How do refundable tax credits like the EITC and child tax credit affect FY2025 deficit figures?
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Executive summary
Refundable credits such as the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC) increase federal outlays when they exceed taxpayers’ liability because the government pays the excess as refunds; for 2025 the CTC refundability was raised to $1,700 per child (adjusted for inflation) and EITC maximums and phase‑ins were increased, including a $8,046 maximum EITC for taxpayers with three or more children [1] [2] [3]. Changes that expand refundability or raise credit amounts raise the deficit in the fiscal year in which refunds are paid unless Congress offsets them or they are projected to generate enough economic feedback to reduce deficits — an outcome the Budget Lab projects does not occur for most CTC reform options [4] [1].
1. How refundable credits flow into FY2025 deficit accounting
Refundable credits reduce net tax receipts and therefore increase the federal deficit in the fiscal year credits are paid out: when a taxpayer’s refundable credit exceeds tax liability, the Treasury mails a refund (an outlay) rather than merely lowering a tax bill, and those refund payments count as federal spending that widens the deficit absent offsets (available sources do not quantify exact FY2025 deficit dollars attributable to refunds in a single line item) [3] [5]. The FY2025 reconciliation law also explicitly affected refundability rules for the CTC, altering the refundable portion for that year and thus the outlay profile [1].
2. What changed for the Child Tax Credit in 2025 and why it matters for deficits
Under the recent legislative changes cited in Congressional Research Service material, the refundable portion of the CTC was increased from $1,000 to $1,400 per child and is indexed so that it reaches $1,700 in 2025; the refundability threshold was lowered from $3,000 to $2,500, expanding the population eligible for refunds [1]. Those statutory increases mechanically raise refundable outlays in FY2025 because more families qualify for larger refundable amounts; absent offsetting revenue or spending cuts, that directly increases the deficit for the fiscal year when refunds are paid [1].
3. EITC adjustments in 2025 and their budget implications
The IRS raised EITC parameters for 2025: higher maximum credit amounts and higher phaseout thresholds (for example, a maximum EITC of $8,046 for filers with three or more children in tax year 2025) expand both benefit size and eligibility and therefore increase refundable outlays paid as refunds [2] [3]. Those outlays reduce net revenues and raise the deficit unless policymakers include offsets or anticipate macroeconomic feedback sufficient to generate net revenue gains — a contested claim in the literature [3] [4].
4. Macroeconomic feedback and contested deficit offsets
Some policy analyses argue expanded credits can boost economic activity and thereby shrink budget deficits over time; however, the Budget Lab’s modeling finds that almost all CTC reform options (except a specific full Family Security Act variant in their simulation) permanently increase deficits even after macroeconomic feedback, meaning the small growth effects do not offset the up‑front cost of larger refundable credits [4]. That shows there is a credible, peer‑reviewed projection that expansion will raise deficits in FY2025 and beyond unless Congress offsets the cost [4].
5. Administration, improper payments, and the deficit picture
Congressional and bipartisan policy discussion around the EITC has focused on program integrity improvements — for FY2025 reforms include administrative changes and a proposed Treasury task force to reduce improper payments — because reducing improper payments can lower outlays and thus the deficit without changing statutory credit levels [6]. Sources note policymakers view better administration as a way to limit the budgetary cost of refundable credits [6].
6. What we know and what sources do not say
Available sources document statutory changes to refundability, increased CTC refund levels (to $1,700 in 2025) and higher EITC maximums and thresholds, and model projections that most CTC expansions increase deficits even accounting for growth effects [1] [2] [4]. Available sources do not mention a single, authoritative dollar figure for how much refundable credits alone moved the official FY2025 deficit number; they also do not report final FY2025 Treasury deficit accounting isolating EITC/CTC refundable outlays as a standalone line (not found in current reporting) [1] [4].
7. Bottom line for readers and policymakers
Refundable credits increase outlays in the year refunds are paid; the 2025 statutory increases in refundable CTC amounts and EITC parameters expand those outlays and therefore raise the FY2025 deficit unless Congress enacts offsets or administrative savings large enough to counteract them. Some analysts point to possible macroeconomic offsets, but rigorous modeling cited here finds most CTC expansions still increase deficits [1] [4] [2].