Just Taxes Blog by ITEP

State Tax Credits Have Transformative Power to Improve Economic Security

September 12, 2023

Read our new briefs for more on state action on Child Tax Credits and Earned Income Tax Credits in 2023.

The latest analysis from the U.S. Census Bureau provides an important reminder of the compelling link between public investments and families’ economic well-being. Policy decisions can drastically reduce poverty and improve family economic stability for low- and middle-income families alike, as today’s data release shows.

In 2022, 40.9 million people lived in poverty in the U.S., a 60 percent increase from 2021. This estimate is produced using the Supplemental Poverty Measure, which is based on a family’s after-tax income and includes benefits like tax credits and other safety net programs. The supplemental measure is also adjusted for cost of living in different geographic areas and is overall a more comprehensive measure than the Official Poverty Measure for evaluating the number of people unable to afford basic needs.

This dramatic rise in poverty occurred on the heels of federal government inaction on an extremely effective policy, the expanded Child Tax Credit (CTC). States have taken steps to pick up where the federal government left off by creating state-level CTCs and boosting existing EITCs, but there’s more to be done in the states and at the federal level.

The power of public programs is apparent when comparing this year’s federal Supplemental Poverty Measure to that of 2021, which captured the impact of the federal American Rescue Plan Act of 2021 (ARPA), like the Child Tax Credit expansion, Earned Income Tax Credit enhancement, and stimulus payments. The expiration of those policies contributed to the highest single-year increase in poverty for children and families.

Federal tax credits, including the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC), lifted 6.4 million people out of poverty in 2022. That is compared to 9.6 million lifted out of poverty in 2021 when the enhancements of both credits were underway. The federal CTC, like other tax credits and other federal programs, benefits middle-income people but also cuts poverty. The biggest example is Social Security, which lifted 28.9 million people out of poverty in 2022. The federal CTC dramatically helps middle-income families, while also lifting 2.4 million above the poverty line in 2022.

States Amplify and Build on Federal Policy

Refundable tax credits help families pay for food, housing, transportation, and other necessities. State lawmakers have, for years, based state-level credits on policies available in the federal tax code. By doing so, they’ve amplified the benefits of federal credits in their states. More recently, however, states have taken more innovative steps that go beyond the basics of federal law to do more for low- and middle-income families. They’ve created more inclusive CTCs that can reach the poorest households, reformed their EITCs to better reach workers without children, and extended eligibility for these credits to immigrant filers. Considerations for those key expansions – and more – are available in ITEP’s two new briefs on state CTCs and EITCs.

States are Boosting Economic Security with Child Tax Credits in 2023

Boosting Incomes, Improving Equity: State Earned Income Tax Credits in 2023

Much of the recent action in the states was prompted by the powerful example the federal government set in 2021 when it drastically slashed child poverty and improved lives through the CTC expansion. Over the past two years, six states created new CTCs (New Mexico, New Jersey, and Vermont in 2022; Minnesota, Oregon, and Utah in 2023). And eight states improved existing credits (California in 2022; Colorado, Maine, Maryland, New Jersey, New Mexico, New York, and Vermont in 2023).

States have also prioritized improvements to their EITCs, which help workers and their families make ends meet and move toward greater economic security. Over the past two years, following the expiration of 2021 enhancements to the federal credit, Utah enacted a state EITC and 15 states plus D.C. increased the size or reach of their state credits (Hawai’i, Illinois, Maine, Vermont, Virginia in 2022; Colorado, Connecticut, Indiana, Maryland, Michigan, Minnesota, Montana, Rhode Island, Utah, Washington, and the District of Columbia in 2023).


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