The expanded Child Tax Credit, which put more money into parents’ pockets and dramatically reduced childhood poverty, expired at the end of last year
Last month, the Federal Reserve released its annual Report on the Economic Well-Being of U.S. Households for 2021. Based on a survey conducted in October and November 2021, it notes that while perceptions of the economy were dimmed, self-reported financial wellbeing in late 2021 was at its highest point since the survey was first conducted in 2013. Seventy-eight percent of adults reported either “doing okay” financially or “living comfortably,” up four percentage points from 2020 and 16 points from 2013. In another sign of improvement, 68 percent said they could cover an unexpected $400 expense using cash or its equivalent, four points higher than in 2020.
Parents saw particularly large gains last year, with the number reporting they were doing okay or better up 8 percentage points from 2020. This improvement was most pronounced for families with low income. The share of parents earning under $25,000 who reported doing at least okay financially rose by 13 percentage points from 2020 to 2021, from 40 percent to 53 percent. For those earning at least $25,000 but less than $50,000, the share doing at least okay financially rose by 7 percentage points.
Relief from the federal government in response to the COVID-19 pandemic took many forms, from enhanced health insurance subsidies to expanded unemployment. But the most significant, broadly shared difference in the financial situations of parents last year was the expanded, fully refundable Child Tax Credit (CTC), which sent parents monthly checks of up to $300 for each child from July through December.1 National studies confirmed that CTC payments succeeded in dramatically reducing childhood poverty and improving economic stability. However, the expanded credit expired this year, and more recent data have observed a concurrent regression in the wellbeing of children.
These findings match the experiences of Maine families. Data from the U.S. Census Bureau’s Household Pulse survey, which measures changes in financial wellbeing from month to month, shows parents’ economic security significantly improved while CTC checks were coming in. From July through December 2021, food insecurity among Maine households with children was nearly cut in half. The share of families reporting trouble paying for usual household expenses and those who were behind on rent or mortgage payments also meaningfully declined. However, all these trends reversed in the months after CTC payments stopped.
A recent MECEP report, How the Child Tax Credit was spent in Maine, examines how parents used CTC payments.
Food was the most-cited use of the CTC payments in Maine, followed by utilities, clothing, savings, and paying down debt. Households with annual income below $50,000 were more likely than others to spend the payments on food, utilities, and clothing, and were about half as likely to save or invest the checks than other Maine families. These payments coincided with rapidly rising prices for food, energy, and other necessities.
Data from the Household Pulse Survey also found that just less than half of Maine families with the lowest income reported receiving the monthly CTC checks, compared with around two-thirds of families with annual income between $25,000 and $200,000. While some of this is due to underreporting, a more significant factor is that families with the lowest income are the least likely to file taxes. Dramatically simplifying the tax preparation process and expanding access to free tax-filing assistance would result in more equitable outcomes and would likely have reflected even greater gains in the wellbeing of parents with low income.
While perceptions of the economy are currently dim, the Federal Reserve report shows how the U.S. government’s interventions in the wake of COVID-19 improved financial health for many families. Unless Congress acts to extend the enhanced Child Tax Credit, the financial wellbeing of parents will suffer, and many more children will grow up in poverty.
Notes:
[1] Under the American Rescue Plan of 2021, advance payments of up to half the 2021 CTC were sent to eligible taxpayers on a monthly basis. It was the first time the credit was delivered monthly. Generally, qualifying households received up to $300 a month for children up to age 6 and $250 for children ages 6 through 17, from July through December 2021. [This description can be found in a new report by Sarah F. Small, PhD, How the Child Tax Credit was spent in Maine.]
