually nothing – both red and blue states.”