Harnessing State Child Tax Credits Will Dramatically Reduce Child Poverty

Kids jump rope in New Orleans, May 2015.

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Many American families have been pushed to the financial brink. As the costs associated with key pillars of family economic security have risen dramatically in recent years, incomes have stagnated.1 Some 43 percent of U.S. households—or 50.8 million households—are unable to afford basics such as food, housing, health care, and child care.2

Families with children in particular have been hit hard by rising costs and flat wages. Diapers alone can cost about $1,000 per child each year.3 In 2014, parents in the lowest-earning 20 percent spent nearly 14 percent of their income on diapers.4 The average price of tuition for an infant in center-based child care is more than $11,000 per year—nearly three-quarters of the earnings of a full-time worker making the federal minimum wage.5

The problem is particularly acute for families with young children. Children under the age of six are in the most critical years for brain development, and in 2017, nearly 1 in 3 of these children were poor or on the brink of poverty. In some states, this share was more than 4 in 10.6 (see Table 1) In fact, the birth of a child is one of the leading triggers of a poverty spell in the United States.7

To combat this problem, state policymakers can create or strengthen a key policy tool: the child tax credit (CTC). A CTC can improve family economic security, reduce child poverty, and make state tax systems more progressive. It can also counteract the harmful effects that the 2017 Tax Cuts and Jobs Act (TCJA) had on some families with children.8

What are the consequences of childhood economic insecurity?

Economic insecurity can have lasting consequences for children’s long-term health, education, and employment. Research shows that growing up in poverty introduces stressors to children’s rapidly developing brains that can undermine healthy cognitive and social emotional development, with differences in children’s cognitive abilities by income appearing as early as 9 months old.9 Promoting economic security among families with young children helps set children on a path for success in school and beyond. Research has found, for example, that boosting a low-income family’s income by $3,000 per year until a child’s sixth birthday translates into a 17 percent average increase in adult earnings for that child.10 A recent report from the National Academy of Sciences showed how the high incidence of child poverty is detrimental to U.S. society as a whole, costing the economy as much as $1.1 trillion per year—5.4 percent of gross domestic product (GDP).11 Despite this, in 2016, the United States spent just 2.1 percent of GDP on child-related benefits—such as the CTC, the earned income tax credit, and child nutrition programs—significantly less than what other developed nations spent on these benefits.12

How do states measure up on addressing children’s economic security?

States’ spending on children varies widely. According to the Urban Institute, the state that spends the least per child devotes about one-third as much per child as the highest-spending state, even after adjusting for cost-of-living differences.13 These differences have been driven in part by the decline of the Temporary Assistance for Needy Families (TANF) program, the key program responsible for delivering cash assistance to poor families with children. While its predecessor, Aid to Families with Dependent Children (AFDC), served 76 out of every 100 poor children nationwide in its final year, TANF—which replaced AFDC during the 1996 welfare reform—serves only about 23 out of 100 poor children today because of the program’s inflexible block grant funding.14 In multiple states—including Louisiana, Texas, and Arkansas—fewer than 5 out of 100 children living in poverty receive TANF; and in no state do its benefits bring families to even half of the poverty line, leaving a gaping hole in assistance to struggling families with children.15

Research also reveals substantial disparities in state spending by children’s race. For example, low-spending states are much more likely to have higher shares of Latino and American Indian or Alaska Native children.16 Further research uncovers that states with the most restrictive TANF programs have the highest shares of African American residents. A 10 percent increase in the African American share of the population is associated with a roughly 12 percent decrease in a state’s maximum monthly TANF benefit.17

The vast majority of state tax systems exacerbate these income- and race-based inequalities. In 45 states, upside-down tax systems mean that low- and middle-income families pay more in taxes as a share of income than higher-income families. In the 10 states with the most regressive tax systems, the lowest-income 20 percent of taxpayers pay up to six times as much as a share of income as the highest-income 20 percent.18

What can states do?

States can take immediate action by creating or strengthening a state CTC, a key policy tool to tackle childhood economic insecurity; help families afford the high costs of raising children; and make their tax systems less regressive. State CTCs not only enable state policymakers to invest in the next generation and future workforce, but they can also be used to counteract the inequities and shortcomings of federal tax policy in the wake of Congress’ 2017 tax law.

Just as states in recent years have paved the way on policies such as higher minimum wages, state policymakers are forging ahead with CTCs.19 Seven states have already created CTCs with a range of designs and featuring credit values of up to $660 per child.20

State CTCs need not be extremely costly to have a strong effect, given evidence that even a modest boost in income can have substantial positive effects on children’s long-term outcomes. For example, a moderate refundable CTC could prevent families with children from needing to turn to predatory loans—which have an average value of about $375—to meet urgent child-related costs, thus forestalling a downward spiral of debt.21

What does a successful state CTC look like?

States can customize their CTCs to best achieve their goals and fit their budget by varying the age of eligibility, credit amount, and more. A 2015 Center for American Progress report, “Harnessing the Child Tax Credit as a Tool to Invest in the Next Generation,” offers guidance for state policymakers to maximize the CTC’s effect on child poverty and economic insecurity in their state.22

Reaches all low- and middle-income children

Several design features will guarantee that state CTCs reach all children who would most benefit from them. First, state CTCs should be fully refundable—allowing families to receive the full amount even in years when they have little or no state tax liability—to ensure that children receive the credit when their family needs help most, such as when a parent loses a job.23 Second, children should be eligible to receive the credit regardless of whether they have a Social Security number or an Individual Tax Identification Number (ITIN). Third, gradually phasing the credit out at higher incomes can help target resources for the greatest effect while reducing costs.24 Finally, linking both the credit’s value and the phaseout thresholds to inflation or median wage growth will ensure that in future years the credit stays meaningful for states’ low- and middle-income residents.

Delivers an extra boost to the youngest children

Because the first few years of life are critical for children’s brain development—and even modest boosts in income can have a large effect on long-term outcomes—a strong policy option is to create an additional refundable young child tax credit (YCTC) for families with children under a certain age, such as three or six. An additional YCTC would help families afford the many urgent expenses associated with a child’s earliest years of life such as diapers, formula, a crib, or a car seat. Because child-related expenses do not necessarily align with tax time, the YCTC could be made available on a monthly basis through direct deposit or the Direct Express card.

Includes disabled adult children

Compared with families with a nondisabled child, families caring for a child with a disability often face both higher costs and lower earnings because both caregivers and children face difficulty participating in the formal labor market. These challenges often continue for families after their child passes age 17, particularly for families with children who have intellectual or developmental disabilities, many of whom reside in the family home into adulthood.25 To address the difficulties these families face, states could extend their CTCs to disabled adult children, employing the same rules and definitions used under the federal EITC.26

Strengthens an existing credit

While each of the seven states where CTCs already exist have some of the design features discussed above, none currently have all of them. States could strengthen their existing credits based on these recommendations. For example, states could combine all of the above recommendations: make their CTC fully refundable; eliminate the minimum earnings requirement; boost the credit amount, particularly for lower-income families; expand eligibility to include children in a greater age range and/or disabled adult children; and extend the credit to children without ITINs.

Why should states act now?

State CTCs are especially timely for several reasons. First, as tax season got underway in 2019, many taxpayers not only unexpectedly discovered that they would not receive a refund, but some families with children—particularly larger families—also experienced state tax hikes due to congressional Republicans’ 2017 tax law.27 This particularly affected families in Colorado, Minnesota, New Mexico, and North Dakota, where state policymakers have not yet taken steps to counteract the effects of the federal tax law.28 But as analysis from the Tax Policy Center shows, state policymakers could use a state CTC to offset this damage. 29 So while state CTCs would greatly help families in any state that has an income tax, they are urgently needed in these four states.

Second, the 2017 tax law also made the federal CTC substantially more generous toward children in middle- and high-income families, while doing little to improve the credit for children in the lowest-income families.30 This is because it is not fully refundable; the federal CTC totally or almost totally excludes nearly 11 million children in struggling families, including nearly 1.5 million in California and 1.3 million in Texas.31 An additional 15 million children receive less than the full federal credit.32

Building on CAP’s 2015 proposal, a new bill in Congress—the American Family Act of 2019—would create a new YCTC of $3,600 per year, or $300 per month, for children under age six while increasing the existing CTC to $3,000 per year, or $250 per month, for children ages six to 18. Families would have the option to receive the credits on a monthly basis.33

By creating or improving state CTCs, state policymakers can counteract the harm done by the TCJA, offset the limitations of the federal CTC, and, most importantly, meaningfully boost economic security for families with children in their states.

Conclusion

When it comes to a child’s formative years of life, research shows that every dollar counts—and modest assistance pays dividends far into the child’s future. State CTCs have the potential to dramatically increase economic security, reduce child poverty, and help families afford the rising costs of raising children. At the same time, states CTCs can reduce the tendency of many states’ tax systems to exacerbate inequality and offset the unequal and even damaging effects that the 2017 federal tax law had on low- and middle-income families. States can take action now—and they don’t need to wait for Congress.

Rachel West is the former director of research for the Poverty to Prosperity Program at the Center for American Progress.

Endnotes

  1. Center for American Progress, “Blueprint for the 21st Century: A Plan for Better Jobs and Stronger Communities” (2018), available at https://www.americanprogress.org/issues/economy/reports/2018/05/14/450856/blueprint-21st-century/.
  2. Quentin Fottrell, “50 million American households can’t even afford basic living expenses,” MarketWatch, June 9, 2018, available at https://www.marketwatch.com/story/50-million-american-households-cant-afford-basic-living-expenses-2018-05-18/.
  3. Bryce Covert, “Welcome to America, Where Parents Can’t Afford Diapers,” The Nation, August 22, 2018, available at https://www.thenation.com/article/welcome-to-america-where-parents-cant-afford-diapers/.
  4. Rachel West, Melissa Boteach, and Rebecca Vallas, “Harnessing the Child Tax Credit as a Tool to Invest in the Next Generation” (Washington: Center for American Progress, 2015), available at https://www.americanprogress.org/issues/poverty/report/2015/08/12/118731/harnessing-the-child-tax-credit-as-a-tool-to-invest-in-the-next-generation/; Emily Badger and Juliet Eilperin, “The cruelest thing about buying diapers,” The Washington Post, March 14, 2016, available at https://www.washingtonpost.com/news/wonk/wp/2016/03/14/the-cruelest-thing-about-buying-diapers/.
  5. Child Care Aware of America, “The U.S. and the High Cost of Child Care: A Review of Prices and Proposed Solutions for a Broken System” (2018), available at https://cdn2.hubspot.net/hubfs/3957809/COCreport2018_1.pdf. 
  6. Authors’ analysis of the share of children under age six living below 150 percent of the federal poverty line in 2017, based on the 2017 1-Year American Community Survey. See Steven Ruggles and others, “Integrated Public Use Microdata Series, U.S. Census Data for Social, Economic, and Health Research, 2017 American Community Survey: 1-year resimates” (Minneapolis: Minnesota Population Center, 2015), available at www.ipums.org.
  7. Gilbert Crouse and Annette Waters, “Welfare Indicators and Risk Factors: Thirteenth Report to Congress” (Washington: U.S. Department of Health and Human Services, 2014), available at https://aspe.hhs.gov/report/welfare-indicators-and-risk-factors-thirteenth-report-congress.
  8. Richard Auxier and Elaine Maag, “Addressing the Family-Sized Hole Federal Tax Reform Left for States: State Child Tax Credits” (Washington: Urban Institute, 2018), available at https://www.taxpolicycenter.org/sites/default/files/publication/156164/addressing_the_family-sized_hole.pdf.
  9. National Center for Education Statistics, “Early Childhood Longitudinal Program (ECLS): Birth Cohort (ECLS-B),” available at https://nces.ed.gov/ecls/birth.asp (last accessed April 2019).
  10. Greg J. Duncan, Kathleen M. Ziol-Guest, and Ariel Kalil, “Early-Childhood Poverty and Adult Attainment, Behavior, and Health,” Child Development 81 (1) (2010): 306–325, available at https://www.ipr.northwestern.edu/events/other-events/docs/conf08-attainment/papers/duncan.pdf. The Center on Budget and Policy Priorities, in citing this paper, confirmed that the correct earnings increase is 17 percent, rather than the 19 percent reported in the paper. See endnote 25 in Chuck Marr and others, “EITC and Child Tax Credit Promote Work, Reduce Poverty, and Support Children’s Development, Research Finds” (Washington: Center on Budget and Policy Priorities, 2015), available at https://www.cbpp.org/research/federal-tax/eitc-and-child-tax-credit-promote-work-reduce-poverty-and-support-childrens.  
  11.  The National Academies of Sciences, Engineering, and Medicine, “A Roadmap to Reducing Child Poverty” (2019), available at https://www.nap.edu/child-poverty/.
  12. Julia B. Isaacs and others, “Kids’ Share 2017: Report on Federal Expenditures on Children through 2016 and Future Projections” (Washington: Urban Institute, 2017), available at https://www.urban.org/research/publication/kids-share-2017-report-federal-expenditures-children-through-2016-and-future-projections; Organisation for Economic Co-operation and Development, “OECD Family Database: Table PF1.1 Public spending on family benefits,” available at http://www.oecd.org/els/soc/PF1_1_Public_spending_on_family_benefits.pdf (last accessed March 2019).
  13. Julia B. Isaacs with Sara Edelstein, “Unequal Playing Field?: State Differences in Spending on Children in 2013” (Washington: Urban Institute, 2017), available at https://www.urban.org/sites/default/files/publication/89881/unequal_playing_field_0.pdf.
  14. Ife Floyd, Ashley Burnside, and Liz Schott, “TANF Reaching Few Poor Families” (Washington: Center on Budget and Policy Priorities, 2018),  available at https://www.cbpp.org/research/family-income-support/tanf-reaching-few-poor-families.
  15. Ibid.
  16. Isaacs and Edelstein, “Unequal Playing Field?”
  17. Heather Hahn and others, “Why Does Cash Welfare Depend on Where You Live?: How and Why State TANF Programs Vary” (Washington: Urban Institute, 2017), available at https://www.urban.org/sites/default/files/publication/90761/tanf_cash_welfare_final2_1.pdf.
  18. Institute for Taxation and Economic Policy, “Who Pays?: A Distributional Analysis of the Tax Systems in All 50 States” (2018), available at https://itep.org/whopays/.
  19. Rachel West, “March 1 Is Minimum Wage Workers’ Equal Pay Day,” Center for American Progress, March 1, 2018, available at https://www.americanprogress.org/issues/poverty/news/2018/03/01/447359/march-1-minimum-wage-workers-equal-pay-day/
  20. As of March 2019, the states with state Child Tax Credits are California, Colorado, Idaho, New York, North Carolina, Oklahoma, and Maine. See Tax Credits for Working Families, “State Tax Credits: States with CTCs,” available at http://www.taxcreditsforworkersandfamilies.org/state-tax-credits/#1468434105770-44f9c6c5-52e0 (last accessed March 2019); and Auxier and Maag, “Addressing the Family-Sized Hole Federal Tax Reform Left for States.”
  21. Rebecca Vallas, Melissa Boteach, and Rachel West, “Harnessing the EITC and Other Tax Credits to Promote Financial Stability and Economic Mobility” (Washington: Center for American Progress, 2014), available at https://www.americanprogress.org/issues/poverty/reports/2014/10/07/98452/harnessing-the-eitc-and-other-tax-credits-to-promote-financial-stability-and-economic-mobility/.
  22. West, Boteach, and Vallas, “Harnessing the Child Tax Credit as a Tool to Invest in the Next Generation.”
  23. States seeking to maximize poverty reduction should avoid tying their CTCs directly to the value of the federal CTC a household receives because the federal credit is not fully refundable.
  24. For example, prior to the TCJA, the federal credit began to phase out at annual incomes of $75,000 for single filers and $115,000 for married couples filing jointly—thresholds which several state credits mimicked. Alternatively, states could tie their income thresholds to a state-level measure such as 150 percent of state median household income. Internal Revenue Service, “Get Ready for Taxes: Here’s how the new tax law revised family tax credits,” Press release, November 7, 2018, available at https://www.irs.gov/newsroom/get-ready-for-taxes-heres-how-the-new-tax-law-revised-family-tax-credits (last accessed March 2019).
  25. Rebecca Vallas, Shawn Fremstad, and Lisa Ekman, “A Fair Shot for Workers with Disabilities” (Washington: Center for American Progress, 2015), available at https://www.americanprogress.org/issues/poverty/reports/2015/01/28/105520/a-fair-shot-for-workers-with-disabilities/.
  26. Internal Revenue Service, “Disability and Earned Income Tax Credit,” available at https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/disability-and-earned-income-tax-credit (last accessed March 2019).
  27. The 2017 TCJA temporarily changed three important elements of the tax code for families: It doubled the standard deduction, eliminated the personal exemption, and expanded the CTC for some families. At the time of its passage, nine states’ tax codes replicated the federal personal exemption, but none replicated the federal CTC. Consequently, as the Tax Policy Center points out, when the TCJA zeroed out the personal exemption starting in the 2018 tax year—and some of those nine states did not act to implement a CTC or an alternative offset taxes—states’ taxes automatically rose on some low- and middle-income families with children. Several state legislatures have acted to at least partly correct this: Idaho and Maine created new state CTCs, while Vermont made other offsetting changes, including to its state EITC. But in four states where lawmakers have taken no such steps—Colorado, Minnesota, New Mexico, and North Dakota—some families are still slated to see their state income taxes rise. See Auxier and Maag, “Addressing the Family-Sized Hole Federal Tax Reform Left for States.”
  28. Ibid.
  29. Ibid.
  30. Congressional Republicans’ 2017 tax law, the TCJA, temporarily boosted the CTC—but not for everyone. The law doubled the maximum credit per child from $1,000 to $2,000. It modestly lowered the minimum earnings threshold at which the refundable portion of the credit—called the additional child tax credit, which applies if the family’s tax liability is below zero—begins to phase in from $3,000 to $2,500; thereafter, the refundable portion phases in at a rate of 15 percent of earnings. The maximum amount of refundable credit, now $1,400, is no longer equal to the full credit, although it is linked to inflation and will eventually grow to reach the noninflation-linked full credit of $2,000. What’s more, unlike in past years, the law now requires a child for whom the CTC is claimed to have a Social Security number. At the top end of the income distribution, the TCJA increased the threshold at which the credit begins to phase out from adjusted gross income (AGI) of $75,000, or $110,000 for joint filers, to AGI of $200,000, or $400,000 for joint filers. The TCJA created a new nonrefundable credit of up to $500 for “other dependents,” including children who do not qualify for the CTC. See Auxier and Maag, “Addressing the Family-Sized Hole Federal Tax Reform Left for States.”
  31. Center on Budget and Policy Priorities, “2017 Tax Law’s Child Credit: A Token or Less-Than-Full Increase for 26 Million Kids in Working Families” (2018), available at https://www.cbpp.org/research/federal-tax/2017-tax-laws-child-credit-a-token-or-less-than-full-increase-for-26-million.
  32. Ibid.
  33. Dylan Matthews, “Democrats have united around a plan to dramatically cut child poverty,” Vox, March 6, 2019, available at https://www.vox.com/future-perfect/2019/3/6/18249290/child-poverty-american-family-act-sherrod-brown-michael-bennet.