Why Republicans Should Prioritize Finding a Child Tax Credit Compromise

The expanded Child Tax Credit expired last year after a political stalemate in the Senate, but members of both parties are eyeing potential compromises to revive it during this year’s congressional session. Josh McCabe, director of social policy for the Niskanen Center, has been a leading voice on the right in arguing that conservatives should be leading the way in the CTC debate, given the party’s focus on family tax relief going back to the Reagan years. McCabe spoke with Spotlight recently about why the GOP should make a CTC compromise a legislative priority and the general state of play on the issue on Capitol Hill. The transcript of that conversation has been lightly edited for length and clarity.

Why don’t we start with why you think it is important for Republicans to be pushing this policy, and then I want to pick your brain a little bit on where you think it is on the Hill.

It’s important for Republicans because they historically have seen themselves as pro-family policy. There’s a long history of conservative, particularly social conservative, involvement in tax policy, so it doesn’t get as much attention. But even going back to Reagan, some of the reasons that he increased the dependent exemption in the Earned Income Tax credit were because you had a lot of pro-family social conservatives pushing him to do so. So, if you think of the Republican party being made up of coalitions, there’s the pro-growth business Republicans, but there’s also these pro-family, social conservative Republicans. And historically, they’ve always worked together. We saw that leading up to the introduction of the Child Tax Credit in 1997 and legislation after that. So, typically they’ve been paired together—business tax cuts with some sort of family tax relief as well.

There was the expectation when the expanded CTC was enacted that it would become so wildly popular that it would never be repealed. That didn’t happen. Obviously, there’s some legislative reasons for that, but I’m just wondering why you think that this didn’t become as popular as some thought that it would?

I think I was one of those persons that thought it would become a bit more popular. There are two reasons why we didn’t see that happen. I think the first one is that it was done as a response to the COVID-19 pandemic. People saw the refundable Child Tax Credit in the same way they saw relief checks or other temporary measures. So, I think a lot of folks who were cheering on this legislation thought of it as a permanent expansion that was technically temporary, whereas most of the public saw this as just another emergency relief program, and when it went away, they sort of shrugged in the same way they shrugged at all the other programs going away.

The second big reason is related to what I talked about in terms of Republican support for these policies, and that’s that Republicans have historically seen it as a way to provide much needed tax relief to families in particular. And because it’s seen as a form of tax relief, they want it only to go to taxpayers. So, because we have a progressive income tax and federal payroll taxes, they see working families as taxpayers. And if you’re not working, you’re not seen as paying those taxes, while a lot of Democrats see the benefit as what we traditionally call a child allowance or family allowance. It’s just another income supplement because raising children is expensive. Your boss doesn’t give you a raise every time you have another kid, so it makes sense for the federal government or state government to supplement your income based on family size so that you have those extra resources to help with the cost of raising children.

Let’s move to where you see things on the Hill right now. As you may have seen, we had Senator Bennet address this recently and he was fairly optimistic about a bipartisan compromise.

 There are probably three main schools of thought on the Hill right now. The first is that Democrats are relatively united behind the Bennet-style Child Tax Credit that we saw under Biden—taking the existing Child Tax Credit, increasing the amount, making it fully refundable, and otherwise leaving the rest of the tax system as it pertains to families in place.

There’s a second school of thought among some Republicans, particularly in the Senate, that wants to see more of that Child Tax Credit go to lower-income families, but they also think it’s important to simplify the entire system. We have child benefits within the Earned Income Tax Credit and a child’s independent care credit within the head of household filing deduction. Their point is, why do we have three or four separate programs for this? Let’s consolidate it. But they also want to keep the phase-in as it is now. So, their policy would be more generous for working class families but the big pay-for is going to be consolidation of these other benefits.

This is generally the Romney approach?

That’s right. And then there’s a third approach where Republicans like the Child Tax Credit more or less as it is, but they see room for improvement in terms of the amount that it’s worth, whether it’s indexed and how quickly it phases in. So this is where you see proposals like the one from Senator Grassley to index the credit so it’s not ruined by inflation or the one from Senators Rubio and Lee to increase the phase-in quite a bit so that it corresponds to income and payroll taxes for low-income families.

And what does your crystal ball indicate where this might end up?

I think a lot of people are waiting for the big battle in 2025, but I think there is room for improvement in the meantime. We’re probably not going to see the Biden-style credit. There’s a chance that you might see the Romney-style credit, but I think the most likely compromise is some sort of Grassley or Rubio/Lee-style incremental improvement to the existing credit.

And what’s the reluctance among Republicans who don’t really like the Romney version?

One of the big concerns is that folks might make more not being employed than they would employed, so they would prefer phase-ins similar to those for the Earned Income Tax Credit, which is seen as incentivizing work.

And that could be part of a more general tax discussion later in the year?

The Republican tax package in the House just recently came out and they ended up going with a larger standard deduction. But in the hearing a few weeks ago you had a lot of Democrats talking about the Child Tax Credit and there were some Republicans who were supportive of shifting the discussion. If that happens between now and October, there could be a chance for some incremental reform.

In terms of building public support for this, I’ve seen some polling, and you probably have too, where if you present it as a pro-family benefit, it polls very well, but if you present it as an anti-poverty policy, it doesn’t poll as well. Does that make sense to you?

It does. In the last CTC debate, there was a lot of emphasis on anti-poverty framing and how it would reduce poverty by X amount. People tend to care a lot about poverty, but they just tend to care more about families in general. We’ve seen rising inflation, which hits everyone’s pocketbook, and they’re more concerned with something that is going to help lower-income families, but also working-class and middle-class families.

How important is this policy and others like it for the Republican party? There’s been a lot written about the need for the party, in light of the Dobbs decision, to really be looking for creative ways to emphasize their support for young families.

We’ve seen it light a fire under some folks that were thinking about this, but the folks that tend to focus on abortion weren’t necessarily thinking about broader family policy. Rubio had been working on this for a long time, but I think he gained a bit more support after the Dobbs decision. Romney had been working on this, and he’s gained a bit more support. So, we’re finally seeing those two camps within the Republican party talking to each other and in getting some more policy support for expansion of the Child Tax Credit as a result.

And are there other policies that you have your eye on in this sort of same general space? We had another event a couple of weeks ago and had Sen. J.D. Vance’s chief of staff who was talking about his idea for making birth cost free in the U.S. I don’t think there’s a bill yet, but that seems to be something that might have some bipartisan appeal.

There is a lot of interest in making birth free and I think that’s now in the stage of trying to figure out what’s the best way to do that. Is it some sort of mandate? Is it through Medicaid or Medicare? And I think the other big one is this idea of trying to make some sort of paid family leave, at least when it comes to, to parental leave. The last attempt to do that was just too ambitious for Republicans to get on board with, but there’s a bipartisan paid working paid family leave working group in the House that is looking at options now. A couple of other folks have been interested in this idea of a baby bonus—a one-time check to help you with the cost of raising a child in the first year. Again, there is this question of how do you structure it, but folks are talking.