Combine the child tax credit and R&D tax credit for a bipartisan home run

President Joe Biden and a closely divided Washington had a remarkable 117th Congress, led by the passage of several substantial bipartisan economic packages on infrastructure and competitiveness. 

Regardless of the outcome of the midterms, Congress should pass one more bipartisan bill that pairs a critical economic priority for each party.

Democrats want an extension of the refundable child tax credit boost originally implemented in the American Rescue Plan so that families with children have breathing room and can make ends meet. Republicans and business leaders want a fix to Research and Development tax deductibility to propel job creation and economic growth. 

If there is a tax match made in heaven, it’s these two provisions: something for businesses and something for working families. And they can be paid for to ensure inflation doesn’t worsen as a result.

When the expanded child tax credit was first enacted under President Biden’s American Rescue Plan, experts predicted it would reduce child poverty by as much as 40 percent. Much of the expanded credit’s impact would be driven by its full refundability, meaning working families who don’t pay a lot in federal income tax can still get the full dollar benefit as a tax refund. Earlier this month, the U.S. Census Bureau confirmed these predictions. According to its Supplemental Poverty Measure, child poverty fell by over 45 percent. Census estimated the expanded credit alone lifted almost 3 million children out of poverty, including 1 million under the age of six. These children came disproportionately from communities of color; around 2 million were Asian, Black or Latino.

Unfortunately for many families across the country, Congress allowed the expanded child tax credit to expire at the end of 2021. Unsurprisingly, 3.7 million more children fell into poverty at the start of 2022. But picking this policy back up has a steep price tag. Extending the child tax credit of the American Rescue Plan will cost about $400 billion from 2023 to 2025, although it can and should be made cheaper by better targeting its benefits to families more in need.

While the child tax credit is critical, so is increasing innovation in this country. The R&D tax fix restores the ability of companies to immediately write off research expenses. By accounting for the research costs when they are made, businesses get a tax reward for their investments when they make them instead of having to spread it out over 5 years. Republicans were short-sighted when they limited this provision in 2017 to pay for the Trump tax cuts, but its long-term importance is no less of an issue. 

America has been at the forefront of global innovation for many years, but we’ve had a shrinking share of GDP going to federally funded research. The private sector has stepped in and kept U.S. research spending above the OECD average, but this private boost is in grave danger now, due to inflationary pressures and rising interest rates. This is even more relevant with the bipartisan and science-focused CHIPS legislation passed this summer — industry and government are going to be able to work hand in hand.

However, fixing the R&D tax fix comes at a cost. The Committee for a Responsible Federal Budget has estimated that the permanent fix would cost $155 billion over the next 10 years with nearly $60 billion of that in the first year. Pairing these two provisions in an end-of-year deal makes sense. We need more innovation flowing onto American shores. And families need help to afford essentials.

What also makes sense is ensuring they are paid for so as to not worsen inflation. There’s an old line in Washington D.C.: If something is worth doing it’s worth paying for. And there are plenty of options to do so if there is a modicum of political will. Extending the state and local tax deduction (SALT) cap and applying it to businesses and extending the personal income SALT cap could raise half a trillion. Finally closing the carried interest loophole and then applying the net investment Income tax to business income would raise $300 billion. And there are hundreds of billions of more health care savings that could be had by the federal government. All of these funds raised or saved would help contain inflationary pressure from a tax deal that would be good for Americans.

At the end of the day, the path forward for these policies is in the final bipartisan and bicameral deal of the 119th Congress that will include funding the government. Nothing is more bipartisan and inevitable than lame-duck legislation that must move. That’s a political outcome we all know.

Zach Moller is the director of the Economic Program at Third Way.

Editor’s note: This piece was updated Friday, Oct. 14 at 2:38 p.m. to correct language surrounding tax deductions for research and development.