Child Tax Credits Used to Address Areas of Hardship
From July 1 to September 30, 2021, the federal government distributed three advance child tax credit payments to eligible families with children, representing a financial boost of approximately $500 per month for recipients. Child tax recipients who previously reported food insecurity or difficulty affording healthcare increased their spending in those areas.
While their account inflows have increased, savings balances show no significant changes, suggesting recipients are spending the funds on critical needs rather than building a financial buffer. This behavior differs from how stimulus payment recipients saved a significant portion of their March 2021 stimulus check.
Spending on Food Increased Among Recipients Who Faced Food Insecurity
People who indicated that they previously experienced food insecurity increased their average monthly spending on food by $345, or 49% (from $711 on July 10 to $1,056 on September 7). Meanwhile, there was no significant change in spending on food for people who did not receive child tax credits and had previously experienced food insecurity. This trend is consistent with recent research: Census Household Pulse surveys indicate that households with children saw a 3 percentage point drop in food insufficiency as tax credits were distributed, while other research indicates that child tax credits were particularly beneficial for lower-income families.
People Who Experienced Food Insecurity Increased Spending on Food After Receiving Child Tax Credits
Spending on Healthcare Increased Among Recipients With Previous Struggles
Child tax credit recipients who previously struggled to pay for healthcare necessities increased their spending on healthcare. A fixed effects regression shows that recipients who experienced difficulty paying for medical or prescription expenses (as reported on their most recently completed Pulse survey) increased their monthly spending on healthcare from $42 to $72 in the three weeks following receipt of child tax credits, a difference of 72% ($30). These results suggest that child tax credits contributed to higher healthcare spending among those who previously struggled to pay healthcare expenses. Furthermore, this trend aligns with research from the JPMorgan Chase Institute showing that income tax refund recipients increased their spending on healthcare expenses immediately after receiving their refunds.
People Who Struggled to Afford Healthcare Spent More on Healthcare After Receiving Child Tax Credits
Child Tax Credit Recipients are Not (Yet) Building Savings
Our analysis shows that child tax credit recipients’ liquid account balances remained largely flat after they received credits. While inflows increased as people received child tax credits, outflows kept pace as recipients spent or transferred this money. This indicates that recipients may be using child tax credits differently than how they used stimulus payments earlier in the COVID-19 pandemic. While many stimulus recipients used their payments to build savings buffers, child tax credit recipients do not appear to be using funds to build their savings in the same way.
Liquid Account Balances Have Not Changed Significantly for Child Tax Credit Recipients
There are several potential explanations for why stimulus payments led to an increase in liquid account balances, while child tax credits have not.
- Child tax credits are distributed to a more targeted segment of the U.S. than stimulus payments – 27% of U.S. households received child tax credits, while an estimated 85% received stimulus payments. People with children may have more immediate uses for the tax credits, while a large proportion of stimulus payment recipients were able to use the payments to build savings.
- The child tax credits in our analysis were distributed at a particularly costly time of year for families with children – the return to school. As a result, spending patterns during the time families received child tax credits may look different than during the time Americans received stimulus payments.
- The average value of child tax credits is smaller than stimulus payments due to the recurring monthly disbursement schedule of the tax credits. Furthermore, tax credit recipients may mentally account to spend the money each month, while stimulus payments represented a novel windfall for many. Recipients may view the recurring nature and framing of child tax credits as money that is easier to spend.
Still, other research indicates that some families are using the child tax credits to increase their savings. This may indicate that recipients have not yet accumulated a significant amount of savings, or that they intend to eventually shift further from spending on expenses to saving. It is also possible that recipients are transferring money into accounts (i.e., savings transfers or paying down debt) that we are unable to observe in the Pulse transactional dataset. Regardless, as the debate over extending child tax credits continues, two things appear clear. In the present, these credits are helping families get by, and if they expire, there is a real risk that recipients will not have a financial cushion.
Child Tax Credits Meet Real Financial Needs for Families
The findings in this Pulse Points brief show that child tax credits have had a positive financial impact on recipients: People who experienced hardship in the past subsequently increased their spending on food or healthcare expenses. Meanwhile, savings balances have generally stayed constant. Other research shows that the targeted and consistent dispersals of tax credits have reduced child poverty and, if expanded, have the potential to increase long-term financial stability. However, the potential for long-lasting effects depend on the outcomes of ongoing political discussions. Future Pulse Points will continue to monitor the impact of COVID-19 relief and recovery efforts on personal finances.