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	Introduction

The Department of Veterans Affairs (VA) has administered and supervised several life insurance programs for servicemembers and veterans since 1919. Currently, three VA life insurance programs that provide benefits to the families of servicemembers and veterans are still enrolling new policyholders. These programs are Servicemembers' Group Life Insurance (SGLI), Veterans' Group Life Insurance (VGLI), and Service-Disabled Veterans' Insurance (S-DVI). The VA's Regional Office and Insurance Center (VAROIC) in Philadelphia, PA, supervises SGLI and VGLI, but the day-to-day administration of the programs is handled by the Office of Servicemembers' Group Life Insurance (OSGLI), a division of the Prudential Insurance Company of America. The Service-Disabled Veterans' Insurance (S-DVI) program, on the other hand, is administered entirely by the VA. Access to VA-administered life insurance programs gives servicemembers and veterans, who may not be eligible for private life insurance policies, the opportunity to carry group life insurance. This provides for their families in the event of the servicemember's or veteran's death.
Across all VA insurance programs, 7.1 million people have $1.3 trillion in face value of insurance coverage.
This report is structured into three major sections. The first section provides an overview of the VA's different life insurance programs, including eligibility requirements, premium rates, and benefits. The second section describes the VA's management and administrative structure, as well as how policy proceeds to beneficiaries are currently paid out for SGLI, VGLI, and S-DVI. The third section discusses major areas of congressional interest and policy issues as they pertain to SGLI, VGLI, and S-DVI.

	Servicemembers' Group Life Insurance Program

In September 1965, Congress established the Servicemembers' Group Life Insurance program in P.L. 89-214 by mandating the VA to enter into an agreement with the private insurance industry to meet the insurance needs of Vietnam era servicemembers. Since 1965, Congress has amended SGLI to include all eligible servicemembers in the uniformed services.
The SGLI program, through a group policy issued by the Prudential Insurance Company of America, provides low-cost term insurance protection to servicemembers. It is administered by the Department of Veterans Affairs Regional Office and Insurance Center's Office of Servicemembers' Group Life Insurance, located in Philadelphia, PA. When first enacted, the SGLI program provided up to $10,000 in coverage for members. Today, all servicemembers can receive a maximum of $400,000 insurance coverage under the program. As of September 30, 2012, about 2.4 million members of the uniformed services were covered under the program.
Under the Veterans' Survivor Benefits Improvement Act of 2001 ( P.L. 107-14 ), Congress extended coverage to the spouses and children of servicemembers covered under the SGLI program. The FY2005 Emergency Supplemental Appropriations Act for Defense, the Global War on Terror, and Tsunami Relief ( P.L. 109-13 ) added Traumatic Injury Protection Insurance to SGLI, which extended the program to provide short-term financial assistance to servicemembers suffering from traumatic injuries.

		Eligibility Requirements

Full-time and part-time life insurance coverage are both provided through the SGLI program. According to the Servicemembers' and Veterans' Group Life Insurance Handbook , full-time coverage is provided to the following active duty servicemembers under calls or orders that exceed 30 days:
commissioned, warrant, and enlisted members of the Army, Navy, Air Force, Marine Corps, Coast Guard, the National Oceanic and Atmospheric Administration (NOAA) Commissioned Corps, and the Public Health Service (PHS) Commissioned Corps; members of a uniformed service's Ready Reserve/National Guard that are assigned to a unit or position in which they may be required to perform active duty or active duty for training and are scheduled to perform at least 12 periods of inactive duty training annually that is creditable for retirement purpose under Title 10 of the U.S. Code ; members of the Individual Ready Reserve (IRR) who volunteer for assignment to a "mobilization" category under Section 12304 (i)(1) of Title 10 of the U.S. Code ; cadets or midshipmen of the U.S. Military Academy, the U.S. Naval Academy, the U.S. Air Force Academy, and the U.S. Coast Guard Academy; and Reserve Officers' Training Corps (ROTC) members, cadets, or midshipmen while attending field training or practice cruises.
The following members of the Reserves (who are ineligible for full-time coverage) are eligible for part-time coverage while on active duty under calls or orders that exceed 30 days:
commissioned, warrant, and enlisted members of the Army, Navy, Air Force, Marine Corps, and Coast Guard Reserves (except temporary members of the Coast Guard Reserve); members of the IRR during one-day call-ups; PHS Reserve Corps; Army National Guard and Air National Guard while performing duty under Sections 316, 502, 503, 504, or 505 of Title 32 of the U.S. Code ; and ROTC members, cadets, and midshipmen while attending field training or practice cruises.

		SGLI Coverage and Premium Rates

Currently, the maximum SGLI coverage is $400,000. This coverage amount ($400,000) is automatic when the servicemember enters into a period of active duty or reserve status. A servicemember can reduce coverage, from the maximum of $400,000, in decrements of $50,000. Members may elect to either decline coverage or reduce coverage by completing SGLI program Form SGLV-8286. However, proof of good health is required if the member decides to obtain or increase coverage after he or she had previously chosen to reduce or decline coverage.
This insurance is forfeited when an insured servicemember is found guilty of mutiny, treason, spying, or desertion, or, as a conscientious objector, refuses to perform service or refuses to wear his or her uniform.

			Full-Time Coverage

Servicemembers who are eligible for full-time SGLI coverage are covered through their period of active duty or qualifying reserve status. They are also covered for a period of 120 days (with no premium) after their separation or release from active duty or reserve status.
The Veterans' Housing Opportunity and Benefits Improvement Act of 2006 ( P.L. 109-233 ) extended the free 120-day coverage period to two years for certain disabled servicemembers and their dependents. This change allows SGLI policyholders that are totally disabled (unable to work) at the time of their separation or release from service to keep their SGLI coverage for up to two years. This coverage is classified as the SGLI Disability Extension, and the servicemember is obligated to apply for the coverage after he or she has separated from service.
When a servicemember with full-time SGLI coverage is released from active duty or the Reserves, he or she may convert his or her coverage to VGLI or to a commercial life insurance policy with any of the participating commercial insurance companies.

			Part-Time Coverage

Servicemembers eligible for part-time SGLI coverage are only covered during the time in which they are on active duty or active duty for training, and the period in which they are traveling to and from such duty. Part-time coverage servicemembers are eligible for the free 120-day period of coverage only if they incur a disability or a preexisting disability is aggravated during a period of duty.

			Beneficiaries

Servicemembers can select anyone as the beneficiary of their insurance policies. If a servicemember fails to name someone, the insurance proceeds, by law, must be distributed in the following order:
1. widow or widower, or, if none, 2. children ( not including stepchildren ), or, if none, 3. parents, or, if none, 4. executor of the estate, or, if none, 5. other next of kin.
If the servicemember chooses not to be insured under the SGLI program, chooses to be insured for less than the SGLI maximum amount, or names someone other than his or her spouse or child as the beneficiary, the law requires that the spouse of the servicemember must be notified by the uniformed service.

			Premium Rates

The cost of SGLI is generally shared by the servicemember and the government. Each servicemember is responsible for paying a monthly premium (unless in a combat zone, in which case the government pays the full premium), and the government and Prudential pay the cost of all death claims. The SGLI insurance premium is deducted from the servicemember's pay. The premium rates are mutually agreed upon by the VA and the contractor (Prudential Insurance Company of America).
Currently, the basic SGLI premium rate decreased from the 2007 rate of 7.0 cents per month per $1,000 of coverage, to 6.5 cents per month per $1,000 of coverage. Table 1 shows premium rates for both full-time and part-time active duty servicemembers and reservists:

		Extra Hazard of Duty Cost

Each branch of service is liable, under law, to pay the additional cost of claims due to the extra hazards of serving in the military. The amount is determined by the VA and paid by the Department of Defense (DOD) on behalf of the uniformed service.
Each year the VA actuaries study the mortality rate of the most recent three years of servicemembers' claim experience. This allows them to develop the average death rate by age. The rate is used to determine the expected number of death claims. At the end of each policy year, the expected death claims are compared with the actual number of incurred death claims. If the actual death claims exceed the estimated death claims, the excess claims are multiplied by the average amount of insurance per servicemember to determine the extra hazard cost for each uniformed service.
If the annual extra hazard cost paid is lower than the estimated amount, Prudential Insurance will refund the excess funds to the VA. Excess funds are deposited into the revolving fund. If the extra hazard cost paid exceeds the annual estimated amount, then the VA is responsible for reimbursing Prudential from the revolving fund.

		Family Servicemembers' Group Life Insurance Coverage

SGLI coverage was extended to the spouses and dependent children of insured servicemembers by the Veterans' Survivor Benefits Improvements Act of 2001 ( P.L. 107-14 ).
Family Servicemembers' Group Life Insurance (FSGLI) coverage is automatically issued to the servicemember's spouse and children, based on the information in the servicemember's personnel records. Servicemembers may decline family coverage or may elect reduced coverage by completing SGLI program Form SGLV-8286A, Family Coverage Election and Certificate. However, proof of good health of the spouse or child is required if the servicemember decides to obtain or increase coverage for his or her spouse or child after he or she has previously chosen to reduce or decline coverage.

			FSGLI Spousal Coverage

Spouses of servicemembers on active duty or reservists, including National Guard members eligible for full-time SGLI coverage, can be insured up to the maximum amount of $100,000 in increments of $10,000. However, spousal coverage cannot exceed the servicemember's SGLI coverage. Premiums for spousal coverage are deducted from the servicemember's or reservist's pay. Table 2 shows the premium rates for spouses based on age and amount of coverage.
A spouse of a servicemember or active duty reservist may convert his or her coverage to a commercial life insurance policy with any participating commercial insurance companies. Coverage for a spouse will end 120 days after any of the following events:
The date the servicemember elects (in writing) to terminate his or her spouse's coverage; The date the servicemember elects (in writing) to terminate his or her own SGLI coverage; The date of the servicemember's death; The date the servicemember separates from service; or The date of the servicemember's divorce from his or her spouse.

			FSGLI Child Coverage

A child is considered to be a dependent of a servicemember if the child is unmarried and under the age of 18, or became permanently incapable of self-support before the age of 18. Dependent children include all natural born children, legally adopted children, and stepchildren who are under the care of the servicemember. A child is also considered to be a dependent if he or she is between the ages of 18 and 22 and is enrolled in an approved educational institution. Dependent children covered under an active duty servicemember's or reservist's SGLI policy are insured at the maximum amount of $10,000 each (at no cost to the servicemember). The child is covered up to 120 days after the servicemember has separated from service.
The Veterans' Benefits Improvement Act of 2008 ( P.L. 110-389 ) added benefits for families of stillborn children born on or after October 10, 2008, under the FSGLI program. Previously, stillborn children were excluded from coverage. Servicemembers who experience the death of such a dependent child are eligible to receive a $10,000 payment (the maximum amount under FSGLI child coverage).
Coverage for a child will end 120 days after the servicemember's separation or release from service or assignment (in the case of Ready Reserve). There are currently no conversion options for children.

		SGLI Traumatic Injury Protection Program

Since its inception in 2005, the Traumatic Servicemembers' Group Life Insurance (TSGLI) program has provided short-term financial assistance to servicemembers who suffer from traumatic injuries while on active duty. TSGLI is not an optional program, but an automatic coverage program under the SGLI program, and its purpose is to ease the burden for servicemembers and their families during times of extensive recovery and rehabilitation. TSGLI premiums are $1.00 per month and are deducted from the servicemember's pay.

			Eligibility

Servicemembers who are covered under the SGLI program are automatically covered by the TSGLI program. However, TSGLI does not cover spouses and children who are covered under the SGLI program, nor does it cover those under the VGLI program. Eligibility and certification for payment are determined and provided by each servicemember's uniformed service.
The VA Secretary prescribes by regulation which conditions are eligible for, or excluded from, TSGLI coverage. The losses covered by TSGLI include the following conditions:
total and permanent loss of sight, speech, or hearing; amputation of hand or the loss of four fingers on the same hand or the loss of a thumb; amputation of the foot or loss of all toes; loss of four toes on the same foot or the loss of the big toe; limb salvage; quadriplegia, paraplegia, hemiplegia, or uniplegia; burns (2 nd degree or more covering 20% or more of the body or 20% or more of the face); facial reconstruction; coma resulting from traumatic injury; inability to perform two activities of daily living due to traumatic brain injury; inability to perform two activities of daily living due to other traumatic injury; certain genitourinary conditions; and continuous 15-day inpatient hospital care due to traumatic injury.
The Veterans' Benefits Act of 2010 ( P.L. 111-275 ) provided that the VA Secretary may distinguish in payments for qualifying loss of a dominant hand and qualifying loss of a non-dominant hand.

			Losses Excluded From TSGLI Payment

Injuries sustained while committing or attempting to commit a felony and losses caused by the following are excluded from TSGLI payment:
mental disorder; mental or physical illness or disease, unless the illness or disease is caused by a pyogenic (pus forming, often from a wound) infection, biological, chemical, or radiological weapon, or accidental ingestion of a contaminated substance; attempted suicide; self-inflicted wounds; diagnostic procedures, preventive medical procedures (i.e., inoculations), medical or surgical treatment for an illness or disease, or any complications arising from such procedures or treatment; or the servicemember's willful use of illegal or controlled substances, unless they are administered or taken on the advice of medical professionals.

			Benefit Amount

TSGLI benefit amounts depend on the type and severity of a servicemember's injury and range from $25,000 to a maximum of $100,000. Servicemembers who suffered injuries between October 7, 2001, and December 1, 2005, may receive retroactive TSGLI benefits regardless of SGLI coverage status.

	Veterans' Group Life Insurance Program

On August 1, 1974, Veterans' Group Life Insurance (VGLI) became available to former servicemembers ( P.L. 93-289 ). VGLI provides for the conversion of SGLI after separation from active duty. The administration of the VGLI program is handled by the OSGLI, a division of the Prudential Insurance Company of America. VGLI is a five-year renewable term policy which provides a maximum of $400,000 of coverage. VGLI policyholders have the right to renew their coverage at the end of each five-year term period. Policyholders may also convert VGLI to an individual commercial policy at any time with any of the participating private companies without proof of insurability. VGLI has no cash, loan, paid up, or extended values and does not pay dividends.

		Eligibility Requirements

Veterans eligible for the VGLI program are:
Ready Reserves/National Guard SGLI policyholders who are separated, retired, or released from assignment; insured SGLI members who are being released from active duty or active duty for training under a call or order to duty that does not specify a period of less than 31 days; Ready Reservists who have part-time SGLI coverage and who, while performing duty (or traveling directly to or from duty), suffer an injury or disability that causes them to be uninsurable at standard premium rates; and people assigned to the IRR of a military service or to the Inactive National Guard (ING). This includes members of the Public Health Service Inactive Reserve Corps (IRC).
After separation from service, servicemembers have 120 days to apply for VGLI without providing evidence of insurability (good health). Servicemembers who do not apply for VGLI within 120 days of separation from service have an additional year in which to apply for VGLI. During this additional year servicemembers are required to submit the initial premium and provide evidence of insurability (good health) in addition to the application for VGLI. If a servicemember does not apply for VGLI within the one year and 120 days allotted following separation from service, he or she becomes ineligible for coverage under VGLI.
Servicemembers who are totally disabled at the time of separation from active duty and are granted a free two-year extended SGLI coverage period are automatically enrolled in VGLI at the end of the two-year extension period.

		VGLI Coverage and Premium Rates

The maximum amount of coverage for VGLI is $400,000 if the veteran separated from service after September 1, 2005. If the veteran separated from service prior to September 1, 2005, his or her maximum coverage is $250,000, according to the Servicemembers' Group Life Insurance Enhancement Act of 2005 ( P.L. 109-80 ). VGLI coverage is issued in multiples of $10,000 up to the maximum amount of coverage. VGLI coverage, at the time of conversion from SGLI, may not exceed the amount of SGLI coverage that the veteran had at the time he or she was released from active duty or the reserves. However, a veteran may increase his or her coverage once in every five-year period by $25,000 if the veteran is under the age of 60, and still to the statutory maximum coverage amount.
The Veterans' Benefit Act of 2010 ( P.L. 111-275 ) permitted certain VGLI policyholders, at every fifth anniversary, to increase their VGLI coverage by up to $25,000, with total coverage limited to the maximum available at the time of renewal. If the current VGLI coverage is for less than $375,000, the policyholder may purchase an additional $25,000 of VGLI coverage (the amount for the increase in coverage cannot be less than $25,000 if the current coverage is less than $375,000). If the current VGLI coverage is more than $375,000, the policyholder can purchase the amount that increases the coverage to $400,000.
Beginning on April 11, 2011, VGLI policyholders were allowed to increase their coverage under the following guidelines:
The additional coverage must be requested during the 120-day period prior to the 5-year VGLI anniversary of the policy; The insured does not have to answer any medical questions; The total amount of coverage cannot exceed $400,000 (the current maximum total coverage available); and The insured must be under the age of 60 on the coverage effective date of the 5-year VGLI anniversary of the policy.
To be covered under VGLI, veterans must pay premiums. VGLI premium rates are determined by age and amount of insurance. For example, a veteran who is aged 29 or younger would pay $32 per month for the maximum $400,000 coverage, while a veteran who is aged 75 or older would pay $1,800 per month for the same $400,000 coverage. Table 3 lists monthly premium rates per age group per coverage amount.

		VGLI Payment of Premiums

The VGLI program offers various options for paying premiums. Policyholders may choose to pay the premiums on a monthly, quarterly, semi-annual, or annual basis. Discounted premiums are available for some of these options. Table 4 shows the different payment options available under VGLI and their associated discounts.

		VGLI Coverage Reduction Schedule

As veterans age, they incur higher premium rates for insurance coverage, as shown in Table 5 . To lessen or maintain cost at older ages, veterans may gradually reduce the amount of their VGLI coverage. VA recommends the following schedule that will allow veterans to maintain level premiums ($225 per month) while reducing coverage at the ages of 65 and older:

		Commercial Conversion Criteria

VGLI policyholders may convert to individual commercial policies at any time with a commercial company that participates in the program without proof of insurability so long as their VGLI premiums are paid up to the date of the conversion. However, once a veteran converts his or her coverage to a commercial policy, he or she may no longer renew his or her VGLI coverage. Veterans that convert to commercial policies are issued standard premium rates regardless of their health, but coverage may not exceed the amount of VGLI coverage that the members had at the time of conversion. In addition, the conversion policy must be a permanent policy, such as a whole life policy. Other types of policies, such as term, variable life, or universal life insurance, are not allowed as conversion policies. Spouses and children may not be covered under VGLI.
To convert a VGLI policy, the veteran must
select a company from the participating companies listing; submit an application to the local sales office of the company selected; obtain a letter from the OSGLI verifying coverage; and give a copy of that notice to the agent who takes the application.

	Service-Disabled Veterans' Insurance Program

During the Korean War, Congress passed the Insurance Act of 1951 (P.L. 82-23) and established the Service-Disabled Veterans' Insurance (S-DVI) program, which is administered entirely by the VA. S-DVI was created to meet the insurance needs of certain veterans with service-connected disabilities, many of whom would not be eligible for private life insurance due to their service-connected disabilities. S-DVI is available as a permanent plan or as a five-year term policy for disabled veterans, and policyholders can apply for up to $10,000 in coverage. Policies for this insurance are issued with the letters "RH" in front of the policy number. RH insurance is considered nonparticipating, which means that no dividends are paid to policyholders. S-DVI is still being issued to new policyholders, and it is currently the only issue of direct VA life insurance for veterans that is open to new policyholders. Table 6 shows basic statistics related to S-DVI, including the current number of veterans covered and the average age of covered veterans.

		Eligibility Requirements

To be eligible for S-DVI, a veteran must have
been released from military service for reasons other than dishonorable discharge or bad conduct discharge awarded at General Court-Martial; been released from active duty on or after April 25, 1951; been rated for a service-connected disability or disabilities (even if only 0%), but is otherwise in good health; and applied within two years of receiving a rating for a new service-connected disability.
Ratings for service-connected disabilities are determined by the severity of the veteran's disability on a scale from 0% to 100%. 0% is a valid rating and is different from no rating at all. A 0% rating means that a service-connected disability exists, but it is not so disabling that it entitles the veteran to compensation payments. Under S-DVI, all veterans with a service-connected disability are eligible for coverage, no matter the rating. However, the veteran must submit an insurance application within two years from the date that he or she is notified about the disability rating. If the veteran does not apply within that time but service connection is later established for some new condition, the veteran will then have two years from the date of notice of that new condition to apply.

		S-DVI Premiums and Disability Provisions

Premiums charged for S-DVI coverage are
based on the rates that healthy people would have been charged when the program started in 1951, and based on 1941 mortality tables; and waived for veterans who are totally disabled.
Because the program insures many veterans who have severe disabilities, premium payments are insufficient to pay all claims and are supplemented yearly by congressional appropriations.
Premiums paid for S-DVI coverage increase as policyholders get older. On November 1, 2000, to provide financial relief from high premium rates for veterans at advanced ages, "RH" term premiums were "capped" at the age 70 renewal rate. Therefore, annual premiums for policyholders were "capped" at $69.73 per $1,000 of coverage.
A major issue for "RH" policyholders is that "RH" premiums are much higher than standard commercial rates because they are based on outdated mortality (1941) tables. The following statement was made at a hearing in the 111 th Congress, concerning the VA's current use of 1941 mortality tables to determine S-DVI premium rates:
the current mortality tables are almost 70 years old. Tables now are based on the assumption that disabled vets die at an average age of 58, which is no longer true given today's record. As life expectancy has significantly improved over the past 60 years, commercial insurance companies have used up-to-date mortality tables. The newest table in general used by the insurance industry has premium rates roughly 50 percent lower than S-DVI rates.
Because life expectancy has improved since the adoption of the S-DVI program, premiums based on the higher mortality rates of 1941 no longer fulfill congressional intent to provide life insurance to service-connected disabled veterans at standard rates. To address these concerns, it has been recommended that legislation be introduced to lower S-DVI premiums by basing them on the 2001 CSO Mortality Table, the table currently used by the National Association of Insurance Commissioners.
Some S-DVI policyholders are eligible for premium waivers at no extra cost. To be eligible for a premium waiver, an insured person must have a total disability that lasts six months or longer and that starts before the age of 65. Even if the total disability started before the effective date of the policy, a waiver can still be obtained as long as the total disability is service-connected.

			Eligibility Requirements

The Veterans' Benefits Act of 1992 ( P.L. 102-568 ) made supplemental coverage accessible to S-DVI policyholders. Veterans who are totally disabled may apply for a waiver of premiums and additional supplemental coverage of up to $20,000. The Veterans' Benefits Act of 2010 ( P.L. 111-275 ) increased the maximum coverage amount to $30,000 effective October 1, 2011. However, premiums cannot be waived on the additional supplemental coverage. To be eligible for Supplemental RH, policyholders must
be eligible for a waiver of premiums on their basic S-DVI policy due to total disability; apply for this coverage within one year from notice of the grant of the waiver; and be under the age of 65.
In the period from December 1992 to September 2010, VA approved 39,336 applications for Supplemental RH.

		Gratuitous S-DVI ("ARH")

In 1959, Congress passed legislation to protect veterans who became incompetent due to a service-connected disability while eligible to apply for S-DVI, but who died before filing an application. This program is known as Gratuitous S-DVI (or ARH). Gratuitous S-DVI differs from S-DVI because it is
issued posthumously, payable to a preferred class of a veteran's relatives, and payable solely in a lump sum.

			Eligibility Requirements

Gratuitous S-DVI is granted posthumously to veterans who
met the basic eligibility requirements for S-DVI; did not apply for S-DVI because of continued mental incompetence due to a service-connected disability; and died before a guardian was appointed or within two years of such appointment.
Applicants must submit their applications for Gratuitous S-DVI payment within two years from the date of the veteran's death. But if the person making the claim is mentally or legally incompetent when the right to apply for the benefit expires, he or she may apply within one year after his or her incompetency ends.
Gratuitous S-DVI lets veterans' families obtain lump-sum payments of $10,000 after the veterans' deaths as long as the previously mentioned eligibility requirements have been met. Gratuitous S-DVI is only payable as a lump sum and may not be paid as an annuity.
Payment of Gratuitous S-DVI is made to the following family members in the order listed below:
1. widow or widower of the insured, if living; if not, 2. insured's child or children, if living, in equal shares; if not, 3. insured's parents, if living, in equal shares.

	Management and Administration

In 1919, the VA began oversight of all servicemember life insurance programs. The VA issued United States Government Life Insurance to World War I servicemembers (1919-1951), National Service Life Insurance for World War II servicemembers (1940-1951), Veterans' Special Life Insurance for Korean War servicemembers (1951-1956), and Veterans' Reopened Life Insurance for disabled World War II and Korean War servicemembers (1965-1966). All of these life insurance programs are currently closed to new issues.
The only three VA life insurance programs that provide benefits to the families of servicemembers and veterans, and that are still allowing new issues of life insurance, are S-DVI, SGLI, and VGLI. Congress passed the Insurance Act of 1951 (P.L. 82-23) and established the S-DVI program. S-DVI was created to meet the insurance needs of certain veterans with service-connected disabilities, many of whom would not be eligible for private life insurance due to their service-connected disabilities. Following S-DVI, in 1965, with the authorization of Congress (as part of establishing SGLI), the VA Administrator purchased group life insurance and selected the Prudential Insurance Company of America to cover its policies. In 1974, VGLI became available to former servicemembers under P.L. 93-289 . VGLI provides for the conversion of SGLI after separation from active duty.
In 1965, the Advisory Council on Servicemembers' Group Life Insurance was established. Initially, the Advisory Council is responsible for reviewing the SGLI programs and advising the VA Secretary on policy matters concerning SGLI. However, in 1974, the Advisory Council became responsible for reviewing the VGLI program as well. The Advisory Council consists of the following six members according to current law:
Secretary of the Treasury as chairperson, Secretary of Defense, Secretary of Commerce, Secretary of Health and Human Services, Secretary of Homeland Security, and Director of the Office of Management and Budget.
The VA Regional Office and Insurance Center (VAROIC) in Philadelphia, PA, supervises the SGLI and VGLI programs. However, the OSGLI in Roseland, NJ, a division of Prudential, administers the day-to-day operations of SGLI and VGLI.

		How Policy Proceeds are Paid Out

SGLI and VGLI proceeds are paid either as a lump sum or with periodic payments over a period of 36 months. The lump sum payment may, at the beneficiary's election, be made as a single check (or electronic transfer) or via an Alliance Account. TSGLI proceeds may, at the beneficiary's election, be made as either a single check (or electronic transfer) or via an Alliance Account. An Alliance Account is an interest-bearing retained asset account administered through the Prudential Insurance Company of America that is similar to a checking account. Like a checking account, proceeds are deposited in the beneficiary's name and he or she is given a draft book, which the beneficiary may use to write drafts for any amount up to the full amount of the proceeds. However, unlike checks, drafts may not be used to make purchases at the point of sale. Instead, the beneficiary must write the draft and deposit it into his or her checking account, where the money will be transferred from the beneficiary's Alliance Account.
Alliance Accounts are not offered under the S-DVI program, which is administered entirely by the VA. S-DVI beneficiaries may receive a lump-sum check or monthly payments, as predetermined by the veteran at the time that he or she fills out the application.

			Accelerated Benefit Option

SGLI or VGLI policyholders may have access to the death benefits of their policies before they die if they exercise the Accelerated Benefit Option (ABO). This is a one-time benefit, available only if the policyholder is deemed terminally ill. If exercised, the ABO allows the policyholder to receive a lump-sum payment of the insurance subject to the following:
Terminally ill policyholders will have access of up to 50% of the face amount of their coverage during their lifetimes. This money will be available in increments of $5,000. The insured must have a medical prognosis of life expectancy of nine months or less.
The S-DVI program does not have an ABO.

		Financial Counseling

Since October 1, 1999, the Beneficiary Financial Counseling Service (BFCS) has been available to VA insurance program beneficiaries. BFCS is a benefit that provides personalized objective financial counseling to SGLI, VGLI, and TSGLI beneficiaries at no additional charge.
BFCS is provided by FinancialPoint. Beneficiaries may contact financial advisors to answer financial questions 24 hours a day, seven days a week, by calling FinancialPoint's toll free number. Beneficiaries may request targeted assistance; for instance, help with estate planning or saving for retirement. Beneficiaries may also request comprehensive personalized financial plans by submitting detailed financial questionnaires or having face-to-face meetings with advisors.

	Policy Issues

		Coverage Limit for S-DVI

Currently, S-DVI policies are issued for a maximum face value of $10,000. This amount has not been increased in almost six decades. The $10,000 maximum coverage was part of the S-DVI program at its inception in 1951. By comparison, $10,000 in 1951 would be worth nearly $88,300 in 2012 after adjusting for inflation. Also, policyholders are denied the opportunity to buy additional coverage under the program.
As of June 24, 2009, less than 4% of veterans who were eligible to participate in the program were insured under S-DVI. According to a recent congressionally mandated study, the lowest area of veteran satisfaction was "the maximum amount of S-DVI insurance coverage that veterans were authorized to purchase." Some critics say the program falls far short of delivering the protection it was originally designed to provide. For example, Brian E. Lawrence, assistant national legislative director of the Disabled American Veterans, said
Government life insurance programs have limited basic coverage to $10,000 since their inception under the War Risk Insurance Act in 1917. Then, they were an excellent benefit. More than 93 percent of military members adopted the maximum coverage of $10,000 because they knew that in the event of their death, their family members would have the financial resources available to pay for the cost of a home and also to cover the cost of living for a considerable amount of time. For example, Sears, Roebuck and Co. sold prefabricated houses in the early 1900's. Its 1920 catalogue featured 80 models, ranging in price from $4,900 to $6,000. Obviously, $10,000 went much further in 1917 than it does in 2003.
According to the VA, 49% of the veterans enrolled in the S-DVI program are considered totally disabled and are eligible for a premium waiver for their basic coverage. Of those who were eligible in 2009, only 27% had a Supplemental S-DVI policy. This means that a relatively small percentage of all S-DVI policyholders have $30,000 in total coverage, while a large majority of participants have $10,000 in total coverage. In comparison, the VGLI program offers maximum coverage of $400,000.
In addition, because coverage for S-DVI is not wholly funded by the premiums paid by policyholders, Congress appropriates funds to subsidize the program. These appropriations are necessary to support veterans who are waived from paying premiums because they are totally disabled from service-connected disabilities. Therefore, if the amount of coverage available to veterans were to increase, the appropriation allocated for the S-DVI program would also have to increase to avoid facing a shortfall.

Output:
The Department of Veterans Affairs (VA) administers and supervises several life insurance programs for active servicemembers and veterans. The VA supervises the Servicemembers' Group Life Insurance (SGLI) and Veterans' Group Life Insurance (VGLI) programs, which are administered by the Office of Servicemembers' Group Life Insurance (OSGLI), a division of Prudential Insurance Company of America. The Service-Disabled Veterans' Insurance (S-DVI) program, on the other hand, is administered entirely by the VA. Access to VA-administered life insurance programs gives servicemembers and veterans, who may not be eligible for private life insurance policies, the opportunity to carry group life insurance. This provides for their families in the event of the servicemember's or veteran's death.
In September 1965, with the passage of P.L. 89-214, Congress established the SGLI program and mandated the VA to enter into an agreement with the private insurance industry to meet the insurance needs of Vietnam era servicemembers. As a result, VA established an agreement with Prudential Financial to administer its policies. When first enacted, the SGLI program provided up to $10,000 in coverage for policyholders. Today, servicemembers can receive a maximum of $400,000 insurance coverage under the program.
On August 1, 1974, with the enactment of P.L. 93-289, VGLI became available to servicemembers. VGLI provides for the conversion of SGLI after separation from active military duty. VGLI is a five-year renewable term policy that, like SGLI, provides a maximum of $400,000 of coverage.
Servicemembers may have their SGLI and VGLI proceeds paid either as a lump sum or over a period of 36 months. The lump sum payment may, at the beneficiary's election, be in the form of a single check via a retained asset account (called an Alliance Account). Free financial counseling is available to SGLI and VGLI beneficiaries.
During the Korean War, before SGLI and VGLI were established, Congress passed the Insurance Act of 1951 (P.L. 82-23) and established the S-DVI program. S-DVI was created to meet the insurance needs of certain veterans with service-connected disabilities, many of whom would not be eligible for private life insurance due to their service-connected disabilities. Currently, policies are issued for a maximum face value of $10,000. Retained asset accounts are not offered under the S-DVI program.
This report provides information on the current VA life insurance programs available for servicemembers and veterans, management and administration issues, and associated policy issues.


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	Introduction

The Taxpayer Relief Act of 1997 ( P.L. 105-34 ) created a $500-per-child nonrefundable tax credit to help ease the financial burden that families incur when they have children. Since 2001, legislative changes, particularly those made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16 ) and the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ), have altered the structure of this tax benefit. Specifically, the amount of the credit per child has increased and the credit has been made partially refundable, expanding the availability of the credit to some low-income families. The American Taxpayer Relief Act (ATRA; P.L. 112-240 ) made the EGTRRA changes to the child tax credit permanent. The Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114-113 ) made the ARRA change to the child tax credit permanent.
The goal of this report is to analyze the economic impact of the child tax credit. This report first provides a brief overview of the current structure of the credit, followed by an economic and distributional analysis of the credit. The economic analysis focuses on the equity (i.e., "fairness) of this tax provision, based on different definitions of equity, and examines the limited impact of the credit on taxpayer behavior. This report does not provide an in-depth examination of the history of the credit.

	Current Law

Families with children may be eligible to claim a tax credit for each eligible child, subtracting the amount of the credit from their tax bill in order to reduce the taxes they owe. The child tax credit has three key features.
Amount: The credit equals a maximum of $1,000 per child. Refundability: Families with little or no income tax liability may be able to claim the credit as a refund. The amount of the refund is equal to 15% of a taxpayer's earnings above $3,000, up to the maximum amount of credit for the family. This is referred to as the "earned income" refundability formula. Phase-out: The credit is phased out for higher-income taxpayers. Specifically, the credit is reduced by $50 for every $1,000 a family's modified adjusted gross income (AGI) exceeds specific income thresholds.
The monetary parameters of the credit (credit amount, refundability threshold, and phase-out threshold) are not indexed for inflation. The child tax credit can also offset a taxpayer's alternative minimum tax (AMT) liability.

	Who Claims the Child Tax Credit?

The current structure of the child tax credit benefits taxpayers over a wide range of income, as illustrated by Table 1 . Roughly half (52.4%) of the child tax credit benefits go to taxpayers with cash incomes under $40,000, whereas the other half go to those making more than $40,000. Roughly the same proportion of the child tax credit goes to taxpayers with AGI between $10,000 and $20,000 ($18.0%) as goes to those with AGI between $50,000 and $75,000 (16.9%), underscoring the fact that this tax credit provides significant benefits to both low-income and middle-income families. Most taxpayers with incomes above $200,000 will be ineligible for the credit due to the phase-out thresholds.
EGTRRA and ARRA, which first made the credit partially refundable and then expanded refundability respectively, expanded the credit's availability to lower-income Americans, especially those with incomes between $10,000 and $20,000. Prior to this expansion, the credit was largely available only to middle- and upper-middle-income taxpayers. As previously noted, the EGTRRA provisions were made permanent by ATRA, while the ARRA changes were made permanent by the PATH Act.
Although the current credit is generally available to low-income taxpayers, it provides little benefit to extremely poor taxpayers. Taxpayers with incomes under $10,000 receive 3.6% of the child tax credit, even though they make up 16.8% of tax units. This suggests that this provision may not benefit the very poor in proportion to their population.
Taxpayers with very low income (i.e., less than $10,000) do not benefit from the child tax credit (or receive a very small credit, less than $1,000 per child) for two reasons. First, taxpayers with very low income do not have any income tax liability and so cannot claim the nonrefundable portion of the child tax credit. Even if the taxpayer had one qualifying child—and so would be able to reduce their tax liability by $1,000—if they do not owe any federal income taxes, they cannot reduce their taxes by the credit amount. This is one rationale for making tax credits refundable (i.e., available to taxpayers with little or no tax liability). The child tax credit is refundable. However, the child tax credit is only refundable if taxpayers have earnings above $3,000, and the refund is calculated as 15 cents for every dollar of earnings above this $3,000 threshold. Hence, the second reason the very poor do not claim the credit, or claim less than the full value of the credit, is that their low income prevents them from fully benefiting from the refundable portion of the credit. For example, a taxpayer with two children and earnings of $10,000 would, based on the refundability formula, be eligible for $1,050 in child tax credits, as opposed to the maximum amount of $2,000. A taxpayer with two children needs $16,333 in earnings to be able to claim the full $2,000 of child tax credit.

	Economic Analysis

Generally, economists evaluate tax policy—like the child tax credit—through three different lenses: the equity (or fairness) of the provision (which necessitates defining fairness), how the tax provision affects taxpayers' behavior (again, the intended behavior must be specified), and the complexity of administering the tax provision. These three lenses are often referred to as equity, efficiency, and administration, respectively. A provision may be seen differently through these lenses. For example, a tax provision may simplify the tax code (improve administration), but result in an undesirable behavior (reduce efficiency). Hence economists tend to evaluate a tax provision using these three approaches to provide the most complete economic analysis of the provision. As with other tax provisions, this report will analyze the child tax credit through the lenses of equity, efficiency, and administration. Specifically:
Equity: Economic theory suggests that there are two ways to analyze the fairness of a provision, vertical equity and horizontal equity. Vertical equity states that groups with more resources should pay more taxes, whereas horizontal equity states that families with the same circumstances should pay the same taxes. While the child tax credit is generally evaluated as vertically equitable, because it reinforces the progressivity of the current tax code, economists have differing views on whether it is horizontally equitable.
Efficiency: When examining the efficiency of a tax provision, economists examine how a tax provision affects taxpayer behavior, in terms of encouraging a taxpayer to do more or less of a certain activity. Theoretically, the child tax credit may have effects on taxpayer behavior, in terms of encouraging taxpayers to work and to have children, but there is currently very little evidence to support or refute these theories.
Administration: Tax policies—like the child tax credit—can be analyzed with respect to their effect on the complexity of the tax code. The administration of a tax provision can affect whether it ultimately achieves its economic or policy goals. There are a variety of tax benefits available to families with children, and the addition of the child tax credit, while beneficial to many families, has made the tax code potentially more complicated especially for lower-income taxpayers.
The following section examines in detail the child tax credit in terms of its impact on equity, taxpayer behavior, and tax administration.

		Equity of the Child Tax Credit

There are several ways to assess the fairness or equity of a tax provision. Depending on the definition used, the child tax credit may or may not be equitable.
The current federal income tax is progressive, meaning higher-income taxpayers pay a greater share of their income in taxes (and thus have a higher average income tax rate) than lower-income taxpayers. A progressive tax system reflects a standard of fairness called vertical equity (whether taxes should be progressive and how progressive is subject to some debate).
The child tax credit is generally considered vertically equitable because it reinforces the progressivity of the current income tax structure. The credit is structured to lower the tax burden of families earning between $3,000 and the phase-out income level, generally $150,000 for a married couple with two children. As illustrated in Table 2 , the child tax credit reduces the average federal tax rate of taxpayers with cash income under $200,000, while having little impact on taxpayers with income greater than $200,000. In addition, the child tax credit tends to reduce lower-income taxpayers' average tax rates more than it reduces the average tax rate of higher-income taxpayers. The largest reduction occurs among those with income between $10,000 and $20,000.
Another standard of fairness used by economists—referred to as horizontal equity—suggests that families with equal circumstances should pay equal taxes. The child tax credit's effect on horizontal equity ultimately depends on what are considered "equal circumstances." In other words, are taxpayers considered equal if they have the same income or are they considered equal if they have chosen to spend that income in the same way?
Some economists interpret horizontal equity to mean that families with the same amount of financial resources (i.e., income) should pay the same amount in taxes (and thus have the same average tax rate), regardless of whether they use those resources to buy a house, go on a vacation, or have a child. If children are viewed as choices of how taxpayers use their resources, the credit would violate horizontal equity. Specifically, the child tax credit generally provides greater tax benefits to a family as the number of children increases, assuming their income remains unchanged. For example, in 2012 a married couple that has $50,000 in earnings and no children (and hence is ineligible for the child tax credit) would be expected to owe $3,634 (7.3% average tax rate) in taxes. If the same married couple had one child, they would be expected to owe $2,634 after applying the child tax credit (5.3% average tax rate). If they had an additional child, the credit would lower their tax liability to $1,634 (3.3% average tax rate).
Other economists define horizontal equity to mean that families with the same "ability to pay" should pay the same in tax. Under this definition, families with more children should pay less in tax because additional children reduce their ability to pay. According to the "ability to pay" approach, the child tax credit does not generally violate horizontal equity. Congress used the "ability to pay" interpretation of horizontal equity to justify the structure of the child tax credit in 1997. According to the Joint Committee on Taxation, the main reason for the creation of a child tax credit was that
Congress believed that [prior to the child tax credit] the individual income tax structure [did] not reduce tax liability by enough to reflect a family's reduced ability to pay taxes as family size increases.... The Congress believed that a tax credit for families with dependent children will reduce the individual income tax burden of those families, will better recognize the financial responsibilities of raising dependent children, and will promote family values.
Policymakers may also be interested in evaluating child tax benefits like the child tax credit simultaneously with the other available tax benefits to get a holistic picture of the tax code's impact on equity. For example, as previously mentioned, the child tax credit when evaluated individually may not be horizontally equitable at low incomes. Based on this analysis, increasing refundability of the credit could make the credit more horizontally equitable for some low-income families. However, prior CRS analysis suggests that after making adjustments for a family's ability to pay based on family size, the totality of child tax benefits results in a tax system that is disproportionally generous at lower income levels to larger as opposed to smaller families. In this broader context, expanding refundability of the child tax credit could exacerbate horizontal inequities.

		Efficiency (Behavioral Effects) of the Child Tax Credit

Economists may also analyze tax provisions in terms of whether a tax provision results in more or less of a good being produced or consumed. Subsidies, which lower the prices of goods, theoretically result in more of a good being consumed and produced. The current structure of the child tax credit subsidizes both low-wage work (by the earned income formula) and children (by the $1,000 per child aspect of the provision). However, there is currently very little substantive research evaluating the impact of the child tax credit on taxpayer behavior.

			Impact on Work Choices

The child tax credit's current refundability structure creates a wage subsidy for some low-income families, suggesting it may affect work decisions. For eligible families with sufficiently low income, the child tax credit gives families 15 cents for every dollar of earnings above $3,000. Economic theory suggests that increasing the price of labor (the wage) among low-income workers will have the overall effect of encouraging them to work more. In practice, however, it is very difficult to isolate the labor market effects of the child tax credit from the similarly structured but larger subsidy provided by the EITC, since both credits simultaneously subsidize earnings over the same income range.

			Impact on Having Children

The child tax credit is unlikely to have a significant impact on inducing families to have additional children. While the child tax credit reduces the cost of a child, the expenses incurred from having children greatly exceed the value of the credit for most taxpayers. A government report estimates that the annual cost of raising a child in a middle-income family ranged from $11,650 to $13,530. In addition, families choose to have children for a variety of factors that are not motivated by economics, including the happiness and fulfillment that children may bring them.

		Complexity of Administering Child-Related Tax Benefits

In a 2010 report to Congress, the IRS Taxpayer Advocate identified the complexity of the current tax code as the most serious problem facing taxpayers. Tax policies, including those targeted toward families with children, are currently structured very differently, adding to the complexity of the tax code. For example, a single parent with a 16-year-old child and income of $20,000 in 2010 will be eligible for a $1,000 child tax credit, a $3,650 dependent exemption for that child (which lowers their tax liability by $548), and $2,487 of EITC. In 2011, when the child is 17, the single parent will be ineligible for the child tax credit, but remain eligible for the dependent exemption (which equals $3,700 in 2011 and will lower their tax bill by $555) and approximately $2,598 of EITC. The amount of these tax benefits will also change if the parent marries (which can change their tax liability), has an additional child, or their income changes (which changes the value of the child tax credit and EITC). Tax complexity associated with child-related tax provisions is particularly burdensome for lower-income families. Complexity reduces utilization rates among eligible populations and reduces the value of the benefits among those who do claim them, because they often rely on a paid preparer for assistance. Complexity can thus undermine the ultimate goal of policymakers, whether it be behavioral changes or increased equity.

	Policy Options: Changing Other Parameters of the Credit

Policymakers may consider modifying the current parameters of the child tax credit. The impact of modifications will depend on a taxpayer's income. Modifications that benefit middle- and upper-middle-income taxpayers include increasing the amount of the credit per child and increasing the phase-out thresholds. Modifications that benefit lower-income taxpayers include reducing the refundability threshold or increasing the current refundability rate. These changes will likely have significant budgetary cost that policymakers may consider alongside policy goals they may achieve by increasing this tax benefit.

		Increasing the Maximum Amount of the Credit

Increasing the maximum amount of credit per child, either by a fixed amount or proportional to inflation, would be most valuable to families whose income does not exceed the phase-out limits. However, for lower-income families—those with income tax liability less than the value of their credit—increasing the maximum amount of the credit will be valuable insofar as they can claim it as a refund using the earned income formula. If their earnings are sufficiently low, they may not be able to benefit from increasing the maximum amount of the credit. For example, if the child tax credit was doubled to $2,000 per child, and all other aspects of the credit remained the same as current law, a family with two children would need earnings of at least $29,667 to claim the full credit if the maximum credit value doubled. Currently the minimum amount of earnings needed to claim the full credit for two children is $16,333.
Policymakers could also choose to increase the value of the credit by indexing it to inflation. If the $500 per child tax credit in 1998 had been indexed for inflation using the Consumer Price Index (CPI), it would be $693.14 in 2011 dollars. If the $1,000 child tax credit in effect in 2003 were indexed to the CPI it would be $1,228.07 in 2011 dollars. Increasing the amount of the credit based on inflation will not benefit certain lower-income taxpayers whose earnings tend to grow more slowly than inflation.

		Reducing the Refundability Earnings Threshold and Increasing the Refundability Rate

Among lower-income taxpayers, whose tax liability is less than the value of their child tax credit, the most relevant parameters of the child tax credits are those that affect refundability. Lowering the refundability threshold (currently set at $3,000) and increasing the refundability rate (currently 15%) would result in more families with low earnings being eligible to receive the credit or a larger credit. Under current law, a family with two children must earn $16,333 to be eligible to receive $2,000 in child tax credits as a refund. If the refundability threshold was lowered to zero (and all other parameters remained the same), this same family would need earnings of $13,333 to receive the full $2,000 in child tax credits as a refund. Economic modeling of this scenario indicates that roughly 95% of the benefit resulting from reducing the child tax credit refundability threshold to zero would go to taxpayers with cash income levels below $30,000. Nearly half of the benefit, 46%, would go to taxpayers with cash income below $10,000.
On the other hand, if the refundability rate were increased to 100% (meaning for every dollar a family earned above the $3,000 threshold, they received $1 of refundable credit), this same family would need earnings of $5,000 to receive the full $2,000 in child tax credits. Alternatively, if the refundability rate were the same as the refundability rate of the EITC for a family with two children (40%), this family would need earnings of $8,000 to receive the full value of the child tax credit. Increasing the refundability rate and keeping the refundability threshold the same as current law would result in certain low-income households that already receive the child tax credit being eligible for a larger refundable credit. However, it would not provide any benefit to households with earnings below the refundability threshold.
Economic modeling of a 40% refundability rate suggests that approximately 94% of the tax benefits associated with increasing the refundability rate would benefit taxpayers with cash income levels under $30,000. The greatest share of the tax benefit would go to taxpayers with cash income between $10,000 and $20,000, because their income level is significantly above the $3,000 refundability threshold such that they can benefit from the increased refundability rate.
Changing the refundable portion of the credit by changing the refundability threshold or refundability rate primarily affects lower-income families for whom the refundable portion is often the key component of the credit. Approximately 80% of the benefit that arises from reducing the refundability threshold to zero or raising the refundability rate to 40% would go to families making less than $20,000.

		Increasing the Phase-out Limits of the Credit

Since the child tax credit was created in 1997, the credit has phased out for married taxpayers filing joint returns whose income exceeds $110,000 ($55,000 for married couples filing separately) and for head of household filers with income above $75,000. These phase-out thresholds are not indexed for inflation. If they had been indexed for inflation, they would have been 41% higher in 2012 than they were in 1998. Over the years, the real value of these thresholds has decreased due to inflation, pushing more taxpayers into the phase-out range and reducing the amount of the child tax credit these taxpayers are eligible for. One policy option would be a one-time increase in the phase-out limits. Another policy option would be indexing the amounts in accordance with established procedures applied to other elements of the tax system, such as personal exemption and the standard deduction. Finally, some combination of the two approaches is also possible.
Increasing the AGI phase-out limits for the child tax credit would significantly expand the number of taxpayers who would be eligible to receive the child tax credit. Such a change may be particularly important for taxpayers who live in areas with a high cost of living, where both incomes and costs of rearing children may be correspondingly higher. It would also increase the budgetary cost of the program. Critics of this change may question the necessity of such relief. The empirical evidence suggests that the overall federal tax burden, as well as the federal individual income tax burden, fell for most households with children between 1979 and 2007. Legislation enacted since 2007 to address economic insecurity resulting from the recent recession, including ARRA and the 2010 Tax Act, has further reduced taxes for many Americans through the enactment of new provisions like the Making Work Pay tax credit (which expired at the end of 2010), payroll tax reduction, and the extension of EGTRRA's individual income tax provisions.

	Policy Options: Reducing Complexity by Creating Uniform Child Benefits

Tax benefits compose a substantial proportion of the federal benefits that go to families with children. According to one study, of the five largest spending and tax programs on children, three are tax provisions—the child tax credit (number two), the EITC (number three), and the exemption for dependents (number four). Only Medicaid spending on children is higher. The refundable portions of the EITC and child tax credit are structured to direct assistance to low-income families, and could reflect an increased interest by Congress in providing financial assistance to low-income workers through the tax code as opposed to transfer payments. In fact, the refundable portion of the EITC and child tax credit ranked fourth and sixth respectively in outlays among programs targeted toward low-income populations.
Some experts believe that the different eligibility rules for different child-related tax benefits make it increasingly difficult for taxpayers to claim these benefits. This complexity results in direct financial costs for taxpayers, who may choose to use paid preparers instead of preparing their returns themselves. According to IRS data, more than half of taxpayers with income below $50,000 use paid tax preparers. President Bush's 2005 Presidential Panel on Federal Tax Reform summarized the complexity of claiming the child tax credit, "Figuring out whether you can claim the child tax credit ... requires the skills of a professional sleuth: You need to complete eight lines on a tax form, perform up to five calculations, and fill out as many as three other forms or schedules."
Much of the complexity in child-related tax benefits is related to differing definitions of what constitutes an eligible child, specifically the different age limits of qualifying children among the different tax benefits. The child tax credit is limited to children under 17 years old, unlike other tax benefits, such as the dependent exemption, that can be claimed by taxpayers with children as old as 23. Increasing the age of eligible children would have significant budgetary costs. One study estimated that expanding the child tax credit to 17- and 18-year-olds would reduce revenues by $6.1 billion in 2011. Beyond the differing eligibility definitions used for different child tax benefits, the tax benefits themselves are structured differently. The interaction of these different structures has led to middle-income families receiving a smaller total benefit than some higher-income taxpayers, as illustrated in the Figure 1 .
President Bush's 2005 Panel on Federal Tax Reform recommended simplifying the tax code, including child tax benefits, but to date these proposals have not been adopted. Specifically, the panel recommended consolidating the standard deduction, personal exemption, and child tax credit into one tax benefit, a family tax credit.
More than five years later, some experts have again proposed reducing the complexity of these provisions and making their benefits more transparent by combining child tax benefits into a uniform child credit. While such a proposal could significantly simplify eligibility rules as well as the calculation of the benefit, policymakers would need to consider the competing functions of current tax benefits as they create a uniform benefit. For example, some benefits like the EITC and refundable portion of the child tax credit subsidize earnings, whereas the nonrefundable portion of the child tax credit provides a uniform benefit per child for taxpayers with sufficient earnings that do not exceed the phase-out level. Because of this distinction, policymakers might consider creating different uniform credits based on the purpose of the credit, whether the purpose of the credit is to subsidize earnings of low-income taxpayers or provide a benefit for having children.

		Appendix. The Impact of the EGTRRA and ARRA Changes to the Child Tax Credit

The most recent changes to the child tax credit were made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16 ) and the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ). These changes, while once temporary, are now permanent. Policymakers interested in potentially modifying the child tax credit in the future may be interested in understanding the economic impact of these past legislative changes.
The data indicate that while the ARRA modifications did provide relatively more benefit to lower-income taxpayers, the EGTRRA changes benefited more children. The analysis will then turn to the implications of extending the ARRA modifications, both on the number of children who will be affected as well as the budgetary cost, with similar data on the impact of the EGTRRA changes provided for comparison.
Impact of EGTRRA Versus ARRA Modifications to the Credit
EGTRRA and ARRA substantially changed the structure of the child tax credit. EGTRRA increased the value of the credit from $500 per child to $1,000 per child and made the credit partially refundable using the earned income formula. At the end of 2012, ATRA made these changes permanent. ARRA expanded upon EGTRRA's changes to refundability by lowering the earnings threshold of the earned income formula to $3,000. The Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114-113 ) made the $3,000 threshold permanent.
Distributional Impact
A distributional impact of a tax benefit indicates the share of a tax benefit received by taxpayers at different income levels. Table A-1 illustrates the different impacts of the EGTRRA and ARRA provisions on taxpayers based on cash income. Overall, approximately 60% of the child tax benefits from EGTRRA went to taxpayers with cash income above $50,000. By contrast, 70.5% of child tax benefits under ARRA went to taxpayers with cash income of less than $20,000.
In addition, after the EGTRRA modification went into effect, research indicates that qualifying Hispanic and African American households were less likely to receive the full value of the child tax credit then qualifying white households. Specifically, in 2005, when all the child tax credit provisions of EGTRRA were effective, 49.5% of households with qualifying African American children and 46.0% of households with qualifying Hispanic children were ineligible to receive the full credit due to low incomes, in contrast to 18.1% of households with white children.
Estimates of the distributional impact on tax filers of the EGTRRA and ARRA provisions are currently unavailable, but can reasonably be expected to approximate the distribution in Table A-1 . Recent data (provided in Figure A-1 ) do, however, provide information on the impact in 2013 of these modifications in terms of the number of children who benefit. (Although the data are presented in terms of the number of children who benefit, the tax credit is actually claimed by their parents, ostensibly for children's benefit.) These data provide another way to analyze the impact of the EGTRRA and ARRA changes to the credit.
Number of Children Affected by EGTRRA Versus ARRA Changes
According to estimates provided by the Tax Policy Center, both the EGTRRA and ARRA changes to the child tax credit are estimated to have a significant impact on the benefits received by millions of children, as illustrated in Figure A-1 . In 2013, the EGTRRA provisions are estimated to result in 18.6 million children being eligible for the credit who otherwise would not receive this tax benefit if the EGTRRA changes had expired. In addition, 3.4 million children in 2013 are estimated receive a larger credit as a result of the EGTRRA provisions.
The extension of the ARRA modifications is estimated to have a lower overall benefit in terms of the impact on children. Approximately 17.1 million children in 2013 will benefit from the extension of ARRA child tax credit provisions as opposed to 22 million children that benefit from the EGTRRA provisions. The majority of children who will benefit from the ARRA modification would receive a larger credit (10.2 million children), while fewer will be newly eligible (6.9 million children).
Cost of Extending EGTRRA and ARRA Modifications to the Credit
Historical data provide estimates of the comparative costs associated with the EGTRRA and ARRA modifications, indicating that a majority of the cost is due to the EGTRRA provisions. The Joint Committee on Taxation's revenue estimates for the 2010 Tax Act isolated the costs of extending the EGTRRA and ARRA provisions for two years (2011 and 2012) and indicated that 78% of the cost of these policies was associated with the extension of the EGTRRA provisions. Specifically, the cost of the two-year extension of EGTRRA child tax credit provisions was $71.7 billion over 10 years (2011-2020), whereas the cost of extending the ARRA provisions was $19.7 billion over the same period.
Of the total annual cost of the child tax credit in 2012, approximately 60% was a result of the EGTRRA changes, 16% was a result of ARRA modification, and 24% was a result of the underlying parameters of the pre-EGTRRA and ARRA credit.

Output:
The child tax credit is currently structured as a $1,000-per-child credit that is partially refundable for lower-income families with more than $3,000 in earnings. Prior to 2001, the child tax credit was a $500-per-child nonrefundable tax credit which generally benefited middle- and upper-middle-income taxpayers.
Since 2001, legislative changes, particularly those made by the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA; P.L. 107-16) and the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5), have altered the structure of this tax benefit. Specifically, the amount of the credit per child has increased and the credit has been made partially refundable, expanding the availability of the credit to some low-income families. The American Taxpayer Relief Act (ATRA; P.L. 112-240) made the EGTRRA changes to the child tax credit permanent. The Protecting Americans from Tax Hikes (PATH) Act (Division Q of P.L. 114-113) made the ARRA change to the child tax credit permanent.
In light of these recent changes to the structure of the child tax credit, this report provides an economic analysis of the current credit, focusing on the credit's impact on fairness (also referred to as "equity"). The report then explores how the credit has affected taxpayers' behavior about working and having children. Finally, this report examines the complexity of administering this tax provision in the context of other child-related tax benefits.
This report concludes with an overview of possible modifications to the child tax credit. The impact of these modifications will depend on a taxpayer's income. Modifications that benefit middle- and upper-middle-income taxpayers include increasing the amount of the credit per child and increasing the phase-out thresholds. Modifications that benefit lower-income taxpayers include reducing the refundability threshold or increasing the current refundability rate. These changes will likely have significant budgetary cost that policymakers may consider alongside their policy goals.
This report does not provide an in-depth examination of the history of the credit. For more information on the legislative history of the credit, see CRS Report R41873, The Child Tax Credit: Current Law and Legislative History, by [author name scrubbed].