U of M study finds expanded child tax credit helped families, but many missed out

Researchers at the University of Michigan are adding to the evidence that expanding the Child Tax Credit in 2021 helped improve lives for low income families.

Congress approved the expanded credit in response to the pandemic. It effectively doubled the credit for families, and made the money available immediately, rather than requiring people to wait for their tax returns. Families could receive up to half their credit in monthly payments of up to $300 per month per child, for children under the age of six.

The credit has "made a huge difference for us every single month that we've received it, “ said Christie Donn, a parent who spoke with Michigan Radio about the tax credits last year.

“Now, I have a little bit of extra room in my budget, so I can still make sure I'm saving and whatnot,” said Anita Cobb, another parent. “But that extra cushion allows us to be able to enjoy life a little bit.”

Those statements from a year ago might seem to show what’s already obvious: giving people money helps.

But Katherine Michelmore, professor at the U of M’s Ford School of Public Policy, said it’s not that obvious, actually.

Research from her colleagues on other cash benefit policies has found little effect on material well-being for families. So, sorting out the details of whether and how the expanded child tax credit affected families is an important research question.

“It takes a long time to determine whether a policy did something good,” Michelmore said.

But a little over a year after the expanded tax credit payments started reaching families, some of the research is in.

That includes a new working paper co-authored by Michelmore and her U of M colleagues published Monday by the National Bureau of Economic Research.

The paper finds that the monthly payments made it easier for families to pay bills, buy food and avoid so-called “material hardships.” The paper, which makes use of surveys of thousands of people, found that the payments reduced overall hardships by 17%, and specifically reduced food insecurity by more than 32%.

“I think we’re showing in the short term it certainly is improving the material well-being of very low income families in the U.S.,” Michelmore said.

Importantly, the study also found that the payments did not lead to parents dropping out of the workforce.

“So that’s what we think of as kind of good news on both accounts,” Michelmore said, “that it seems to be helping families improve their food security and it does not seem to be coming at the cost of kind of reducing their labor supply as many people had feared.”

The one major downside found in the study is that more than 30% of people in the U of M’s survey said they didn’t receive their monthly payment.

Michelmore said that could have been because of problems getting the payments out at the IRS. It could also have been because of custody or child welfare issues.

“I think this benefit was certainly doing a lot of good for these low-income families,” Michelmore said. “But in some ways it was still not doing enough in that a third of the people in our sample did not seem to be getting it, and I think that that’s a big concern.”

The IRS relied on previous tax returns to determine how many eligible children were in each household. If the children had been living with another family member, or in foster care in previous years, the parents may not have gotten the credit.

“That sort of situation is more common among low-income households,” Michelmore. “So we think a lot of that is going on.”

Sorting out those issues will be key if the federal government ever revives the program of sending partial tax credits to families as monthly payments.

The U.S. Congress allowed the expanded tax credits to expire at the end of 2021. Eligible caregivers are still eligible for credits of up to $2,000 per child. But some Democrats have been pushing to make the 2021 expansion back, including President Joe Biden.

“The expanded Childcare Tax Credit is one of the most effective programs we’ve ever seen,” Biden said at an event at the White House last month, adding that he wants congress to bring back the expanded credit, and this time make it permanent.