Although expansion of CAG repeats in ATAXIN1 (ATXN1) causes Spinocerebellar ataxia type 1, the functions of ATXN1 and ATAXIN1-Like (ATXN1L) remain poorly understood. To investigate the function of these proteins, we generated and characterized Atxn1L(-/-) and Atxn1(-/-); Atxn1L(-/-) mice. Atxn1L(-/-) mice have hydrocephalus, omphalocele, and lung alveolarization defects. These phenotypes are more penetrant and severe in Atxn1(-/-); Atxn1L(-/-) mice, suggesting that ATXN1 and ATXN1L are functionally redundant. Upon pursuing the molecular mechanism, we discovered that several Matrix metalloproteinase (Mmp) genes are overexpressed and that the transcriptional repressor Capicua (CIC) is destabilized in Atxn1L(-/-) lungs. Consistent with this, Cic deficiency causes lung alveolarization defect. Loss of either ATXN1L or CIC derepresses Etv4, an activator for Mmp genes, thereby mediating MMP9 overexpression. These findings demonstrate a critical role of ATXN1/ATXN1L-CIC complexes in extracellular matrix (ECM) remodeling during development and their potential roles in pathogenesis of disorders affecting ECM remodeling.