Earlier this week, my colleague Rob Moore testified before the Ohio House about our recent memo looking at the potential impacts of Ohio’s new Child Tax Credit proposal. During this testimony, he was asked two questions by state lawmakers. The first was what the impact of removing the program’s proposed phase-in would be. The second was what the impact of changing the amount of the credit would be.
We love talking about active policy proposals and giving people more information to make smart decisions with, so we decided to take a stab at answering these two questions.
What if we relaxed the phase-in?
Many policies have phase-in and phase-out schedules that can help soften any potential labor market impacts. This is especially important for the phase-out, because otherwise you create a benefits cliff where people can actually lower their total income by increasing their earnings in the labor market.
On the phase-in side, the opposite effect occurs where the marginal impact of increasing earnings in the labor market is increased, since low-income workers can simultaneously increase their wages and their benefits.
The obvious difference between phase-in and phase-outs is that people on the phase-in part of the income distribution are in more need of money. In its current form, families whose total income is less than $22,500 would not earn the full amount of the credit. That is $1,000 above the federal poverty line for a family of two.
Our current model estimates that families in the first income quintile would receive an average benefit of just under $650 per qualifying child. Removing the phase-in would increase the average per-child benefit by over 50%.
One limitation of our model is that we assume that benefits accrue to an “average” recipient, so these increased payments only have a linear impact on our estimated outcome. However, it is reasonable to expect that because this money is going to the people who need it the most, it would have a larger marginal impact.
We expect that removing the phase-in would result in an additional $87 million going to families in the first income quintile. This is almost a 20% increase in the expected cost of the program, but it could lead to large returns for the state in the long run.
What happens if we change the benefit amount?
As mentioned above, our model assumes that most of the outcomes have a linear relationship with the size of the credit. That means if you increase the size of the credit by 50%, you would see a 50% increase in the costs and the benefits.
The most notable exception to this is the added administrative costs associated with this program. It will take some overhead from the state to make sure that this credit actually ends up with the people who qualify for it.
However, these administrative costs are orders of magnitude smaller than the other costs and benefits due to the low cost of managing tax benefits, so administrative costs are not significant when the credit amount changes. Technically there are economies of scale at play, and it would be less efficient to increase the proportion of fixed costs by offering a lower amount, but these are negligible.
What would change with the credit prices is how effective this program is at improving outcomes for low- to middle-income families. As it currently stands, the Child Tax Credit would generate over $700 million worth of value for the state, and families would be able to pay for a couple of months worth of groceries with it.
Decreasing the benefit amount to $500 would lead to $350 million of benefits compared to the status quo of no credit, and it would reduce the average benefit per child from $815 down to $407. On the other hand, increasing it to $1,500 would lead to over $1.4 billion in benefits for the state compared to the status quo, and it would increase the average per-child benefit to $1,223.
There are many options for policymakers interested in tweaking the state child tax credit. What our model tells us is this: relaxing the phase-in would deliver more benefits to low-income households, decreasing the benefit amount would decrease (but notably not eliminate) overall benefits, and increasing the benefit amount would increase overall benefits.