Obama SOTU Plan Includes Non-Refundable Child Tax Credit Expansion

The official word is that the Obama administration isn’t planning to “trim its sails” in response to Scott Brown’s win. But realistically that’s nonsense. Reading this rehash of ideas about theories of political change reminds me of my “count the votes” theory of political change — when you turn a liberal seat into a Republican one, you lose a vote. And when moderate Democrats become panicked, you’ve lost even more votes. Consequently, you need to trim your sails. And after the midterms, there will be further trimming.

But there’s no reason that trimmed sails needs to mean unsound policy design. And this bit of State of the Union preview seems ill-considered to me:

For example, the president is calling on Congress to nearly double the child care tax credit for families earning less than $85,000 — a proposal that, if adopted, would lower by $900 the taxes such families owe to the government. But the credit would not be refundable, meaning that families would not get extra money back on a tax refund.

Expanding the child and dependent care tax credit isn’t the most earth-shattering progressive idea in the world, but I think there’s a good case for it on the merits, and you can see the political appeal. That said, making it non-refundable — i.e., useless to poor people — considerably reduces its substantive merits. Does it increase its political appeal? I don’t see how it could. You could probably fit the total number of people in America who understand the difference between a refundable and non-refundable tax credit into a football stadium.


Indeed, even Sheryl Gay Stolberg who wrote the article doesn’t really seem to understand it. The way this works, though, is that your taxes start with your income — the amount of money you were paid. But then certain kinds of spending are “tax deductible,” in other words you can subtract them from your income. You are thus left with your taxable income. Then the income tax and payroll tax rates are applied to your taxable income, and you’re left with the taxes you owe. Except at this point you’re allowed to subtract any “tax credits” to which you’re entitled from the bill. But if it’s a non-refundable credit, the amount you can subtract is limited by the amount of income tax you owe. If it’s a refundable credit, the amount you can subtract is limited by the combined amount of income and payroll taxes that you owe. Non-refundable credits don’t benefit poor people, and there’s really no reason that tax credits should ever be made non-refundable. The right wing has somehow gotten the idea out there that payroll taxes aren’t really taxes (or something) and that, therefore, making tax credits refundable is some kind of cheating. But that’s nonsense and I don’t know why the Obama administration would embrace it.


Note that during the transition, the Change.gov website said “The Child and Dependent Care Tax Credit provides too little relief to families that struggle to afford child care expenses. Obama and Biden will reform the Child and Dependent Care Tax Credit by making it refundable and allowing low-income families to receive up to a 50 percent credit for their child care expenses.”