Over 3 Million Low-Income Children in Rural Areas Face Cut in Child Tax Credit if Recovery Act Improvement Expires

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Nearly 3.3 million low-income children with working parents in rural areas will lose important tax benefits if Congress does not extend the Child Tax Credit improvements that the 2009 American Recovery and Reinvestment Act provided for low-income families, as President Obama has proposed.

These nearly 3.3 million low-income children live in rural areas all across America. More than 10,000 rural children will face reductions in the tax credit in each of the 44 states for which we have reliable rural data. In 11 states, more than 100,000 rural children will face a reduction. Moreover, rural children (i.e., those who live in non-metropolitan areas) will be over 20 percent more likely than children in urban and suburban areas to be affected — because their families are more likely to have modest incomes.

If the tax credit improvement that is in effect for 2009 and 2010 is allowed to expire at the end of this year, a family with two children in which a parent is working at a full-time, minimum wage job will see its child credit fall from $1,725 to $248.

Recovery Act Enabled More Low-Income Working Families to Qualify for Child Tax Credit

The 2009 Recovery Act modified the Child Tax Credit to enable low-income working parents to count more of their wages toward the credit. Under prior law, a working family’s first $12,550 in wages would not have counted toward the child credit in 2009. The Recovery Act lowered this wage threshold to $3,000 for 2009 and 2010.

This improvement extended the tax credit to an estimated 2.7 million low-income working families — including over half a million rural working families — who otherwise would not have qualified for it because their wage income is too low. The improvement also increased the amount of the tax credit for many other low-income families who previously received only a partial credit.^[1] The expansion of the tax credit both rewards these families’ work and encourages greater work effort. (Note: The Child Tax Credit begins phasing in slowly once a family’s wages rise above the wage threshold. For every $100 of earnings above the threshold, the family qualifies for an additional tax credit of $15, until the family reaches the maximum tax credit level of $1,000 per child. As a result, low-income families with two children whose earnings exceed the wage threshold level receive a partial credit — rather than the full credit of $1,000 per child — unless their earnings surpass the threshold by at least $13,333. If the wage threshold is set at $3,000, families with two children must earn at least $16,333 to receive the full tax credit.)

President Obama has proposed making this improvement in the tax credit permanent. If Congress fails to act, the wage threshold to qualify for the credit will jump from $3,000 this year to $12,850 next year. That means, for example, that a family with two children where a parent is working at a full-time, minimum wage job will see its child credit fall sharply from $1,725 this year to $248 next year. This reduction also will affect families further up the income scale.  If the wage threshold rises to $12,850, a family with two children will not qualify for a full tax credit until its earnings reach the $26,183 level.

The Urban Institute-Brookings Institution Tax Policy Center estimates that more than 18 million children aged 0-16 whose parents work will lose all or part of their child credit if Congress lets the improvement expire.^[2] In addition, the Center on Budget and Policy Priorities estimates that 600,000 children will be pushed into poverty because the loss of part or all of the credit will drop their families’ incomes below the poverty line, and an additional 4 million children who already are poor will become poorer. ^[3]

Reduction in Credit Will Have Sizeable Effects on Rural Children in Most States

Our analysis finds that nearly 3.3 million rural children in low-income working families, and 14.8 million children in metropolitan areas, will see reductions in their Child Tax Credit if Congress does not extend the current rules (see Table 1).

Reliable data on rural children are available for 44 of the 50 states.^[4] More than 10,000 rural children will be affected in each of these states. The states with the largest numbers of rural children whose families will face a reduced tax credit include: Texas (258,000 such children), North Carolina (199,000 children), Mississippi (154,000), and Georgia (139,000). The other states with losses for 100,000 or more children are Kentucky, Michigan, Missouri, Ohio, Oklahoma, Pennsylvania, and Tennessee.

States where rural children make up the largest percentage of all affected children include: Montana (where 73 percent of the children who will be affected, or 40,000 children, are rural children), Vermont (where 68 percent, or 15,000, are rural), Wyoming (66 percent, or 17,000, are rural), and North Dakota (63 percent, or 17,000, are rural).

Rural Children at Greater Risk

Rural children will be roughly 20 percent more likely than those in metropolitan areas to face reductions in their child credit if Congress fails to extend the Recovery Act improvement. Nationwide, rural America includes 15 percent of all children — but 18 percent of the children whose Child Tax Child credit would be reduced. (See Table 2 for state data.)

This disparity reflects the generally lower earnings of rural workers and their families. In metropolitan areas, 49 percent of earners earn less than $30,000 a year. But in nonmetropolitan areas, 60 percent do. Low earnings are significantly more common in rural than metropolitan areas in 45 of the 48 states for which these data are available. (See Table 3.)

Appendix: Data and Methods

Our estimates start with the Tax Policy Center’s projection that approximately 18.1 million children nationwide will lose all or part of their Child Tax Credit in 2011 if the Recovery Act provisions expire. We allocate this figure by state, and within states by metropolitan status, using data from the Census Bureau’s 2008 American Community Survey.

Specifically, we use the Census data to create a simplified model of each family’s tax credits and use these simplified estimates to allocate the Tax Policy Center’s more precise national total.^[5] For example, if our model shows that the non-metropolitan portion of a state contains 1 percent of all U.S. children facing a Child Tax Credit reduction, we assign that area 1 percent of the Tax Policy Center’s 18.1 million total. All estimates were weighted to account for sampling.

Rural areas are defined as all areas that were not in a metropolitan statistical area in 2008. Two states (New Jersey and Rhode Island) and the District of Columbia are entirely metropolitan and include no rural areas.

Because public data files from the American Community Survey do not identify metropolitan status directly, we used geographic identifiers provided by the Census Bureau (called Public Use Microdata Areas). Most of these Census areas fall entirely within or entirely outside metropolitan boundaries and thus provide a straightforward indicator of rural status.

In cases where part of the Census area is in a rural area and part in a metropolitan area, we assign the percentage of the area’s CTC-eligible children to metropolitan status based on the percentage of the area’s total population that is metropolitan.^[6] In four states, the overlap between Census areas and rural areas is relatively weak and we are less confident that this method will give us an accurate result.^[7] In these states (Idaho, Massachusetts, Maryland, and Utah) we do not show results, although we include data from these states in the national totals.

Available data were not sufficient to distinguish urban from suburban parts of metropolitan areas.