Fiscal Fact No. 10
In 1997, Congress enacted a new $500 per-child 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. credit that cut the tax burden for millions of middle-income families with children. Few tax measures in history have so quickly reduced the typical family’s income tax burden, in many cases erasing it entirely.
In 2001, Congress and the President doubled the credit to $1,000, not all at once but gradually over several years, reaching $1,000 in 2010. In 2003 they thought better of this long delay and accelerated the increase so that the $1,000 per-child credit went into effect right away, in 2003. However, this more generous approach to the child credit was only a two-year, temporary measure that expires after 2004. Its value will fall from $1,000 to $700 at the end of this year, effectively increasing the tax burden in 2005 for 22.6 million families by an average of $448 per family.
The House of Representatives is now considering legislation that would make the $1,000 value of the child credit permanent instead of allowing it to dip to $700. (The House bill would also increase the income at which the taxpayer loses the credit, but this Fiscal Fact only analyzes the benefit of making the credit permanent at $1,000 with current-law thresholds. See analysis of proposal to change the income threshold.)
Tax Foundation economists estimate that increasing the value of the child credit to $1,000 in 2003 knocked at least 5.8 million families from the tax rolls, and if the value of the credit dips to $700, almost half of those, 2.5 million families with 9.2 million people, would once again be writing a check at tax time. The total number of taxpayers who file tax returns but pay no income taxes is currently 44 million, one-third of all filers, and half of these zero-tax filers benefit from the child credit.
Using the Tax Foundation’s Individual Tax Model and Matched IRS/Census Database, Foundation economists were able to build a basic demographic profile of the 22.6 million American taxpayers—representing 78 million persons—who would face higher taxes if the value of the child credit falls to $700 per-child.
Low-Income Taxpayers Will Bear Largest Burden of the Tax IncreaseIf the value of the child credit falls to $700 in 2005, the typical family will see a tax hike of $448. Table 1 shows the current average tax liability for taxpayers in various income ranges and the average tax increase that those taxpayers will face next year if the value of the credit falls. The table clearly shows that lower-income taxpayers will face tax hikes that are smaller in dollar terms than high-income taxpayers, but larger as a percentage of their current tax bills. For example, a typical family earning between $20,000 and $29,999 will see an average tax hike of $180, a 30 percent boost over their current tax bill. By contrast, a typical family who earns between $75,000 and $99,999 will see an average tax hike of $562, a 7 percent tax hike.
| Table 1. Lower-Income Taxpayers Would See the Largest Tax Hikes in Percentage Terms If Credit Falls from $1,000 to $700, with Current-Law Phase-Out Threshold | |||
| Income Range | Average Current Income Tax Liability | Average Tax Increase if Credit is Reduced | Percentage Increase in Tax Burden |
| $10,000 to $14,999 | $6 | $306 | 5265% |
| $15,000 to $19,999 | $168 | $94 | 56% |
| $20,000 to $24,999 | $592 | $180 | 30% |
| $25,000 to $29,999 | $954 | $250 | 26% |
| $30,000 to $39,999 | $1,525 | $308 | 20% |
| $40,000 to $49,999 | $2,466 | $410 | 17% |
| $50,000 to $74,999 | $4,645 | $514 | 11% |
| $75,000 to $99,9999 | $8,274 | $562 | 7% |
| $100,000 to $199,999 | $17,585 | $583 | 3% |
| $200,000 and above | $58,572 | $0 | 0% |
| Source: Tax Foundation Individual Tax Model |
Table 2 shows that most of the 22.6 million taxpayers affected by the falling value of the child credit earn between $30,000 and $75,000 per year. Indeed, fully 78 percent of all taxpayers affected by this tax hike earn less than $75,000.
| Table 3. Younger Taxpayers Will Be Hit Hardest by the Tax Increase | |
| Age Range | Percentage of 22.6 Million in Each Age Range |
| 18 to 24 | 2.00% |
| 25 to 34 | 22.10% |
| 35 to 44 | 42.40% |
| 45 to 54 | 27.90% |
| 55 to 59 | 3.40% |
| 60 and above | 2.20% |
| Source: Tax Foundation Individual Tax Model |
The families impacted most by the $300 drop in the value of the child credit are overwhelmingly young. Table 3 shows that more than two-thirds of the families most affected by the declining value of the child credit are younger than age 44. Unsurprisingly, as Table 4 shows, more than three-quarters of these taxpayers are married and, as Table 5 shows, nearly 88 percent work full-time.
| Table 4. Three-Quarters of the Affected Taxpayers are Married | |
| Single | 22.60% |
| Married | 77.40% |
| Source: Tax Foundation Individual Tax Model |
| Table 5. Almost 88 Percent of Affected Taxpayers Work Full-Time | |
| Full-Time Worker | 87.60% |
| Part-Time Worker | 12.40% |
| Source: Tax Foundation Individual Tax Model |