The new Democratic trifecta will soon pass (or perhaps has passed by the time of publication) President Biden’s first major legislative initiative: the American Rescue Plan. As Senator Ron Johnson so graciously reminded us, this bill does A LOT; however, its most significant provision is likely not the much-adored $1,400 stimulus checks, the maligned aid to state and local governments, or the highly effective boost to unemployment insurance. No, the most substantial change is the introduction of a “child allowance.”
The basic idea is to send people with kids money to support those kids. Simple as it is, numerous analyses suggest that a child allowance of the size included in the American Rescue Plan would reduce child poverty by up to 50%. To quote the President, this is a big f**ng deal.
It’s such a big f**ng deal that even some conservatives have felt the need to present alternatives to such a proposal. The best and most notable of these proposals is Senator Mitt Romney of Utah’s Family Security Act. On several fronts, this bill is plainly better than the Democratic proposal. Here’s why.
The chief problem with the Democratic proposal is that it is administered through the Child Tax Credit, a tax credit provided to individuals with children under 17 years old which reduces one’s tax liability and can be partially converted to cash, (CTC) and the IRS. Granted, the American Rescue Plan does fix the most egregious failing of the CTC: namely, that filers have to make a certain income before they can receive any tax credit, colloquially known as a phase-in. Also, Biden’s plan makes the entire CTC refundable, meaning that if the CTC reduced your tax liability to $0, you could receive any excess value from the CTC in the form of a check.
These are both phenomenal changes and go a long way towards improving the CTC, but significant issues remain. For one, you have to file taxes to receive a tax credit. As a consequence, the universally low-income families that don’t file taxes receive no benefit. Under the current CTC, 22% of families who are eligible receive nothing. Making a benefit opt-in basically guarantees that it will not reach everyone. These problems also apply to the CTC’s sister programs, the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC). A further problem lies in the fact that these tax credits are paid-out based on previous year income, meaning that families which experienced a significant change in income could either receive far too little of a benefit or a larger benefit, but face very high marginal tax rates to claw back their overpayment.
There are also specific issues facing the American Rescue Plan’s child allowance due to its passage through the budget reconciliation process, an arcane method of circumventing the Senate filibuster. For one, the child allowance is set to expire at the end of the year. Democrats plan to try and make the allowance permanent, but that will still be a challenge. Secondly, the Senate Parliamentarian, now famous for ruling a $15 minimum wage as merely “incidental” to the federal budget, ruled that the bill’s original language calling for “monthly” payments was inappropriate, forcing Democrats to change the bill so that it orders the IRS to send out payments “periodically.” This is obviously an insane way to legislate, but such is budget reconciliation. The change to periodic payments could, or could not, result in payments being too infrequent to act as an effective income support. In the immediate term, the Biden administration will have leeway to define “periodic” however they wish, but it is not difficult to imagine this becoming problematic under an administration hostile to the child allowance.
Romney’s proposal contains a couple of obvious provisions which would help solve most of the problems in the Democratic bill. Most notably, Romney has the Social Security Administration (SSA) administer his child allowance rather than the IRS. This has the benefit of automatically sending the allowance to anyone who qualifies, eliminating the need for a family to “opt-in.” Romney’s proposal also sends more money per child each month which makes it, in that instance, a more generous poverty-reduction tool than the Democratic bill while also having higher phase-outs, meaning that more families receive the benefit.
There are some more controversial elements of Romney’s plan that I think Democrats ought to include in their own, as well. Firstly, Romney’s plan is written to pass through regular order, which means it is designed as a permanent program; as such, the Family Security Act includes pay-fors to make the child allowance fiscally solvent. I’ve previously written about my disdain for arguments that the deficit matters (it does not), but if Democrats want to create a permanent change in the welfare state it would be both politically and fiscally prudent to identify funding sources. The most obvious choice is to eliminate the CTC and ACTC which the child allowance would be functionally replacing. Matt Bruenig of the People’s Policy Project notes that doing so would raise almost $195 billion of the necessary $365 billion to fund a universal, generous child allowance as I am advocating. Bruenig includes a complete repeal of the EITC to get to the number $195 billion but seeing as EITC is not exclusively a child welfare program, doing so would eliminate an anti-poverty program for the childless. The EITC is a flawed program, so lawmakers ought to try and develop a replacement, but repealing the EITC to fund a non-analogous program would create income losers in the wrong places.
Instead, Democrats should eliminate the State and Local Tax Deduction (SALT) while returning the corporate tax rate to at least what it was pre-TCJA to cover the remainder of the costs of the child allowance. Admittedly, SALT repeal is probably a non-starter due to Senator Schumer’s long-held support for the deduction, but SALT is basically indefensible on the merits. The deduction massively favors the rich; as the Brookings Institute notes, lifting the cap on SALT deductions would be more regressive than the TCJA.
Democrats also ought to make the child allowance universal. There is a seemingly endless list of things to say about universalism, but simply put, universal programs are advantageous because they are more popular and because they do not let anyone fall through the cracks. If Senate moderates are worried that rich people will get the child allowance too, they can easily tax back the allowance. Worrying excessively about “undeserving” people receiving the allowance will only guarantee that people who really need help do not get it.
With the Senate voting to advance the American Rescue Plan, there is neither the political space nor will to risk a complete overhaul of the child tax credit this late in the game. Democratic leadership is simply interested in getting the bill out the door, but when Democrats return later this year to try and cement their child allowance as permanent law, they would be serving the country well if they sought to pass the best possible child allowance, not just the first to come to mind.
