Spotlight Exclusives

Child Tax Credit Expansion is Boon for Low-Income, Rural Families 

Sam Hammond Sam Hammond, posted on

The expansion of the Child Tax Credit accomplished through the passage of the American Rescue Act last year represents one of the most impactful policy changes in the poverty/opportunity space in recent memory. A recent analysis by Samuel Hammond and Robert Orr at the Niskanen Center offers new evidence that rural and/or Red State Americans may see the biggest benefits of all. The Niskanen study estimates that across the next 12 months, the CTC expansion will boost consumer spending by $27 billion, generate $1.9 billion in revenues from state and local sales taxes, and support the equivalent of over 500,000 thousand full-time jobs at the median wage. Hammond discussed the study recently with Spotlight; the conversation has been lightly edited for length and clarity. 

Why don’t we start with an overview of the study you did and its major findings?

The purpose of the report was to expand how we think about the Child Tax Credit beyond seeing it as just an anti-poverty tool. Of course, lifting 40% of children who are in poverty out of poverty is a really big deal in itself. But the role of child benefits in stimulating broader economic activity is still underrated.

When Canada expanded its child benefit in 2016, they had a large, unexpected increase in employment driven by the fiscal stimulus. At the time, Canada was recovering from the Great Recession and it’s natural to expect the expanded Child Tax Credit to have a similar impact as we recover from the COVID pandemic.

The other impetus was just understanding that families in general, but particularly families with small children, have a much higher propensity to consume; you give them money, they spend it. That’s particularly the case under the current conditions, where child care is scarce and families are dealing with new expenses related to having a kid at home. And we also wanted to underline the impact that the expanded Child Tax Credit will have on the rural economy. This is a benefit that doesn’t discriminate based on where you live; it’s the same amount regardless. Nonetheless, in relative terms, the Child Tax Credit represents an enormous increase in the purchasing power of families in rural areas. And I think we’ll see, over the medium term, greater economic activity and job creation in rural America as well.

Walk through a bit what the study specifically does

The expanded Child Tax Credit benefits began to show up monthly in July and so we wanted to look at what the impact over the next year will be on household spending and the byproducts of that spending in the form of job creation. To do so, we constructed a model of households based on where they live, the number of children in the household, and their relative income, and modeled the Child Tax Credit expansion to see which households would see the most benefits and how that tracks with geography.

That gave us our first set of estimates, namely, what is the estimated dollar value of the benefit of the Child Tax Credit in different states and congressional districts. Then we had to translate that dollar value into likely spending because just because you receive $300 a month doesn’t mean you will spend that full $300. Many families put aside a portion of their Child Tax Credits for savings just like with their stimulus checks. So, what we did next was to try to take into account that lower-income families and households with children tend to spend more than say, wealthy households without children. If you gave Bill Gates the Child Tax Credit, he wouldn’t even notice. But if you gave it to a struggling, single mother of two, then you can imagine that that goes straight back into school supplies, rent, transportation, etc. To do that, we drew on a recent paper from the Boston Fed estimating spending multipliers based on different household characteristics. What they find confirms past research that government spending on the bottom 20 percent of the income distribution has a much larger stimulative effect than an across-the-board tax cut; in fact, it can be two to three times more stimulative. We built that heterogeneity into our model so that households with more kids and households in the bottom 20 percent were assigned a higher propensity to consume. And then we aggregated all of that to see what the effects are. What we find is that the Child Tax Credit will drive consumer spending disproportionately in states with more low-income families and families with more children.

Despite all that, we exercised some conservatism with our results. If you look at our total multiplier, it’s 1.13; that is, every dollar spent on Child Tax Credit spurs 13 cents in greater consumer output. Past research on refundable tax credits during the Great Recession found a higher multiplier, about 1.22. We went lower because the COVID shock was not a traditional demand-side recession and also because of the amount of stimulus that has already occurred through the recovery bills.

But even with those conservative assumptions, we still find enormous impact: $27 billion in new consumer spending is created by the Child Tax Credit, leading to $1.9 billion in state and local sales tax revenue and supporting the creation of half a million full-time jobs at the median wage. The most surprising takeaway, from my point of view, was just to put numbers on the impact in rural America. In a rural state like Idaho, for example, the full value of the Child Tax Credit is now 1.8% of their state GDP.

If you do a thought experiment where we ended Social Security overnight, you would imagine the rural economy would collapse. In many ways, the Child Tax Credit has put that thought experiment in reverse. It represents an unprecedented influx of spending power into areas that are otherwise starved for resources.

And what kind of impact has this study had, given that in many of those rural areas, the congressional delegation may not support extending the Child Tax Credit increase?

To me, the most remarkable political fact about the Child Tax Credit expansion has been how little opposition there has been. Besides the odd Wall Street Journal op-ed, the typical Republican response has been, ‘next question?’ Many people on the right have a caricature of child poverty drawn from the debates in the 1990s that imagines the typical low-income single mom as Black, uneducated, and living in an urban area. It turns out that does not necessarily reflect reality. There’s been suburbanization of poverty while today’s Republican electorate includes many low-income families and single parents, as well, struggling to make ends meet but who do not match that 90s caricature. That sort of cross-class consciousness is being conveyed by the fact that in per-capita terms, the Child Tax Credit is a much bigger deal for low-income families in rural America. That does not mean that the urban poor miss out; they get the exact same credit as anyone else. The difference is large metro areas have a robust knowledge economy and in relative terms, that means that even when you put money in the hands of low-income families you don’t necessarily move the needle on local economic activity.

And when do you think the impacts will really begin to be felt on the ground? And secondly, I know there’s a lot of people out in the field doing research. When do you expect to start seeing some of that data?

I think we’re going to start seeing it sooner than people expect. The most recent (Census Bureau) Household Pulse Survey found a three-percentage-point decline in child food insecurity and noted a substantial increase in families who were able to pay weekly expenses. And that coincided with the first Child Tax Credit payment in July. To me, it’s remarkable that we’re already seeing an impact through those surveys after only one month. We just put up a piece on our site looking at the fiasco with federal housing assistance and the eviction moratorium and I think it’s noteworthy that if we had had a child allowance like this last year, there would have been much less need for a federal eviction moratorium and bespoke housing supports because we’re already seeing in the data that families are now more able to pay their rent and mortgages.

And also compare how much more effective this delivery system is than the one for housing aid, most of which still remains undelivered.

Right. The problem with housing assistance has been administrative. The application process is incredibly Byzantine and the virtue of the Child Tax Credit is its no-strings-attached support that’s simple, straightforward, and flexible. The Child Tax Credit has proved to be incredibly effective at meeting families where they’re at and empowering them to spend it on their most urgent needs.

It sounds like you’re optimistic in terms of congressional support for an extension moving forward?

Yes, I think an extension is highly likely. But I also think the longer the program exists, even if it’s only extended for a few years, the more these secondary and third-order impacts on local economies will manifest. When you increase resources for families, you don’t just increase the spending side, you also change the production side. You’re shifting resources to different people who will spend it differently and that will translate into different goods and services being produced. That takes some time. We see the immediate effects on parents being able to purchase food and pay for things like rent but over the longer term, I think we’ll also see new businesses form in areas where they didn’t use to be viable because of low demand. As more of those impacts are felt, any residual ambivalence about the Child Tax Credit will wane. That’s my prediction.

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