How Tax Credits Could Help States Reduce Child Poverty by 25%
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A well-designed plan would collectively cost 2.6% of total state and local revenue and complement existing federal policies, according to the Institute of Taxation and Economic Policy.
Child poverty in the U.S. hit a record low last year, according to the U.S. Census Bureau, in part due to the American Rescue Plan Act’s expansion of the federal child tax credit. While the initiative expires at the end of 2021, states could continue the trend with their own child tax credit policies, a new report found.
In most states, a refundable state child tax credit of $2,000 or less, paired with an additional 20% for children under six, would reduce child poverty by 25% or more, according to the Institute of Taxation and Economic Policy.
Under current law, families earning up to $400,000 can receive a maximum tax credit of $2,000 per child. But that sum isn’t fully refundable, which means if a person owes less than their credit value in taxes, they aren’t issued the difference. The result is families with very low or no income are often ineligible for the credit. The earning requirements disproportionately affect families of color, and half of all Black and Hispanic children aren’t eligible for the credit, according to the report. Rural families, large families, single-parent families and families with young children are also often excluded from the program.
The credit expansion under the American Rescue Plan Act eliminated earning requirements. It also increased the total value of the credit to $3,600 per child under six and to $3,000 per older child for families earning up to $150,000. Families received payments each month, rather than one lump sum annually.
While some policymakers hoped to see the new iteration of the federal child tax credit continue after 2021, the report notes that it doesn’t appear the policy will return permanently any time soon. That leaves it up to states to tackle child poverty with their own tax credit policies.
To effectively do so, some suggestions include creating child tax credits that complement the existing federal rule and including some key features from the COVID-relief bill, like getting rid of earning requirements and offering the option to receive payments monthly.
Additional considerations for designing a child tax credit policy include correlating benefits to the number of children in the household, regularly adjusting benefits to account for inflation, and including all children regardless of immigration status.
Reducing child poverty by 25% would collectively cost 2.6% of total state and local revenue, according to the report. If policies focused only on providing benefits to extremely low-income families, that figure drops to 1.7%.
Halving child poverty would cost about 7% of total state and local revenue with policies that include some middle-class families. Most states would need a base credit between $3,000 to $4,500 to achieve this.
Child tax credits appear to be gaining traction. In 2019, California became the first to pass a state child tax credit. It provides up to $1,000 for families with children under six earning less than $30,000. Since then, nine other states have also implemented child tax credits that range from a $100 nonrefundable credit in Oklahoma to a $1,000 fully refundable credit in Vermont. Earlier this year, New Jersey, New Mexico and Vermont became the latest to create their own policies.
Some state policies are permanent while others are set to expire within the next few years, and eligibility requirements differ across states.
To read the full report and an analysis for each state, click here.
Molly Bolan is the assistant editor for Route Fifty.
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