As families nationwide struggle to afford the basics, refundable tax credits remain a tried and effective option for boosting incomes. Despite tightened budgets from a slowing national economy and federal tax cuts, some states have taxed the top to successfully improve tax credits, setting an important example for other states to follow.
The Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) are federal programs that reduce tax liabilities for low- and moderate-income families and provide direct cash support. These benefits are automatically delivered to eligible individuals or households when they file their annual income taxes. States have offered their own versions of these credits for decades, but following the success of the 2021 federal CTC expansion, which cut child poverty nationwide in half, state credits have exploded in popularity.
State budgets are getting tighter and will become increasingly strained by changes from federal tax and spending cuts. But that shouldn’t stop the progress on refundable credits. States can find new revenue that supports these and other spending priorities by disconnecting from parts of the new Trump tax law or by taxing wealth.
Both the District of Columbia and Pennsylvania recently “decoupled” from key provisions of the Trump tax law while also creating and expanding refundable credits.
D.C. will disconnect from 13 parts of the tax law, raising almost $600 million in revenue over the next four years. With this extra cash, the District will fund a new CTC of up to $1,000 per child and raise its existing EITC to 100 percent of the federal credit.
In Pennsylvania, lawmakers approved a 2025-26 state budget that, despite other shortcomings, includes the state’s first EITC at 10 percent of the federal credit. At the same time, Pennsylvania lawmakers decoupled from several corporate tax breaks in the new tax law to preserve nearly $1 billion a year in revenue necessary to meet the needs of Pennsylvanians.
States interested in raising revenue to fund tax credits should look to Washington and Minnesota for strategies on taxing the wealthy. In 2023, Washington began taxing capital gains on profits exceeding $250,000 through a Capital Gains Excise Tax that affects only the very highest income individuals in the state. For 2024 alone, the tax brought in $560 million of additional revenue, and the state expanded the tax earlier this year. Similarly, Minnesota in 2023 passed a 1 percent tax on investment income for households making over $1 million a year. In its first year, this 1 percent tax was projected to raise $86.2 million, and as ITEP recently detailed, states could raise tens of billions of dollars if they levied a similarly structured tax on the profits or proceeds generated by wealth in high income households.
Both of these taxes are highly targeted and raise vital revenue supporting Washington and Minnesota’s refundable tax credits. Washington offers a refundable state EITC despite not having a broad-based personal income tax, and Minnesota offers the most generous state CTC in the nation: up to $1,750 per child in 2025 for qualifying families.
State refundable tax credits are vital for families struggling with our nation’s affordability crisis. Research on the federal EITC and CTC has shown they help households afford everyday living expenses like child care and groceries, helping to reduce food insecurity and increase housing stability.
Refundable Earned Income Tax Credits and Child Tax Credits offer an opportunity for states to support families amid high prices for the basics like food, utilities, and child care. Many states already recognize the potential of these credits to boost low- and moderate-income households. Other states should follow suit.
