Report on the Indexation of the Child Tax Credit and its Alignment with Sustainable Development Goals

This report analyzes the legislative evolution of the United States Child Tax Credit (CTC), with a specific focus on the recent implementation of permanent inflation indexation under the One Big Beautiful Bill (OBBB) Act. The analysis evaluates these policy changes through the framework of the United Nations Sustainable Development Goals (SDGs), particularly SDG 1 (No Poverty), SDG 10 (Reduced Inequalities), and SDG 16 (Peace, Justice, and Strong Institutions).

Historical Context: Non-Indexation and the Erosion of Support for Families

The practice of indexing tax provisions to inflation became standard in the U.S. following the high inflation of the 1970s, a crucial measure to protect the real value of tax benefits and support economic stability. However, the Child Tax Credit, introduced in 1997, was a significant exception.

• Pre-1980s Policy: Tax provisions were set in nominal terms, leading to a decline in their real value during periods of inflation.
• 1981 & 1986 Reforms: The Economic Recovery Tax Act of 1981 and subsequent 1986 reforms established indexation for key parts of the tax code, including personal exemptions, tax brackets, and the Earned Income Tax Credit (EITC). This was a foundational step towards creating a more just and stable tax system (SDG 16).
• 1997 CTC Introduction: The original CTC was not indexed, meaning its value was systematically eroded by inflation. This policy choice directly undermined its long-term effectiveness as a tool for poverty reduction (SDG 1) and exacerbated economic disparities (SDG 10) by failing to protect its purchasing power for families.

Analysis of Recent Reforms and SDG Implications

The Tax Cuts and Jobs Act (TCJA) of 2017 and the subsequent OBBB Act introduced significant changes to the CTC, fundamentally altering its structure and relationship with inflation.

The Tax Cuts and Jobs Act (TCJA) of 2017: A Mixed Impact on SDGs

The TCJA implemented temporary but pivotal changes that had varied effects on different income groups, highlighting challenges in achieving SDG 10 (Reduced Inequalities).

1. Indexation of the Refundable Portion: For the first time, the maximum refundable portion of the CTC ($1,400) was indexed to inflation. This was a critical reform that stabilized the credit’s real value for working-class families, directly supporting efforts to combat poverty (SDG 1).
2. Non-Indexation of the Earnings Threshold: The earnings threshold for the refundable portion remained fixed at $2,500. Due to inflation, the real value of this threshold has declined, making it progressively easier for low-income families to qualify for the credit. This structural change has modestly advanced progress on SDG 1 and SDG 8 (Decent Work and Economic Growth) by expanding access.
3. Non-Indexation of the Nonrefundable Portion: The nonrefundable portion of the credit and its higher phase-out thresholds ($200,000/$400,000) were not indexed. This led to a steady erosion of the credit’s value for middle and upper-income families as inflation pushed more households into the phase-out range, working against the goal of reducing inequalities (SDG 10).

The OBBB Act: Solidifying Progress Towards Sustainable Development

The OBBB Act made the TCJA provisions permanent and introduced further reforms, representing a significant step toward creating stronger and more equitable institutional frameworks (SDG 16).

Key Provisions of the OBBB Act:

• Permanency: By making the 2017 changes permanent, the OBBB Act provides long-term stability and predictability for families. This institutional strengthening (SDG 16) ensures the CTC can serve as a reliable tool for poverty reduction (SDG 1).
• Indexation of the Nonrefundable Credit: The Act finally indexed the nonrefundable portion of the CTC, aligning it with the rest of the tax code. This is a crucial step toward ensuring the credit’s value is protected for all eligible families, thereby addressing a key driver of inequality (SDG 10).
• Insufficient Value Restoration: The Act increased the nonrefundable credit to $2,200. However, this increase does not fully compensate for the value lost to inflation since 2017. To fully restore its purchasing power, an increase to approximately $2,500 would have been required.

Conclusion: Two Steps Forward, One Step Back for SDG Achievement

The reforms culminating in the OBBB Act mark substantial progress in aligning the CTC with key Sustainable Development Goals. The establishment of permanent indexation for the entire credit is a landmark achievement that strengthens its capacity to fight poverty (SDG 1), reduce inequality (SDG 10), and build a more resilient institutional framework (SDG 16).

However, the failure to fully restore the inflation-eroded value of the nonrefundable portion represents a missed opportunity. While the policy framework is now more robust, its immediate impact on reducing financial pressure for many middle-class families is diminished. Looking ahead, the permanent indexation provides a stable foundation upon which Congress can build more comprehensive reforms to further enhance the CTC’s role in supporting families and advancing sustainable development.

Which SDGs are addressed or connected to the issues highlighted in the article?

1. SDG 1: No Poverty

   • The article focuses on the Child Tax Credit (CTC), a social protection measure designed to alleviate the financial burden on families with children. By discussing the indexation of the CTC to inflation, the article directly addresses the goal of protecting the real value of benefits for families, particularly “working-class families,” thereby preventing them from falling into poverty due to rising living costs. The text states that indexation “protects families from inflation by automatically adjusting the value of tax benefits to keep pace with increases in the cost-of-living.”

2. SDG 10: Reduced Inequalities

   • The article analyzes how changes in tax policy, specifically the CTC, affect different income groups differently. It distinguishes between the impacts on “working-class families” and “middle and upper-class families.” For instance, it notes that under the TCJA, working-class families received a partially indexed refundable credit, while higher-income families received a non-indexed nonrefundable portion, leading to “shrinking benefits for an increasing number of these families over time.” This discussion on the distributional effects of fiscal policy directly relates to reducing inequality within a country.

What specific targets under those SDGs can be identified based on the article’s content?

1. Target 1.3: Implement nationally appropriate social protection systems and measures for all, including floors, and by 2030 achieve substantial coverage of the poor and the vulnerable.

   • The entire article is an analysis of a key component of the U.S. social protection system—the Child Tax Credit. It discusses its history, legislative changes (TCJA, OBBB Act), and mechanisms like indexation, which are all part of implementing and refining this system. The text mentions other social protection policies like the Earned Income Tax Credit (EITC) and the standard deduction, highlighting a broad national effort to provide a financial floor for families.

2. Target 10.4: Adopt policies, especially fiscal, wage and social protection policies, and progressively achieve greater equality.

   • The article is a deep dive into a specific fiscal and social protection policy (the CTC). It evaluates how making the policy’s benefits permanent and adjusting them for inflation (“permanent indexation”) is a crucial step toward achieving greater financial stability and equality for families. The analysis of how non-indexation eroded the credit’s value for certain income groups, and how the OBBB Act sought to correct this, is a direct examination of adopting fiscal policies to achieve greater equality.

Are there any indicators mentioned or implied in the article that can be used to measure progress towards the identified targets?

1. Indicators for Target 1.3 (Social Protection Systems)

   • Value of Social Protection Benefits: The article explicitly mentions the nominal dollar value of the CTC at various points, such as the increase from “$1,000 to $1,400” and later to “$2,200.” This serves as a direct measure of the level of support provided.
   • Real (Inflation-Adjusted) Value of Benefits: A central theme is the measurement of the credit’s real value. The charts (Figures 1 and 4) graphically represent the “real and nominal dollars” of the credit, showing how its purchasing power changes over time. This is a key indicator of the effectiveness of the social protection system.
   • Coverage Thresholds: The article specifies the income thresholds for both phasing in and phasing out the credit (e.g., phase-in threshold of “$2,500,” phase-out thresholds of “$200,000” for heads of household and “$400,000” for married filers). These thresholds are indicators that define the population covered by the benefit.

2. Indicators for Target 10.4 (Fiscal Policies for Equality)

   • Inflation Indices: The article mentions specific economic indicators used to adjust fiscal policy, namely the “Consumer Price Index for Urban Consumers (CPI-U)” and the “Chained Consumer Price Index for Urban Consumers (C-CPI-U).” The choice of index is an indicator of how the government measures inflation to maintain the policy’s fairness.
   • Differential Impact by Income Group: The analysis of how non-indexation differently affected the refundable portion (for working-class families) versus the nonrefundable portion (for middle and upper-class families) serves as an implicit indicator of the policy’s effect on income inequality.
   • Real Value of Income Thresholds: Figures 2 and 3 illustrate the declining real value of the earnings thresholds for phase-in and phase-out due to non-indexation. This erosion, which affects who is eligible for the full credit over time, is a direct indicator of how the policy’s progressivity changes.

SDGs, Targets, and Indicators Analysis

Source: niskanencenter.org