The Budget Agreement Permanently Expands Important Tax Credits for Working Families

The bipartisan tax and budget agreement signed into law last week achieves many of the President’s key priorities – from increasing investments in areas like research, early education and job training to extending key incentives to support renewable energy, all while providing certainty by removing the risk of a government shutdown. But one aspect of the deal that you may not have heard about represents a major piece of the Obama Administration’s agenda for increasing opportunity and reducing poverty: the permanent extension of expanded tax credits for millions of working families.

The so-called “ARRA credits” may not be a household name, but they provide a big boost to working households across the country at tax time. First enacted as part of the Recovery Act the President signed in 2009, these credits – specifically, expansions of the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), and the American Opportunity Tax Credit (AOTC) – collectively provide about 24 million working and middle-class families a year with a tax cut of about $1,000. The ARRA credits were scheduled to expire at the end of 2017, but this agreement ensures that they will remain a permanent feature of the tax code -- even as major tax cuts for businesses were put on a path to expiration.

Here’s what the credits do: 

• A big tax break for millions of working families: To understand why these tax breaks are so important to working families, consider the expansions of the Earned Income Tax Credit and Child Tax Credit, which provide an average tax cut of about $900 for roughly 16 million working families a year. What can that mean for a family? If a single mother of two works full-time all year for the federal minimum wage – earning $14,500 a year – she receives an additional Child Tax Credit of $1,725 each year as a result of the expansion. She would not receive any CTC if the provision expired. Similarly, the tax cut expansions increase the EITC for families with more than two children, a group with disproportionately high poverty rates, and reduce the EITC’s “marriage penalty,” making married couples eligible for the EITC at somewhat higher income levels. The benefits of these changes are widespread: according to the Center on Budget and Policy Priorities, among the 16 million families who benefit from CTC and EITC expansions are:
  • About 5 million Latino working families; 
  • About 2 million African American working families; 
  • About 1 million veteran and military families;
  • About 2.6 million rural families;
  • And more than 6 million millennial workers. 

• A lasting investment in fighting poverty: Together, the EITC and CTC improvements reduce the extent or severity of poverty for more than 16 million people – including about 8 million children – each year.  With the Recovery Act expansions in place, the EITC and CTC lift more children out of poverty than any other federal program. And the tax credit enhancements also complement the President’s other anti-poverty efforts, which include extending health coverage to millions of families through the Affordable Care Act and pushing for increases in the minimum wage and an expansion of the EITC for childless adults. In addition, the EITC and CTC not only encourage work and fight poverty in the near term, but also lead to better health and educational outcomes for children, helping promote economic mobility.  A growing body of research suggests that the EITC improves infant health, children’s academic performance, college enrollment and completion, and leads to greater earnings and work effort in adulthood.  Thus, locking in these important EITC and CTC expansions will likely pay dividends by boosting economic mobility over the next generation.

• Up to $10,000 to help pay for college: The deal also locks in one of the President’s major investments in making college more affordable. It makes permanent the American Opportunity Tax Credit, which helps nearly 10 million families a year afford college.  The AOTC provides a maximum credit of $2,500 per year for the first four years of college – up to $10,000 per student. That’s significantly more than the Hope scholarship it replaced, which was worth less and only available for two years. By also increasing the number of families eligible for college tax credits, the AOTC will cut taxes by over $1,000 on average for nearly 10 million families in 2015. Making the AOTC permanent is a key component of the President’s successful effort to make college more affordable, which also includes historic increases to Pell Grants and reducing the burden of student loans for borrowers. 

By making the ARRA credits permanent now, we have eliminated the risk that these vital provisions would be allowed to expire and ensured that they will continue to reward work, reduce poverty, and boost opportunity for years to come.

Jacob Leibenluft is the Deputy Director of the National Economic Council.