January 18, 2023
State Policy Analyst
January 18, 2023
Refundable tax credits are an important tool for improving family economic security and advancing racial equity, and there is incredible momentum heading into 2023 to boost two key state credits: the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC).
With households feeling the pinch of inflation and fears of a possible recession, lawmakers are rightly considering policies that will improve the lives of their constituents. Creating or enhancing refundable credits is a proven and effective approach to begin providing economic stability and opportunity for low- and middle-income families. Looking beyond the current economic uncertainty, refundable credits – like the CTC and EITC – have immense potential to curb inequities in state tax laws while setting up the next generation of Americans to succeed. State lawmakers, recognizing this, have improved credits in many states in recent sessions and appear poised to move forward in other places in 2023.
State Interest in Refundable Credits Continues
Last year, 10 states enacted or expanded their EITCs and four created or enhanced state CTCs. This trend looks likely to carry through into 2023, with lawmakers in more than a dozen states already discussing proposals to create new credits and boost existing ones.
▸Arizona Gov. Katie Hobbs’ proposed budget includes $50 million to create a CTC for households that earn less than $40,000 per year, which would provide low-income households $100 for each child.
▸In Massachusetts, Maura Healey continues to support a fully refundable $600 CTC and has expressed interest in expanding the EITC.
▸Minnesota Gov. Tim Walz announced a budget proposal that includes a CTC for low-income households, providing $1,000 per child and a maximum credit of $3,000. The proposal is estimated to cut child poverty by nearly 25 percent. House lawmakers have also proposed a state CTC.
▸Legislative leaders and Michigan Gov. Gretchen Whitmer have proposals to reverse past cuts to the state EITC. A Senate bill would boost the EITC to 30 percent, and a House bill to 20 percent, of the federal credit amount. In 2011 lawmakers cut the state’s credit from 20 percent to 6 percent, where it remains today.
▸In Montana, Gov. Greg Gianforte has proposed a $1,200 CTC for children under 6 years old. However, he has paired this proposal with regressive tax cuts such as permanently reducing income tax rates. Gov. Gianforte has not yet provided specifics on the credit’s design.
▸Lawmakers in Nebraska introduced legislation to create a $1,000 per child CTC and increase the EITC from 10 percent of the federal credit to 17 percent.
With the 2023 state legislative sessions just getting started, these early proposals from lawmakers merely scratch the surface of the growing momentum behind these tax credits, and we expect to see more proposals in the coming months.
Benefitting Families and Children, Boosting Incomes
Our nation faces serious challenges like rising economic inequality, stagnating wages, and child poverty. The EITC and CTC have proven track records of supporting families and moving the needle on these critical issues. Under the American Rescue Plan Act of 2021, the federal CTC and EITC were temporarily expanded. The wild success of those policies has undoubtedly spurred state lawmakers into action.
The 2021 federal expansion of the CTC resulted in 2.1 million fewer children living in poverty during the year in which it was in effect. Although this expansion has since expired, a recent ITEP report estimates that states can reduce child poverty by up to 50 percent within their borders if they adopt and, in some cases, enhance their CTCs.
The federal government’s 2021 EITC enhancement was also a notable step forward. It increased the credit for low-wage workers without children in the home while making the credit available to more adults through expansions of age and income limits. Those enhancements have also since expired, but states are free to incorporate those improvements into their own EITCs on a permanent basis.
Refundable credits provide economic stability and opportunity for low-income and working households, while also reducing the regressive nature of state and local tax systems. Nearly every state and local tax system requires a much greater share of income from low- and middle-income families than from the wealthy. Despite this, far too many state policymakers are seeking to double down on regressive, top-heavy tax cuts that are a boon for the rich without meaningfully aiding low- and middle-income families, and that reduce revenue available for education, health and other critical needs. In sharp contrast to these immensely expensive and ill-targeted tax cuts, refundable credits like state CTCs and EITCs have the potential to advance genuine tax fairness without the same degree of negative impact on state revenue collections.
While refundable credits benefit low-income people of all races and ethnicities, they are also particularly impactful in historically excluded Black and Hispanic communities where discrimination in the labor market, inequitable educational systems, and countless other inequities have relegated a disproportionate share of people to low-wage jobs.
Best Practices for Robust, Equitable Credits
When crafting or improving these credits, lawmakers should design them to reach as many low- and moderate-income households as possible. They should start by making state CTCs and EITCs fully refundable so that low-income families who may not owe personal income tax, but who pay substantial amounts of other state and local taxes—often at far higher overall rates than other families—are able to access their benefits.
For the CTC, lawmakers should also avoid earnings requirements, provide the credit per child (rather than per family) to not penalize children in larger families, establish income phase-out ranges that more effectively reach families in need, index the credit to inflation so its power does not erode over time, and make the credit available on an advanced or monthly basis.
For the EITC, lawmakers should include immigrant children and workers of all ages (the federal credit, which is often the basis of state-level credits, is only available to workers without children in the home if they are between the ages of 25 and 64), and increase the credit for all workers, specifically workers without children in the home who have historically tended to receive far lower credit amounts, or no credit at all.
States are moving forward: 31 of them, plus the District of Columbia, now have an EITC and 10 states have some form of CTC. Lawmakers in this moment have an incredibly powerful opportunity to help low- and middle-income households weather inflation in the short-term, boost financial stability for the long-term, and enhance economic mobility for generations to come.