Business Tax Break Renewal Hinges on Child Tax Credit ‘Fulcrum’

By the end of September it may start feeling like Groundhog Day for tax policy.

With only a few legislative weeks before government funding runs dry on September 30, lawmakers will likely need to pass a stopgap spending bill punting a final package—and potential tax vehicle for tax provisions—toward year’s end. But there’s a familiar sticking point: Democrats want action on the child tax credit.

Like a year ago, business groups are pushing to renew expired or expiring business breaks from the GOP 2017 tax bill. Those include the research and development tax break, the ability to immediately write-off some purchases like new equipment and deductions for some interest expenses. Republicans and some Democrats back those provisions, though Democratic lawmakers appear unwilling to support the business breaks if they’re not paired with child tax credit provisions attached.

“I’m open to expensing, but I like the child credit. I’m open to R&D, but I want the child credit,” said House Ways and Means Committee ranking member Richard Neal (D-Mass.) “I do think that’s a fulcrum.”

Senate Finance ranking member Mike Crapo (R-Idaho) said he and Finance Chairman Ron Wyden (D-Ore.) have begun talking in earnest about what may be possible for taxes.

“I can’t answer the ultimate question you asked, ‘How will that get resolved?’” Crapo said. “But we will negotiate it and see where we can find a way to move forward.”

Last year Congress careened toward an omnibus spending bill while debate stirred among taxwriters over how to strike a deal. Democrats upped the CTC in a 2021 pandemic aid bill boosting maximum benefits from $2,000 to $3,600 for children under age 6 and to $3,000 for children 17 or younger.

It was too expensive, Republicans said last year, and also argued it encouraged recipients to avoid entering the labor force. A compromise never materialized.

“The chief stumbling block, or issue that’s not fully resolved, is the child tax credit,” said Rohit Kumar, a former aide to Minority Leader Mitch McConnell (R-Ky.) and now a principal at PwC. “The path travels through acknowledging that there will be a work requirement, and the scale of what’s being discussed is roughly equivalent.”

Roundtables and Conversations

The Senate Finance Committee held multiple hearings on the tax credit this year, and heard from experts who said the enhanced CTC helped lift millions out of poverty, which is backed byUS Census Bureau research.

At one of the Senate subcommittee hearings, Sen. Michael Bennet (D-Colo.) and Sen. Ron Johnson (R-Wisc.) agreed that further discussion on finding agreement was warranted, agreeing to roundtable discussions.

It’s not just taxwriters who see the importance of the CTC, said Rep.Brian Fitzpatrick (R-Pa.), co-chair of the moderate Problem Solvers Caucus and Ways and Means member.

The 2017 tax law doubled the credit to $2,000, but denied the full increase to low-income families—the cost is a sticking point among Republicans in both chambers. It’s something Fitzpatrick said Problem Solvers are examining, in hopes of finding a bipartisan way to include people with little to no income.

The pandemic-era CTC passed in the Democrats’ American Rescue Plan pandemic aid bill did away with the income requirement—making it refundable—and paid the CTC out in monthly checks.

It’s not clear whether Ways and Means Republicans would support any recommendation. So far, he said, “it’s been more of a Problem Solver push.”

House Republicans marked up a trio of tax bills in June, spotlighting their desire to extend the business tax breaks and increase the individual standard deduction. The legislation hit a rough patch with moderate Republicans from New York and California in the narrow GOP majority, who withheld support until there’s a fix giving taxpayer relief to the $10,000 state-and-local tax deduction cap.

House Ways and Means Chairman Jason Smith (R-Mo.) told reporters he still expects the bills to still get a full House vote.

Getting the GOP bill through the chamber, even with little hope of Senate passage, would show the party gelling on a set of priorities that Smith could bring to Senate Democrats. But the bill was silent on the CTC, even though Smith has made past statements suggesting he’d entertain changes to it.

Wyden told reporters he’s had meetings with Smith, though he demurred on their discussions.

Some Republicans are still not sold on moving a tax bill with the child tax credit included, arguing that the business provisions that enjoy some level of bipartisan support are enough to build a tax package on.

“What we need to do is separate the child tax credit, and then have those discussions around where to set that, and not hold up other pieces of the tax bill,” said Marsha Blackburn (R-Tenn.). “Things where we find agreement, we need to be pushing those forward because people are wanting to have some certainty.”

Cost Debate

Republicans last year, and again this year, said they’d accept a bill roughly equivalent in cost of each party’s priorities, though they quibble tax breaks like R&D have bipartisan appeal.

The portion of this year’s GOP bill that included the three highest priority tax breaks—R&D, bonus depreciation, and interest expense deductions—would reduce tax revenue by $220.4 billion between 2023 and 2026, according to the nonpartisan Congressional Budget Office. Because the bill extends all three breaks through around the end of 2025, the CBO score through 2033 shows tax revenue recovering, to only cost $47.4 billion.

Making the pandemic-era child tax credit permanent would cost about $570 billion if extended from 2023 to 2027, according to a Joint Committee on Taxation report from last year. Through 2032, the estimate increases to $1.4 trillion.

If lawmakers can agree on the package price tag—the jury is still out on whether lawmakers can get together on whether to offset the spending—then they can dial in parts of the credit they want to prioritize.

Lawmakers could revise the threshold for refundability, reducing the cost but cutting out the most-needy families from getting some or all of the credit. They could also tweak the size of the credit for each child, or index it for inflation.

Some Democrats have softened the ask for full restoration of the pandemic aid bill’s version. The White House indicated last year it may be flexible on work requirements, and Democrats like Rep. Don Beyer (Va.) said they’d be willing to support the right compromise.

“What seems most sensible is a bipartisan bill that reinstates some limited part of the child tax credit, it doesn’t have to be as big,” he said. “As a tradeoff for a lot of the things that they’d like to get done, and I’d vote for it. Policy is the art of the possible”

—With assistance from Samantha Handler.