Spotlight Exclusives

A Possible Bipartisan Compromise on the Extended Child Tax Credit?

Zach Moller Zach Moller, posted on

Supporters of the expanded Child Tax Credit, which expired earlier this year when Senate Democrats failed to reach agreement, continue to hope for a bipartisan path to extension. Zach Moller, director of the Economic Program at Third Way, recently raised a possible deal: a bill that combines a CTC extension with changes to research and development tax deductibility that Republicans are concerned about. Moller spoke with Spotlight recently; the transcript of the conversation has been lightly edited for length and clarity

Why don’t we start with the importance to you of extending the CTC. Why is it such a big deal?

Sure. So, I think there’s really two big arguments for extending the CTC. First and foremost, it’s an exceptional way to fight childhood poverty. We saw that when the CTC boost expired, 3.7 million more children fell into poverty this year in this country. That’s really unacceptable. And with all the ancillary benefits that come with reducing child poverty, it’s really good policy.

On the other side of it, there’s a strong argument that the other advantageous thing here is it’s helping working families afford the necessities that they need right now. Inflation is very high, child care is very expensive, and the prospects for substantial action on child care policy are more limited right now, especially as we potentially go into divided government. The prospects for other forms of relief for working families from inflation are kind of low, especially because if we’re going to fight inflation through monetary policy actions and slowing the economy, working families are going to bear the brunt of that. The Child Tax Credit can really help reduce child poverty and help families afford what they need right now.

And is it your view that if it’s going to be extended, that will have to be done on a bipartisan basis?

If we’re going to see any sort of CTC policy this year, it’s going to come in the lame duck session of Congress after the election, which will be done through standard order. And standard order means 60 votes in the Senate at this point. Going forward, what happens really hinges on the election outcome. If Democrats over perform in the midterms and maintain the majority in the House of Representatives and potentially extend their majority in the Senate, then that opens the opportunity to use budget reconciliation in the next Congress. This is the fast-track process that was used for the Inflation Reduction Act and how the CTC policy was passed in the first place in the American Rescue Plan.

But even if that does happen, you might still have a slightly compromised CTC depending on who those new Democratic members are and where they are from.

Yes—some compromise will be needed to get a CTC expansion across the finish line, whether that’s a budget reconciliation, Democrat-only version or a bipartisan bill. You’re going to need to bring costs down because when we’re fighting inflation, we’re going to need to pay for it. And when we pay for policies, that can cause a lot of anxiety because that’s legislating to kind of figure out these trade-offs. And if it’s bipartisan, that will absolutely be the case.

Let’s talk about your idea then. What’s your proposal?

Sure. I wrote this op-ed suggesting that there is a natural trade on taxes this fall in the lame duck. The CTC is a great tax policy for working families, and it’s got strong support among the Democratic party. On the other side, there’s a need for business tax cuts to correct some issues that Republicans built into some of the pay-fors in the Tax Cuts and Jobs Act in 2017. They modified how research and development expenses can be written off and they are now at the precipice of their policy actually coming into place, and they don’t really want it. They’re getting a lot of pressure from industry, who are saying, we’ve done all these big, bipartisan things on CHIPS and science and it’s counter-intuitive to slow R&D expenditures at the same time.

I think those are a very attractive pairing and I’m sure there are other tax policy priorities that Republicans might have that that could be part of the discussion. It just seems like there’s no way that one gets done without the other, though the research and development expenditure is substantially less expensive than the CTC. We’ll see where negotiations go on that, but I’ve definitely heard people talking about this type of tradeoff. Everything is going to come together at the end of the year on a government funding bill because the government is going to run out of money in mid-December. That’s a very important action-forcing mechanism in the lame duck Congress.

And if that doesn’t happen, are there any other potential bipartisan compromises—Romney’s bill being an example—that have caught your eye or that you think are potentially viable, particularly if you have a Republican House next year?

Senator Romney’s proposal is definitely one I notice and pay attention to. I think there’s a lot of concerns there about how he chose to offset some of those policies. But that’s where the negotiations are going to happen, on how to pay for these things. Parts of the Tax Cuts and Jobs Act are going to start expiring in 2025, so there could be a potential for trades happening there. If nothing happens beforehand, 2025 is going to be the biggest tax fight I think Washington will have seen in decades.

One of the most important priorities for Democrats is going to be getting full refundability or something very close to it. The Tax Policy Center actually just released an analysis of the CTC this year and the impact of the loss of full refundability. They found that 11 million households are too low-income to get the full CTC—that’s 28% of kids in the United States. That’s the power of full refundability.

Let me ask you, finally, a couple of more political questions. There was the expectation when the CTC was passed, I think on both sides of the aisle, that if this ever got passed, it would never go away because it would be so popular. That really hasn’t happened. And I just wonder if you have any thoughts about that. Have Democrats and the administration done a poor job calling attention to it? It’s clearly a policy that has been effective and is popular with the people who are using it, but yet there doesn’t seem to have been a political groundswell around it.

I think that was certainly was the intention, that this policy was going to be so wildly popular that it was going to stay. And that’s clearly not materialized. Part of the reason why it’s not materialized is just because we’ve had a really damaging and pervasive inflation issue, and I think that has been the big distraction. The inflation tax on working families is very bad and I think that’s really been one of the largest drags on the CTC.

And similarly, there also is this thought that post-Dobbs, there is more pressure on at least some in the Republican party to be more active on what we can broadly call pro-family policy. Do you agree with that?

Yes. Republicans are the dog that caught the car with this abortion ruling. And now they are starting to recognize, or at least folks like Senator Romney are recognizing, that they need to be doing more pro-family economic policy: CTC, paid leave, child care, those are all going to be things that should be addressed in a bipartisan way. If the power in DC is split next year, however, I’m not super hopeful that it will actually come together. I think there’ll be a lot of talk, but I’m still skeptical. The Biden administration has had resounding bipartisan successes this year and last year, with the CHIPS and science bill, gun control legislation and the infrastructure bill. There is a path here. Democrats will absolutely want to have those conversations, but I have no idea if Republicans will do anything other than talk the talk.

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