State legislators have been making remarkable strides in advancing state tax credits, with an impressive 17 states either introducing or enhancing their Child Tax Credits or Earned Income Tax Credits this year. These forward-thinking policies hold the potential to significantly bolster family economic security and substantially reduce child poverty rates, as demonstrated by the positive impact of the temporary federal credit boost in 2021.
As the future of the federal Child Tax Credit remains a subject of debate in Congress, states are taking the initiative to invest in their citizens by implementing and expanding refundable tax credits, occasionally showcasing rare instances of bipartisanship. In 2023, ten states have newly established or expanded their Child Tax Credits, while 12 states have augmented their Earned Income Tax Credits.
Child Tax Credit: Permanent Improvements and Expanded Reach
A majority of these initiatives are fully refundable, guaranteeing that even the lowest-income families will receive the complete credit regardless of their state income tax obligations. By implementing such credits, especially those with full refundability, families will be better equipped to meet their financial needs, and this infusion of funds will have a positive ripple effect on underserved communities and local economies.
Furthermore, the commitment to enhancing these credits remains strong, as ongoing discussions in Maine and Massachusetts focus on potential improvements to their Child Tax Credits during the final budget negotiations.
What is the difference between a Child Tax Credit and an Earned Income Tax Credit?
The Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC) are two different tax credits with distinct purposes and eligibility criteria. Here is a breakdown of the differences between the two:
Earned Income Tax Credit (EITC):
- The EITC is a federal tax credit for low- and moderate-income working individuals and families.
- It encourages and rewards work, and it offsets federal payroll and income taxes.
- The amount of the EITC depends on the recipient’s income, marital status, and number of children.
- The credit rises with earned income until reaching a maximum level and then gradually phases out at higher income levels.
- The EITC is refundable, meaning that if it exceeds a low-wage worker’s income tax liability, the IRS will refund the balance.
- In addition to the federal EITC, twenty-six states plus the District of Columbia also offer a state EITC, typically set at a percentage of the federal EITC.
Child Tax Credit (CTC):
- The CTC helps working families offset the cost of raising children.
- It is worth up to $1,000 per eligible child (under age 17 at the end of the tax year).
- The CTC includes a refundable component called the Additional Child Tax Credit (ACTC).
- The CTC increases with earnings, but the first $3,000 in earnings does not count when determining the credit.
- Families receive a refund equal to 15 percent of their earnings above $3,000, up to the credit’s full $1,000-per-child value.
- The credit phases out at higher income levels.
- Unlike the EITC, the CTC is not fully refundable. Any amount of the credit remaining after the taxpayer eliminates their tax liability is not returned to them.
- Instead, they can claim the Additional Child Tax Credit on Form 8812, which refunds 15 percent of the excess amount of the CTC.
Significant Expansion and Permanence of State Tax Credits Post-Pandemic in 2023
In the wake of the COVID-19 pandemic, numerous states that previously implemented temporary credit expansions returned to the drawing board in 2023 to institute permanent improvements. Connecticut, for instance, solidified its commitment by permanently increasing its Earned Income Tax Credit (EITC) from 30.5 to 40 percent, following a temporary boost to 41.5 percent in 2022. Similarly, New York extended its Empire State Child Credit to cover children under four years of age, building on the success of temporary enhancements in 2022. Furthermore, Maryland converted its temporary EITC boost from 2020 into a permanent fixture, rendering the credit fully refundable and raising it from 28 to 35 percent, thus avoiding expiration.
The scope of these credits has also expanded significantly. Until 2023, the maximum state Child Tax Credit, previously available only to qualifying families with young children in Vermont, amounted to $1,000 per child. However, this year, four states surpassed or matched that amount: Oregon established a $1,000 credit per child under six, New Jersey doubled its maximum credit to $1,000 for children under six, Colorado raised its maximum credit to $1,200 for children under six, and Minnesota created a credit of $1,750 for children under 17.
Recognizing that key state and federal policies often leave immigrant families and others who file taxes with Individual Tax Identification Numbers (ITIN) behind, several states took steps to ensure that access to a Social Security number would not be a barrier to receiving these credits. Vermont and Minnesota now enable eligible families filing taxes with an ITIN to receive state EITCs and CTCs. Colorado and Oregon, which already allowed ITIN filers to claim their state EITCs, expanded their CTCs to include these families as well. Additionally, ITIN filers were also incorporated into the Maryland EITC expansion.
States also demonstrated progress in making housing more affordable through targeted tax credits. Minnesota expanded its Renter’s Property Tax Refund Program and introduced administrative changes to enhance take-up rates. North Dakota increased property tax credits for senior homeowners and renters. Maine is currently contemplating a boost to its Property Tax Fairness Credit and deferment program, while Massachusetts is proposing increases to its senior circuit breaker credit as part of the final budget deliberations.
Strengthening Families: The Power of Refundable Credits in State Policies
In every state, countless families find themselves struggling to make ends meet due to inadequate minimum wages, exorbitant childcare expenses, and soaring housing costs, among other policy shortcomings. However, there is a transformative solution within the tax code that can make a significant difference in their lives. Boosting the incomes of these families through refundable credits, such as the Child Tax Credit (CTC) and Earned Income Tax Credit (EITC), yields remarkable dividends.
Families and workers who benefit from refundable credits experience improved health outcomes, particularly in areas of maternal and infant health. Their children thrive academically, with higher aspirations for postsecondary education. Additionally, families report reduced stress as they face fewer financial hardships. The increased income provided by refundable credits has a direct impact on local communities, as it is spent on essential goods and services such as groceries, car repairs, utility bills, and other necessities, bolstering local businesses and supporting jobs.
States that prioritize refundable credits, particularly those that reject expensive tax cuts benefiting the wealthy, are heeding advice based on decades of research, affirming that these credits strengthen our communities. Refundable tax credits are proven to create greater equity within state tax systems while effectively combating poverty and reducing unnecessary hardships. It is crucial for state lawmakers to continue building upon the momentum behind refundable credits, ensuring a brighter and more secure future for families across the nation.