IRS Sends Nearly $15 Billion of Advance Child Tax Credit Payments

Last week the Internal Revenue Service (IRS) sent nearly $15 billion of advance Child Tax Credit (CTC) payments to families of nearly 60 million children, acting on the CTC expansion from the American Rescue Plan (ARP). New Treasury Department data released on the payments shows the distribution of the expanded CTC by state, including how much, on average, households in each state received. The expansion will only be in effect for the 2021 tax year—if policymakers wish to continue providing the increased benefits, they must address the administrative and revenue costs of the policy.

The ARP included a more than $100 billion expansion of the CTC, increasing it from a maximum of $2,000 to $3,600 for younger children and $3,000 for older children, making it fully available and refundable to households with no income, and instructing the IRS to pay half of the credit out in advance. The extra credit amount phases out by $50 for every $1,000 in income above $150,000 for joint filers and $112,500 for head of household filers.

Treasury data shows that eligible households received an average advance payment of $423 in the July disbursement. Residents of Utah received the highest average payment at $515, while residents of the District of Columbia got the lowest average payment at $376. California, Texas, Florida, New York, and Pennsylvania had the greatest number of qualifying children, and thus received the largest aggregate payment amounts.

Table 1. Top 5 States for Receiving Advance Child Tax Credit Payments

State	Number of Qualifying Children (in millions)	Total Payment Amount (in millions)	Average Payment Amount
All Returns, total	59.3	$14,887	$423
California	6.6	$1,622	$406
Texas	5.9	$1,500	$434
Florida	3.6	$916	$403
New York	3.2	$802	$407
Pennsylvania	2.2	$555	$423
Source: U.S. Department of Treasury, Advance Child Tax Credit Payments Disbursed July 2021, by State, https://home.treasury.gov/news/press-releases/Treasury-and-IRS-Announce-Families-of-Nearly-60-Million-Children-Receive-%2415-Billion-Dollars-in-First-Payments-of-Expanded-and-Newly-Advanceable-Child-Tax-Credit.

Treasury estimated that more than 26 million children who would have either received a limited credit amount or no credit at all under previous law because their incomes were too low will now receive the full expanded credit.

One trade-off of making the credit fully refundable is that it increases marginal tax rates on labor on certain households as they no longer receive a taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. incentive as their income increases. Higher marginal tax rates disincentivize work, though the magnitude of the labor supply effect is debated.

Making the CTC fully refundable means that more spending is taking place through the tax code as households receive more in benefits than they owe in tax liability.

Specifically, $84.2 billion of the $105 billion cost of the expansion is classified as increased outlays, indicating most of the expansion would be received as a refund above the amount of taxes owed. The expansion will increase the number of tax filers who have no federal income tax liability to 58.4 million, or about 39 percent of all filers, in 2021.

Another trade-off of the new CTC design is that a dollar of credit received in advance means a dollar less credit received at tax time. It will be important for families to understand and plan for how accepting part of the credit in advance may change their tax refundA tax refund is a reimbursement to taxpayers who have overpaid their taxes, often due to having employers withhold too much from paychecks. The U.S. Treasury estimates that nearly three-fourths of taxpayers are over-withheld, resulting in a tax refund for millions. Overpaying taxes can be viewed as an interest-free loan to the government. On the other hand, approximately one-fifth of taxpayers underwithhold; this can occur if a person works multiple jobs and does not appropriately adjust their W-4 to account for additional income, or if spousal income is not appropriately accounted for on W-4s. or balance due next spring to avoid unexpected cash flow problems. So far, only about 1 million people opted out of the first advance payment. The reconciliation process for advance payments could be a potential area rife for complications on next year’s tax returns.

But perhaps the biggest outstanding question is whether the new CTC will be continued after 2021. While policymakers have proposed extensions, the expansion’s cost remains a hurdle. We estimate that making the expanded CTC permanent would cost $1.6 trillion on a conventional basis over the 10-year budget window using a current law baseline.

Spending $1.6 trillion on an expanded CTC lifts the after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize their earnings. of lower- and middle-income households, but it does not boost long-run economic output. Other tax changes aimed at improving marginal tax rates on work or investment can also lift after-tax incomes while boosting economic growth at a lower cost. Policymakers will have to balance the desire to use the tax system for social spending with the need to collect revenue and have a tax system that is transparent and easy to understand.

Table 2. Advance Child Tax Credit Payments by State

State	Number of Qualifying Children (in thousands)	Total Payment Amount (in thousands)	Average Payment Amount
All Returns, total	59,301	$14,886,893	$423
Alabama	913	$234,232	$422
Alaska	155	$39,088	$468
Arizona	1,356	$344,278	$440
Arkansas	585	$150,288	$437
California	6,564	$1,621,878	$406
Colorado	992	$244,566	$420
Connecticut	566	$137,474	$391
Delaware	169	$42,628	$413
District of Columbia	90	$21,812	$376
Florida	3,600	$915,551	$403
Georgia	2,054	$520,295	$418
Hawaii	257	$65,027	$431
Idaho	393	$99,665	$487
Illinois	2,200	$547,169	$418
Indiana	1,306	$333,251	$445
Iowa	618	$156,942	$458
Kansas	568	$143,650	$456
Kentucky	851	$218,408	$436
Louisiana	896	$229,406	$417
Maine	215	$54,404	$415
Maryland	1,072	$262,332	$401
Massachusetts	1,060	$253,118	$385
Michigan	1,775	$449,403	$438
Minnesota	1,090	$270,372	$449
Mississippi	595	$153,666	$417
Missouri	1,152	$293,116	$444
Montana	198	$50,426	$457
Nebraska	404	$102,279	$464
Nevada	560	$143,317	$425
New Hampshire	216	$53,017	$399
New Jersey	1,550	$373,155	$394
New Mexico	383	$98,379	$434
New York	3,227	$802,249	$407
North Carolina	1,881	$476,025	$415
North Dakota	154	$38,920	$463
Ohio	2,169	$550,840	$436
Oklahoma	782	$200,574	$450
Oregon	692	$173,227	$425
Pennsylvania	2,217	$554,813	$423
Rhode Island	173	$43,277	$399
South Carolina	945	$241,176	$422
South Dakota	184	$46,868	$477
Tennessee	1,260	$321,591	$428
Texas	5,937	$1,499,988	$434
Utah	780	$196,032	$515
Vermont	98	$24,767	$410
Virginia	1,533	$377,455	$412
Washington	1,322	$325,617	$423
West Virginia	301	$77,419	$431
Wisconsin	1,041	$262,789	$443
Wyoming	114	$28,971	$464
Other areas (includes residents of U.S. territories, U.S. citizens abroad, and members of the armed forces stationed overseas)	85	$21,701	$481
Source: U.S. Department of Treasury, Advance Child Tax Credit Payments Disbursed July 2021, by State, https://home.treasury.gov/news/press-releases/Treasury-and-IRS-Announce-Families-of-Nearly-60-Million-Children-Receive-%2415-Billion-Dollars-in-First-Payments-of-Expanded-and-Newly-Advanceable-Child-Tax-Credit.

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