As Congress considers expanding the child tax credit (CTC) as part of its massive budget bill (One Big Beautiful Bill Act, or OBBBA), a major flash point is whether such a credit discourages parents from working.
In new research, we found that estimates of a substantial labor market exodus are overstated. And there are ways to expand the CTC that would help low-income families and increase parents’ employment.
The fully refundable version of the CTC Congress passed in 2021 would reduce employment somewhat, especially for single moms. (See Table.) There’s an argument for helping parents who temporarily leave paid work to care for a young child or a relative with special needs. But even if helping some parents spend more time with their babies were deemed undesirable, that cost may be a small price to pay for lifting about three million kids out of poverty.
In 2025, the CTC reduces a family’s income taxes by up to $2,000 per child under 17. If a family’s credit is more than what they owe in income taxes, they can receive some or all of the difference as a refundable credit. The refundable portion of the CTC equals 15 percent of family earnings above $2,500, up to a maximum of $1,700 per child in 2025. The maximum refundable credit, unlike the regular CTC, has been indexed for inflation since 2018.
The House version of the OBBBA would increase the CTC to $2,500, but only for four years, at which point the credit would return to $2,000 per child (adjusted for inflation occurring since 2024). The Senate version would permanently increase the CTC to $2,200, indexed for inflation. Both would help middle- and upper-income families but do nothing for low-income families who can’t qualify for the full $2,000 per child.
Many households who most need help get little or no benefit from the current credit for two reasons.
First, they must engage in paid employment or have a substantial amount of other taxable income. A single parent who takes a year off from a job to care for a newborn or a relative with disability gets no help from the CTC.
Second, many low-income parents who work get limited benefit from the credit. That is because the base credit is limited by income tax liability, which doesn’t even start in 2025 until an income of $22,500 for a single parent ($30,000 for married parents). Note that both versions of OBBBA would increase the standard deduction (tax threshold) even more.
Families with lower incomes can still receive the refundable portion of the credit, equal to 15 percent of earnings above $2,500 up to $1,700 per child. But neither the House nor Senate version of OBBBA would change that formula. Thus, a parent earning $12,500 would only qualify for a $1,500 credit in 2025, compared with the $2,000 per child credit under current law for a higher-income family or a $2,200 or $2,500 per child under the Senate and House OBBBA variants.
The CTC could be reformed to provide more help for low-income parents. Indeed, in 2021, the American Rescue Plan Act (ARPA) raised the credit to $3,000 per child between 6 and 17, and to $3,600 for children under age six. Importantly, ARPA made the full credit available to all parents with qualifying children regardless of tax liability or whether they worked. That fully refundable credit was a major driver in cutting child poverty in half.
Critics objected that severing the connection between work and the credit would cause many recipients to exit the workforce. And the credit was expensive. As a result, Congress did not extend the ARPA credit after 2021.
But short of reinstating the 2021 credit, lawmakers could reform the credit in other ways that would benefit children in lower-income families at relatively low cost and with only small effects on parents’ employment. Reform could even increase employment. Options include adjustments to the phase-in and restoring the 2021 CTC for children under two.
The “enhanced phase-in option” would phase in the CTC starting with the first dollar of earnings on a per-child basis up to $2,000 per child, allowing larger families to receive the maximum benefit at lower income levels. For a family with two kids, their CTC would phase in the credit at a 30-percent rate (two times the 15-percent rate). The House passed this proposal overwhelmingly in 2024, but it failed in the Senate.
The enhanced phase-in would increase overall employment slightly (+0.11 percentage points), especially for unmarried moms (1.34 percentage points). (See Table.) Those with larger families would have a bigger incentive to work because working could lead to a much larger credit than under current law or the House-passed OBBBA. It would reduce employment somewhat for married moms (-0.38 percentage points) because, in many cases, they’d qualify for a much larger CTC before they go to work based on their spouse’s earnings.
Another option would be to restore ARPA’s $3,600 refundable CTC for children under the age of two. This would slightly reduce employment for all groups (less than 0.2 percentage points) at much lower cost than the $2,500 CTC in the House reconciliation bill (based on TPC estimates for a similar but slightly less generous proposal), but it would make a meaningful difference for families with infants for whom child care costs are highest.
We also analyzed increasing the maximum CTC from $2,000 to $5,000 without raising the maximum refundable tax credit, an option similar to, but much larger than the $500 increase in the House reconciliation bill. This option would be quite expensive, costing $1.1 trillion over the 10-year budget period. It would increase employment by 0.26 percentage points overall; virtually all of the benefit would go to families with higher incomes because taxpayers with higher incomes generally have higher tax liabilities and can fully access a $5,000 per child credit. The House proposal’s $2,500 credit would cost much less—about $230 billion over ten years—but it would do virtually nothing to help low-income households because it doesn’t change the refundable component of the CTC.
Nurturing children transcends partisanship. Reducing financial stress on parents leads to better outcomes for children throughout their lives: less poverty, higher graduation rates, less incarceration, higher lifetime incomes, and better health. It's hard to imagine a better investment.
