Several states have created or improved tax credits this year — particularly state earned income tax credits (EITCs) and state child tax credits (CTCs) — to support families struggling to afford the basics as costs rise amid the pandemic. Since families with high incomes pay a smaller share of their income in taxes than those with lower incomes, the EITC and CTC make the tax code fairer, bolster equity, and improve families’ economic security now and in the future.
Tax credits for families with low incomes help them to afford housing, food, utilities, and more. Research indicates that additional income from tax credits is associated with reduced poverty, improved child and maternal health and students’ educational achievement, and can boost local and state economies. Tax credits also help to advance racial and gender equity; most states tax Black, Indigenous, and Latinx families at higher rates than white families on average — the result of historical and ongoing bias and discrimination. These equity-boosting tax credits are especially important today, given people of color, immigrants, women, and individuals with low incomes were particularly hit hard by the pandemic’s economic downturn.
Seven states and Washington, D.C. recently expanded or enacted EITCs. For example:
Illinois increased its state EITC from 18 percent to 20 percent of the federal credit and extended it to immigrants who file taxes with an Individual Tax Identification Number (ITIN), as well as to people aged 18-24 and 65 and over who don’t claim children on their tax return. Eight states and D.C. now offer EITCs that include ITIN filers.
Utah recently created an EITC worth 15 percent of the federal credit as part of a new tax law, providing many workers and families a meaningful boost. However, families with the lowest incomes are ineligible for the full credit, and other aspects of the tax plan tilt the balance toward wealthy people in the state, prompting sizable revenue losses that risk harming services over time.
Virginia will provide a larger credit to families with the lowest earnings: families can choose from two versions of the credit (a 15 percent fully refundable or 20 percent nonrefundable one), whichever provides them the largest benefit.
Washington, D.C. approved its fiscal year 2023 budget, which will make its EITC inclusive of immigrants by enabling people to use an ITIN to receive the credit. The change will benefit up to 5,100 households and 7,500 children. By extending tax credits to ITIN filers, lawmakers are expanding economic opportunities for the many low-paid essential workers who are immigrants, in turn helping make the economy stronger and more equitable for everyone.
Three states created new child tax credits, all of which are fully available to families no matter their income, and California improved its Young Child Tax Credit. These advances are critical given the expiration of the enhanced federal Child Tax Credit, which made it easier for millions of families to care for their kids and kept millions of children above the poverty line. While Congress should revisit and make permanent the federal CTC improvements as soon as possible, states should also continue to create and improve their own CTCs.
California expanded its Young Child Tax Credit (a component of the state’s CalEITC) so that families with children under age 6 and without earnings can receive the $1,000 credit.
New Jersey enacted a new CTC that will be worth up to $500 for each child under age 6 and is expected to reach an estimated 250,000 households and more than 400,000 children.
New Mexico enacted a new CTC worth up to $175 per child under age 17, which will benefit over 530,000 children.
Vermont created a new CTC worth $1,000 maximum per child age 5 and under — the largest stand-alone state CTC enacted to date. The credit is estimated to help over 34,000 families with children.
Recognizing the unique challenges posed by the pandemic and its economic impacts, some states issued additional one-time payments through tax credits. For example, New York approved supplemental payments worth 25 percent of its EITC and up to 100 percent of its Empire State Child Credit. Oregon issued $600 payments to state EITC recipients. Connecticut and Rhode Island both provided one-time $250 CTC rebates for children aged 18 and under (for up to three children). While these kinds of targeted one-time payments are helpful, lawmakers in these states can build on the momentum by expanding their existing, permanent credits or — in states without permanent credits — creating them.
Several states this year also improved other credits, such as those that help families afford groceries or offset a portion of property taxes for certain homeowners and for renters struggling to afford rising rents. These families pay a much larger share of their incomes on grocery and home taxes than wealthier households, underscoring the upside-down nature of most state tax systems. Targeted tax credits make state tax codes more equitable and are especially helpful when food and energy prices are rising and family budgets are under strain. For example, Idaho increased the value of its grocery tax credit from $100 to $120, and Connecticut increased its property tax credit from $200 to $300 and expanded eligibility to all residents who meet certain income requirements.
States should double down on providing these supports for families during the pandemic as they face an uncertain economic outlook. Creating and improving tax credits can reduce inequities and work toward shared prosperity in the long term.
