Comparing The Fiscal Costs Of Tax Breaks For Children Versus Businesses

Portrait of a little girl in a lab coat doing a science experiment in a lab

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As the year winds down, Congress will need to decide what to do on several tax fronts, including whether to extend more favorable treatment of business research and development investments and to increase benefits for families with children. To better understand what’s at stake, we reviewed both tax breaks and compared their fiscal costs.

As our colleague John Buhl noted, businesses would like to repeal—or at least roll back—the new requirement to capitalize research and development (R&D) expenditures, which could boost economic growth. Child advocates would like to see legislators instead invest in children by making the child tax credit (CTC) fully refundable. Plenty of research suggests the investment in children would pay off in better health and higher educational attainment.

Since the 1950s, the US tax code allowed full, immediate expensing of qualifying R&D expenditures. That policy encourages investment in R&D, which evidence shows has positive spillover benefits for the overall economy. The 2017 Tax Cuts and Jobs Act (TCJA) changed this longstanding policy by requiring businesses to write off their R&D expenditures over five years, beginning in 2022. This less favorable treatment raised about $120 billion over the 10-year budget window to help offset costs of other TCJA tax cuts.

Since R&D capitalization was deferred until 2022, however, legislators and businesses both knew there was time to undo it. But legislators couldn’t have predicted what would happen with the CTC in the interim. In 2021, the American Rescue Plan Act (ARP) made CTC fully refundable for one year, and advocates would like it to stay that way, along with a host of other changes.

Beyond making the CTC fully refundable, the ARP also increased the per child credit amount, included 17 year olds, and paid the credit monthly. The change most targeted towards low-income families was making it fully refundable. That alone would cost about $16 billion for an extension just in 2022, assuming the current $2,000 CTC maximum was retained.

By comparison, repealing R&D capitalization, which is largely a timing shift, would incur a first-year revenue loss of about $22 billion and steady-state annual losses of $6-7 billion after 5 years. The 10-year budget cost of fully repealing the measure would be roughly $150 billion, but Congress could reduce that cost by deferring capitalization for a few years, as proposed in the Build Back Better Act.

Over half the benefit of full CTC refundability would go to families in the lowest income quintile, and another third to families in the second income quintile. That is much more progressive than repealing R&D capitalization.

Lawmaking can be about tradeoffs, and, for less money in 2022, legislators could pick children over businesses. Or, as often happens in Congress, everyone could go home a little happier by picking both.

I co-authored this blog with my TPC colleague, Thornton Matheson.