Democrats have to figure out how many households need to stop receiving monthly child tax credit payments in order to make Sen. Joe Manchin happy.
The West Virginia Democrat has refused to back the party’s ambitious spending plans unless Democrats cut costs and deny various benefits to people who make what he deems too much money or none at all.
Since July, households earning as much as $150,000 annually have received $300 per child under 6 and $250 for older minor children each month. Democrats want to continue the monthly payments past their current December expiration as part of a much broader bill that would expand access to child care, education and health benefits.
The child payments are probably Democrats’ most prized policy achievement, but because the Democratic caucus has just a slim 50-seat Senate majority, it can’t pass anything without Manchin on board.
Manchin has said every aspect of the bill should have “work requirements,” to deny benefits to the unemployed, and “means testing,” to cut off people with high incomes. He hasn’t been specific about where he’d draw the line, but since last year he has repeatedly mentioned $50,000 per year as the income beneath which someone counts as “working poor.”
“Basically 90 million taxpayers file taxes of $50,000 or less,” Manchin said Monday in response to a HuffPost question about where he’d like to target benefits. “The mean household income for America is $68,000. If you’re gonna target, target to people that need it the most, the working.”
Manchin wouldn’t say whether he’s pushing Democratic leaders to embrace a $50,000 income threshold for the child tax credit.
“We’re talking about all that,” Manchin said.
Democrats expanded the child tax credit earlier this year as part of the American Rescue Plan, making it available to parents regardless of whether they pay federal income taxes and telling the IRS to advance the refunds on a monthly basis.
The guaranteed income for parents will slash child poverty, and Democrats believe it will one day be as popular and politically powerful as Social Security retirement benefits. That’s why they set it up for households with incomes approaching $150,000 to receive full payments ― so the policy would have a middle-class base of support.
Manchin thinks sending checks to the unemployed and people with high incomes will create an “entitlement mentality,” which is a Washington way of saying the money will make people lazy. During the last debate over coronavirus relief checks, Manchin advocated for shrinking checks to individuals earning more than $50,000 and couples with incomes above $100,000.
Changing the rules on the child tax credit could save money, but it would come with risks. For one thing, people with incomes above the new lower limits who received full monthly payments this year could be mad about receiving smaller payments next year. For another, some parents might feel like they have to opt out of the program just because they’re afraid the money will be clawed back at tax time if their overall income ends up exceeding the threshold.
“You really could undermine credit delivery on a monthly basis,” said Elaine Maag, a research associate at the Urban-Brookings Tax Policy Center.
Democrats could reduce the number of families who would unexpectedly exceed the lower income limits. Last month, House Democrats drafted an extension of the expanded credit that would let taxpayers base their credit amount on their lowest annual income in any of the previous three years, rather than the most recent year they filed taxes.
Another problem with shrinking the credit is that President Joe Biden has pledged that no family earning less than $400,000 would face a tax hike from the bill. Taking away credits ― even if they were delivered as advance monthly payments ― certainly increases a family’s overall tax bill.
Extending the credit through 2025, as Democrats intend, would cost more than $400 billion. According to an estimate by the Tax Foundation, a conservative think tank, phasing the credit out for all filers earning more than $60,000 would reduce the cost by $116 billion. (Phasing out benefits at $60,000, even for two-earner households, is much stricter than what Manchin proposed for the stimulus checks earlier this year.)
In other words, drastically tighter eligibility rules might make the program more “targeted” but wouldn’t save tons of money because most of the payments are already going to lower-income households.
“Ultimately, it’s hard to meaningfully reduce the costs by lowering the phaseouts because the costs of the expansion really come in at the lower end due to full refundability,” Tax Foundation economist Erica York said in an email.
As Sen. Michael Bennet (D-Colo.) put it, “Unfortunately, there’s just not a lot of money there.”
It’s possible Democrats could satisfy Manchin with other changes to the bill, leaving the child tax credit unscathed.
In the spring, Manchin couldn’t get Democrats to impose lower income limits for full pandemic relief checks, but party leaders did agree to a lower cutoff on partial payments, reducing the amounts to households making above $150,000.
Imposing a “work requirement,” or denying checks to households with very low earnings or none at all, would probably save more money, but is likely a non-starter with Democrats, since their favorite thing about the policy is that it reduces child poverty by giving parents money.
“I don’t see why anybody would want to do that,” Bennet said. “That wipes out the anti-poverty.”
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