How families used the advanced Child Tax Credit

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (ARPA) into law. The stimulus bill aimed to deliver direct relief to families and workers continuing to struggle financially during the ongoing COVID-19 pandemic. ARPA included provisions for an additional round of economic impact payments (EIP), state and local fiscal recovery funds, homeowner and rental assistance funds, and programs to help small businesses and unemployed workers ¹. A notable component of ARPA was the expansion of the existing Child Tax Credit (CTC) program. Among other things, this expansion introduced automatically disbursed cash payments to the overwhelming majority of families with children under 17. It was both novel in its structure and unprecedented in its scale—characterized by its designers as “the largest child tax credit ever and historic relief to the most working families ever” ². Accordingly, the program provides a unique opportunity for policymakers to understand how effective future policies like the CTC might be.

Other studies have tried to measure the impact of the CTC expansion on household finances, particularly the impact of the expansion on household consumption. Studies leveraging data from the Census Bureau’s Household Pulse Survey show that recipients report using these advanced payments to pay for bills and other living expenses and establish differences in spending patterns by income and race (Pilkauskas and Cooney 2021; Karpman et al. 2021; Pilkauskas et al. 2022). However, these studies are not able to quantify how much of the advanced CTC payments households spent—a critical question for policymakers concerned with balancing the goal of increasing the welfare of families with children against concerns about potential adverse inflationary or labor market effects of expansions to CTC. ³

This report seeks to fill this gap by using transaction-level data to estimate the impact of these accelerated payments on household spending. We explore a range of spending categories, including spending on durable goods, services, and debt payments. We also analyze whether spending responses differed by type of household—whether changes were more pronounced for lower liquidity households, or households of different races. Given the unprecedented nature of this program, ongoing assessments of the credits’ impacts on household finances will be important in understanding the program’s success and planning similar programs in future ⁴.

The Advanced Child Tax Credit

ARPA introduced several specific updates to the Child Tax Credit. The credit amount was increased from $2,000 to $3,600 for children under age 6 and to $3,000 for other eligible children; eligibility was expanded to include 17 year-olds; the credit became fully refundable; and 50 percent of the credit was scheduled for automatic disbursal via monthly payments between July and December 2021. Families were automatically enrolled in the advanced CTC payments and the IRS provided a channel to opt out of advanced CTC payments for families that preferred to receive the full tax credit when filing their 2021 tax returns ⁵. Married couples with income up to $150,000 (or $112,500 for single parents) were eligible for the full credit; married couples with income under $400,000 (or $200,000 for single parents) qualified for at least $2,000 of the CTC, with $166 per child each month disbursed via advanced payments ⁶.

Advanced CTC payments substantially increased the income of families that received them—particularly lower income families. Among the recipients in our sample, the median household received $300 per month for households earning less than $73,000 in annual take-home income (the lowest three income quartiles; refer to the appendix for income quartile details), and $500 per month for households earning above that threshold (Figure 1). This difference is due to differing family composition across the income groups. Only 38 percent of the lowest-earning CTC recipients had more than one dependent child, compared to 61 percent of the highest-earning recipients (46 and 53 percent for the middle quartiles, respectively) ⁷. Despite receiving, on average, greater monthly amounts, the overall income impact was lowest for the highest-earning households, whose monthly income increased by only 4 percent with the CTC payments. By contrast, the advanced CTC payments represented a 10 percent increase in monthly income for the lowest-earning households (those with annual take-home income less than $31,000). So while lower-earning households typically received lower payment amounts (due to the presence of fewer children per household), that amount had a greater impact on monthly income and may have therefore been felt more keenly.

Figure 1: Advanced CTC payments boosted monthly income by 10 percent for the lowest-earning recipients.