How did advance Child Tax Credit payments affect households’ 2021 tax year outcomes and spending response?

Introduction

On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 (ARPA) into law. The stimulus bill aimed to deliver direct relief to families and workers continuing to struggle financially during the ongoing COVID-19 pandemic.¹ A notable component of ARPA was the expansion of the existing Child Tax Credit (CTC) program. It was unprecedented in its scale—characterized by its designers as “the largest child tax credit ever and historic relief to the most working families ever.”²

It was also novel in its structure: the overwhelming majority of families with children received half of their newly expanded CTC through monthly payments over the second half of 2021, instead of receiving the entire credit through their tax refund the following year.³ This change gave families more timely access to their CTC funds, which they used to help pay for bills and other basic living expenses like food (Pilkauskas and Cooney 2021; Karpman et al. 2021; Pilkauskas et al. 2022), spending a large portion of their advance CTC payments right away (Wheat et al. 2022).⁴

While the advance CTC payments provided liquidity to many families and the expansion of the credit contributed to lower child poverty, the monthly disbursal of payments during the second half of 2021 came with a tradeoff.⁵ In 2022, households would receive tax refunds substantially lower than their expectations because some of their tax-time CTC money was included in the advance payments. All else equal, a couple with two school-age children would see their refund decrease by $1,000 relative to the previous year.⁶ Tax refunds are substantial cash flow events that lead to significant increases in spending for many families (Baugh et al. 2018; Farrell et al. 2019). How did tax refunds received—or tax payments owed—change, and how did the spending response to the remaining tax refund change? Did this change disrupt families’ regular tax-time financial activities?

These questions are important for the design of future government support programs, and this report seeks to answer them. Using transaction-level data, we estimate the impact of the 2021 advance CTC payments on households’ federal tax refunds—or taxes owed—in 2022. We then estimate how households changed their spending behavior in response. We explore a range of spending categories, including spending on durable goods, services, and debt payments. We also analyze whether changes were more pronounced for households with lower liquidity. Overall, we find remarkably consistent year-over-year tax-time behaviors, given the scale of the advance CTC payments and subsequent decrease in federal tax refund amounts for CTC recipients. Our precise measurement of the spending response to this government benefit, and the behavioral impacts of changes in benefit amount and timing, can improve the efficiency of future programs by enabling policymakers to target the right households at the right cadence.

We find that:

1. Following advance CTC payments, net tax refunds for the typical CTC recipient decreased by 15 percent in 2022 compared to 2021, rarely enough to push families from receiving a refund to making a payment.
2. Smaller refund amounts following the advance CTC payments did not affect spending at tax time.
3. Year-over-year, CTC recipients were consistent in their allocation of tax refund dollars across expense categories.
4. Decreases in federal tax refund amounts did not differentially impact spending by households with low liquidity—across the liquidity spectrum, the spending response to tax refunds was consistent year-over-year.

These findings have several important implications. While this and prior work consistently finds that households with low liquidity spend more of their tax refunds right away, the smaller tax-time CTC payments do not appear to have significantly affected how much households spent after getting their tax refund, regardless of liquidity. This lack of response may suggest that some part of the tax-time spending response is driven by routine (i.e., payment receipt creates and inflows-induced spending effect) and is not driven only by demand deferred due to liquidity constraints. This in turn suggests that policymakers have some leeway to steer household finances, either further increasing monthly liquidity by shifting a larger share of annual payments to monthly payments, or further increasing saving by doing the opposite.