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

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By Arloc Sherman and Marybeth J. Mattingly

June 10, 2010

Issued Jointly With

    Carsey Institute Logo Logo
     

Special Series: Economic Recovery Watch

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.

Table 1:
Number of Children (0-16) Who Will Receive A Smaller Child Tax Credit, Or No Child Tax Credit, If the Wage Threshold Rises from $3,000 to $12,850 in 2011

 

Estimated Number of Children (in thousands)

Metro

Nonmetro

United States

14,802

3,251

Alabama

206

96

Alaska

19

17

Arizona

455

39

Arkansas

129

96

California

2,396

44

Colorado

246

33

Connecticut

118

11

Delaware

36

13

District of Columbia

18

0

Florida

988

70

Georgia

536

139

Hawaii

29

13

Idaho

72

Illinois

627

98

Indiana

293

88

Iowa

98

70

Kansas

95

58

Kentucky

143

121

Louisiana

219

91

Maine

35

25

Maryland

184

Massachusetts

212

Michigan

477

106

Minnesota

140

73

Mississippi

97

154

Missouri

229

125

Montana

15

40

Nebraska

63

40

Nevada

151

13

New Hampshire

17

17

New Jersey

339

0

New Mexico

103

73

New York

935

77

North Carolina

410

199

North Dakota

17

Ohio

476

130

Oklahoma

170

104

Oregon

172

53

Pennsylvania

448

104

Rhode Island

38

0

South Carolina

200

68

South Dakota

24

25

Tennessee

291

119

Texas

1,873

258

Utah

147

Vermont

15

Virginia

299

63

Washington

266

53

West Virginia

56

52

Wisconsin

190

67

Wyoming

17

Reliable data not available. (See footnote 7.)
Source: Tax Policy Center national estimates allocated by state and place using 2008 American Community Survey data.

Table 2:
Percent Rural, For All Children and Those Who Will Lose Part or All of the Child Tax Credit if Threshold Increases from $3,000 to $12,850 in 2011

 

Percent Living in a Non Metropolitan Area

All Children

Children Facing Loss/Reduction of CTC

United States

15%

18%

Alabama

28%

32%

Alaska

32%

46%

Arizona

7%

8%

Arkansas

38%

43%

California

2%

2%

Colorado

13%

12%

Connecticut

8%

8%

Delaware

19%

27%

District of Columbia

0%

0%

Florida

5%

7%

Georgia

17%

21%

Hawaii

30%

34%

Idaho

34%

Illinois

11%

13%

Indiana

21%

23%

Iowa

42%

42%

Kansas

34%

38%

Kentucky

40%

45%

Louisiana

26%

29%

Maine

40%

42%

Maryland

5%

Massachusetts

0%

Michigan

17%

18%

Minnesota

25%

34%

Mississippi

55%

61%

Missouri

25%

35%

Montana

65%

73%

Nebraska

39%

39%

Nevada

9%

8%

New Hampshire

34%

50%

New Jersey

0%

0%

New Mexico

34%

41%

New York

7%

8%

North Carolina

28%

33%

North Dakota

51%

63%

Ohio

19%

21%

Oklahoma

34%

38%

Oregon

21%

24%

Pennsylvania

15%

19%

Rhode Island

0%

0%

South Carolina

23%

26%

South Dakota

52%

52%

Tennessee

25%

29%

Texas

11%

12%

Utah

10%

Vermont

64%

68%

Virginia

12%

17%

Washington

11%

16%

West Virginia

44%

48%

Wisconsin

25%

26%

Wyoming

69%

66%

Reliable data not available. (See footnote 7.)

Note: Children in column 1 are children under 18 related to the head of household; data are from published Census tables from the 2008 American Community Survey. Children in column 2 are estimated children under 17 who would lose all or part of the CTC under the higher refundability threshold, based on analysis of the 2008 American Community Survey public use file.

Table 3:
Percent of Earners Earning Less Than $30,000 a Year, 2006-2008

 

In Metro Areas

In Nonmetro Areas

United States

49%

60%*

Alabama

54%

61%*

Alaska

45%

53%*

Arizona

50%

62%*

Arkansas

57%

66%*

California

48%

57%*

Colorado

47%

55%*

Connecticut

41%

44%*

Delaware

45%

52%*

District of Columbia

39%

Florida

52%

62%*

Georgia

49%

62%*

Hawaii

44%

49%*

Idaho

55%

63%*

Illinois

47%

59%*

Indiana

52%

56%*

Iowa

52%

58%*

Kansas

49%

62%*

Kentucky

52%

62%*

Louisiana

54%

60%*

Maine

53%

60%*

Maryland

40%

46%*

Massachusetts

43%

47% .

Michigan

50%

60%*

Minnesota

43%

58%*

Mississippi

55%

64%*

Missouri

51%

65%*

Montana

59%

62%*

Nebraska

51%

61%*

Nevada

47%

51%*

New Hampshire

43%

50%*

New Jersey

41%

New Mexico

56%

62%*

New York

46%

58%*

North Carolina

52%

60%*

North Dakota

57%

58% .

Ohio

51%

58%*

Oklahoma

55%

63%*

Oregon

52%

60%*

Pennsylvania

49%

58%*

Rhode Island

48%

South Carolina

54%

61%*

South Dakota

55%

62%*

Tennessee

53%

63%*

Texas

53%

62%*

Utah

55%

60%*

Vermont

50%

56%*

Virginia

44%

59%*

Washington

46%

60%*

West Virginia

56%

62%*

Wisconsin

49%

56%*

Wyoming

53%

53% .

* Metro-nonmetro difference is statistically significant at the 90 percent confidence level.
 
All portions of state are metropolitan.
Source: 2006-2008 American Community Survey Table B20001. Additional calculations by CBPP
.

End Notes:

[1] Marybeth Mattingly, “Child Tax Credit Expansion Increases Number of Families Eligible for a Refund,” Issue Brief No. 4 (Spring 2009), Carsey Institute, University of New Hampshire.

[2] See www.taxpolicycenter.org/numbers/Content/Excel/T10-0009.xls.

[3] Arloc Sherman, Avi Feller, and Chuck Marr, “Failure to Extend Improvements in Child Tax Credit Would Harm Millions of Low-Income Working Families, ” Center on Budget and Policy Priorities, February 16, 2010. That analysis also contains state-by-state estimates of the number of children who will lose some or all of their child credit. Those state estimates differ from the sum of the metro and nonmetro numbers in this analysis due to the use of different Census survey data and methods.

[4] New Jersey and Rhode Island (along with the District of Columbia) contain no nonmetropolitan areas and Idaho, Maryland, Massachusetts, and Utah have limited rural data, as discussed below.

[5] Steps in creating our simplified tax model include constructing tax filing units, calculating their earnings and approximate adjusted gross income, and using federal tax rules to calculate taxable income, income tax liability before taxes, and the Child Tax Credit. All income figures and tax parameters are in 2011 inflation-adjusted dollars. The model excludes children under age 17 who are married or heads of household. In total, our model indentifies 13.0 million children who would lose some or all of the child credit if current rules are allowed to expire.

Our simplified model assumes that all families claim the standard deduction. When we use a more complex tax model that includes estimates of itemized deductions such as mortgage interest, property taxes, and state income taxes, our results change very little from those shown in Table 1.

[6] Files available from the Missouri Census Data Center show what share of each Census area’s total population lives in a metropolitan statistical area. We designate that same fraction of the area’s children “metropolitan” and the remaining fraction “rural.” This rural/metro split is applied equally to every child in the data file who lives in that area. (For example, in conventional analyses of Census data, a typical child whose parents filled out the American Community Survey might represent a total of 100 “weighted” children in his or her community. If the child is from a Census area that we know to be 80 percent rural, we consider that child to represent 80 rural children and 20 metropolitan children.)

[7] We do not show results for states where the average resident who is assigned “rural” status by our method is drawn from a Census area where the actual population is less than two-thirds rural (i.e., at least one-third metropolitan). In Massachusetts, for example, the average resident assigned “rural” status lives in an area that is only 25 percent rural. Comparable percentages are somewhat higher in Maryland (50 percent), Utah (53 percent), and Idaho (66 percent) but still below our cut-off of two-thirds. For the nation as whole, by our method, the average resident assigned “rural” status is from an area that is 86 percent rural.

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