Congress is currently debating the future of the Tax Cuts and Jobs Act (TCJA) as its expiration looms at the end of 2025. The TCJA brought about significant changes to family-related tax policies, which were not independent but intentionally packaged together. Understanding these changes is crucial to inform the debate about whether to continue or further reform these policies post-2025.
Before the TCJA took effect in 2018, taxpayers could reduce their income by either itemizing their deductions or by subtracting a standard deduction. They could further reduce their taxable income by subtracting exemptions for each filer and dependent. Additionally, taxpayers could reduce their tax bill with a tax credit for each qualifying child.
The TCJA reformed these provisions by consolidating them into a larger, more refundable child credit and a nearly doubled standard deduction. The Joint Committee on Taxation estimated that these changes would reduce federal revenue by just $4.2 billion between 2018 and 2025, after which the provisions would expire and revert to pre-TCJA law.
Despite the minimal budgetary impact, the consolidation had a substantial effect on the structure of the individual income tax. The elimination of personal exemptions was more than offset by the expanded standard deduction, and the expanded child tax credit more than offset the loss of dependent exemptions for many taxpayers, especially those in the low- and middle-income brackets.
Since the TCJA’s reforms, the child tax credit was expanded further during the COVID-19 pandemic. However, the 2021 changes ignited a debate about the credit’s work incentives. Most economists agree that removing the phase-in and participation bonus reduces work incentives, but the disagreement lies in the magnitude of that effect and the relative importance of decreased work versus increased government benefits.
As we approach 2025, lawmakers are likely to face tighter budgetary constraints than they did in 2017. The reforms to the family provisions offer a template of how lawmakers can meet those constraints: offsetting the cost of simplifications and tax cuts with less distortionary base broadeners. As lawmakers revisit the TCJA, they should review how provisions fit together and interact with one another as they prioritize a new tax reform package that is simple, pro-growth, and fiscally responsible.
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