Several states have created or enhanced tax credits this year — specifically Earned Income Tax Credits (EITCs) and Child Tax Credits (CTCs) — to help families struggling to pay basic expenses as costs rise amid the pandemic. Because high-income families pay a smaller share of their income in taxes than low-income families, the EITC and CTC make the tax code fairer, strengthen fairness, and improve economic security for families now. and in the future.
Tax credits for low-income families help them afford housing, food, utilities, etc. Research indicates that additional income from tax credits is associated with reduced poverty, improved maternal and child health and student academic achievement, and can boost local and state economies. Tax credits also help advance racial and gender equity; most states charge Black, Indigenous, and Latina families higher rates than white families on average—the result of historical and ongoing bias and discrimination. These equity-enhancing tax credits are especially important today, given that people of color, immigrants, women, and low-income people have been particularly hard hit by the economic downturn of the pandemic.
Seven states and Washington, DC have recently expanded or enacted EITCs. For instance:
- Illinois increased its state EITC from 18% to 20% of the federal credit and extended it to immigrants who file taxes with an individual tax identification number (ITIN), as well as people aged 18 to 24 and 65 and older who do not claim children on their tax return. Eight states and DC now offer EITCs that include ITIN registrants.
- Utah recently created an EITC worth 15% of the federal credit as part of a new tax law, giving many workers and families a significant boost. However, families with the lowest incomes are not eligible for the full credit, and other aspects of the tax plan are tipping the balance in favor of the state’s wealthy, leading to significant revenue losses that risk hurting services. over time.
- Virginia will offer a larger credit to lower-income families: families can choose between two versions of the credit (15% fully refundable or 20% non-refundable), depending on which offers them the greatest benefit.
- washington d.c. approved its FY2023 budget, which will make its EITC immigrant-inclusive by allowing 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, helping to make the economy stronger and fairer for everyone.
Three states have created new child tax credits, all of which are fully available to families regardless of income, and California has improved its tax credit for young children. This progress is critical given the expiration of the enhanced federal child tax credit, which has made it easier for millions of families to care for their children and kept millions of children above the threshold. of poverty. While Congress should review and make federal CTC improvements permanent 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 families with children under age 6 and no income can receive the $1,000 credit.
- New Jersey issued a new CTC which will be worth up to $500 for each child under the age of 6 and is expected to reach approximately 250,000 households and over 400,000 children.
- New Mexico enacted a new CTC worth up to $175 per child under 17, which will benefit more than 530,000 children.
- Vermont created a new CTC worth up to $1,000 per child 5 and under – the largest stand-alone state CTC adopted to date. It is estimated that the credit will help more than 34,000 families with children.
Recognizing the unique challenges posed by the pandemic and its economic impacts, some states have issued additional one-time payments through tax credits. For example, New York has approved additional payments worth 25% of its EITC and up to 100% of its Empire State Child Credit. Oregon issued $600 payments to state EITC recipients. Connecticut and Rhode Island both offered one-time $250 CTC discounts for children 18 and under (up to three children). While these types of targeted one-time payments are helpful, legislators in these states can build on this momentum by expanding their existing permanent appropriations or, in states without permanent appropriations, creating them.
This year, several states have also improved other credits, such as those that help families pay for groceries or offset part of property taxes for some landlords and for renters who are struggling to pay rising rents. These families pay a much larger share of their income in grocery and housing taxes than wealthier households, underscoring the reverse nature of most state tax systems. Targeted tax credits make state tax codes fairer and are especially helpful when food and energy prices rise and family budgets are under pressure. 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 conditions.
States should redouble their efforts to provide these supports to families during the pandemic as they face an uncertain economic outlook. Creating and improving tax credits can reduce inequality and promote long-term shared prosperity.