States Can Enact or Expand Child Tax Credits and Earned Income Tax Credits to Build Equitable, Inclusive Communities and Economies

Eleven states have enacted a child tax credit, and 31 states plus the District of Columbia and Puerto Rico have enacted their own version of the federal Earned Income Tax Credit (EITC). State child tax credits and EITCs build on the success of both federal credits by helping families afford the basics and reducing poverty, in turn helping them thrive in the long run through improved child and maternal health, school achievement, and other benefits, research has found. Because people of color, women, and people who immigrated to the U.S. are overrepresented in low-paid work and in families with little to no earnings, these two state credits are an important tool for advancing equity. And by bolstering families’ incomes, they also boost local communities and state economies.

The credits complement each other and reach overlapping but distinct populations. The same is true of other programs in the nation’s public assistance system that provide cash and cash-like support. These include the Supplemental Nutrition Assistance Program (SNAP), Temporary Assistance for Needy Families (TANF), and housing assistance among other supports, all of which should be improved or implemented (but which are outside the scope of this report).

Lawmakers in states without their own child tax credit or EITC should enact them. States that have limited their credits should make these credits refundable. States should also expand their credits to those left out of each federal credit, particularly by ending exclusions for immigrants who have an Individual Taxpayer Identification Number (ITIN).

The Basics Are Out of Reach for Too Many Families

Low wages make it hard for families to afford basics such as decent housing in safe neighborhoods, nutritious food, reliable transportation, quality child care, and educational opportunities that can improve their earnings. Furthermore, some people with caregiving responsibilities face high barriers to employment, such as unaffordable child care and inaccessible educational opportunities, which constrain their current and future incomes and make it difficult to provide for their families.

The pandemic and resulting economic downturn hit people with the lowest incomes the hardest. While the economy has rebounded by several measures, many effects are lingering. People of color, women, and immigrants are overrepresented in many jobs that pay low wages,^[1] in significant part due to structural barriers such as wealth and income disparities, inadequate access to health care, and discrimination in hiring. As a result, these groups are disproportionately likely to be paid wages insufficient for their basic needs. Many people — disproportionately women and people of color — dropped out of the workforce entirely due to caregiving needs during previous waves of the pandemic, and many have not yet been able to return.^[2]

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The pandemic recession intensified hardship,^[3] but these are long-standing trends. For the most part, wages for lower-paid workers have stagnated or declined over the last 50 years, with the only period of sustained growth from the late 1990s to the early 2000s.^[4] Nominal wage growth has been strong recently, especially for lower-paid workers, but high inflation eroded much of those gains. And though increases in state minimum wages have helped boost wages for those earning the least, these gains are meager when compared with significant growth in productivity, which has increased 65 percent since 1979, or 3.7 times as much as pay.^[5]

While many families’ wages do not reflect the last 50 years of economic growth, the basics — including housing, child care, and transportation — have gotten more expensive. For example, housing costs for renters continued to increase faster than incomes: from 2001 to 2019, after adjusting for inflation, median renter household income rose just 3.2 percent, while rents rose 17.9 percent, according to Census data.^[6] A combination of growing demand for goods and services, supply chain constraints, and Russia’s invasion of Ukraine all led to much higher than average inflation between spring 2021 and the end of 2022. These market forces have driven up the cost of food, energy, and other basics substantially. While many lower-paid jobs have seen rising wages over the past year, on average, those increases haven’t been enough to maintain people’s buying power.^[7]

Furthermore, state tax systems that ask the most as a share of income from families earning the least contribute to squeezing families between inadequate wages and increasingly expensive basic needs. In 9 of every 10 states, families earning the least — disproportionately families of color — pay a larger share of their income in state and local taxes than do higher-income families. (See Figure 2.) That means they shoulder more of the load for roads, schools, health care, and other investments that contribute to broadly shared prosperity.^[8] Most states’ tax structures worsen racial and ethnic inequities because households of color are more likely to have lower incomes and less wealth than white households due to historical and ongoing discrimination and bias.

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Child Tax Credits and EITCs Can Ease Hardship, Promote Opportunity

Child tax credits and EITCs can boost incomes for families paid low wages, for adults not raising children who work low-paid jobs, and for caregivers facing barriers to employment. They can also help address imbalances in the tax system that ask the most of people who earn the least. Eleven states have adopted child tax credits, and 31 states plus D.C. and Puerto Rico have adopted state EITCs. (See Figure 3.)

Refundability is a key feature of these credits and the source of much of their ability to boost income, reduce poverty, and help families in the long run. It means that if the credit exceeds a filer’s tax liability, some or all of the credit is paid out as a refund. In the case of refundable state EITCs, filers can receive the full credit amount they are eligible for based on their earnings, no matter how much they owe at tax time. Refundable state child tax credits provide families with the maximum amount of the credit regardless of earnings (with no phase-in).^[9] Without these provisions, the credits leave out families who earn the least.

Most state child tax credits provide a flat amount per child and phase out at a specified income; some are tied to federal eligibility rules and amounts. California and Vermont provide the largest credits: California’s Young Child Tax Credit provides up to $1,083 to families with a child under 6 in the home, and Vermont provides up to $1,000 for each child under 6.

Most state EITCs are modeled directly on the federal credit: they use federal EITC eligibility rules and match a specified percentage of the federal credit. EITCs that provide the full credit filers are eligible for, regardless of tax owed, range from 3 percent of the federal credit in Montana to 100 percent in D.C., the latter once it’s fully phased in in tax year 2026.^[10] (See Figure 4 below for characteristics of federal EITC recipients by state, and Appendix Table 1 for more details on each state’s credits.) To help more families make ends meet during the pandemic recovery and beyond, states without a child tax credit or EITC should adopt them and those with these tax credits should continue to expand them.

Child Tax Credits, EITCs Work Together to Boost Family Incomes

By reaching overlapping but different populations, each credit supports some families and individuals that the other doesn’t reach. State child tax credits are generally available to families with low or no earned income on their tax returns. These families may face high barriers to employment as well as high caregiving expenses, which the credits can help them meet. State EITCs are also available to families with children, but they also typically include people paid low wages without children in the home. Adults without children still face the same rising prices that make it hard to afford the basics; they may also be caretakers for people they cannot claim as a dependent on their tax return, such as non-custodial children. 

Figure 5 shows how Vermont’s child tax credit works (unlike most state EITCs, which are based directly on the design of the federal EITC, many state child tax credits have their own amounts and phaseouts). The full $1,000 amount is available to all families, whether or not they have earned income. Once a family’s income reaches $125,000, the credit amount begins to decrease, fully phasing out at $175,000. Families receive the credit for each child claimed on their tax return.

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Figure 6 shows how the federal EITC works for a single-parent family with one child earning the federal minimum wage in 2022 (about $15,000 a year for full-time, year-round work). Most state EITCs share a similar structure. For every dollar the parent earns, they get 34 cents in EITC benefits from the federal EITC. The value of the credit continues rising at that rate until their earnings reach $10,980. At that point, the parent receives the maximum benefit of $3,733. Once their earnings exceed $20,130 the credit shrinks by about 16 cents for each additional dollar of earnings until reaching zero at about $43,500. Although the EITC parameters are adjusted for inflation each year, the Tax Cuts and Jobs Act of 2017 included a permanent provision that erodes the credit’s value over time by changing the measure used for inflation indexing from the Consumer Price Index to the “chained” Consumer Price Index, which usually increases at a slower rate. A projection at the time it was enacted found that families will receive a credit that is about $100 to $300 smaller in 2027 as a result, depending in part on family size and earnings.^[11]

The American Rescue Plan, enacted in March 2021, expanded the federal Child Tax Credit and EITC for the 2021 tax year. (See Figure 4 for state-by-state data on Child Tax Credit recipients under the Rescue Plan.) It made the maximum value of the child tax credit available to children in families with low or no earnings, raised the maximum credit from $2,000 to $3,000 per child and $3,600 for children under age 6, extended the credit to 17-year-olds, and provided for advance payment of part of the credit. It also increased the EITC for low-paid working adults who are not raising children at home from about $540 to $1,500, increased the income limit for these individuals, and expanded the age range to include younger adults aged 19-24 (excluding students under 24 who are attending school at least part time), as well as people aged 65 and over. It also extended a federal supplement to help Puerto Rico expand its local EITC.^[12]

Child Tax Credits, EITCs Boost Family Income, Communities, and Local Economies

Benefits from these credits extend far beyond the dollars that a family receives. By helping families keep up basic spending, the credits help them build economic security, improve longer-term health and well-being, and boost state and local economies. They are especially important when high prices for basic needs hit low-paid workers the hardest, as they did when inflation started rising in early 2021 and peaked in mid-2022 before starting to come down. They:

Reduce poverty, especially in communities of color. Child tax credits and EITCs are helpful to households with children struggling on low wages and to those living below the poverty line. Overall child poverty in the U.S. is much higher than in any of the world’s 18 other similarly wealthy nations: 20 percent of U.S. children live in families with incomes below half of the national median,^[13] compared to between 3 and 15 percent in those 18 others. But child poverty is higher still for Latino, Black, and American Indian and Alaska Native children in the U.S. than for white children. Children in some Asian ethnicity groups also face higher child poverty rates than white children, despite low overall poverty rates among all Asian and Pacific Islander children. For example in 2020, 24 percent of Hmong and 25 percent of Bangladeshi children lived in poverty compared with 11 percent of Asian and Pacific Islander children overall.

Child tax credits and EITCs both reduce poverty and improve racial equity. The temporarily expanded federal Child Tax Credit, when combined with other pandemic relief measures, drove the child poverty rate to a record low of 5.2 percent in 2021.^[14] The Rescue Plan’s expanded credit reduced hardship for children of all races and ethnicities — with the greatest reduction in child poverty rates for Black, Latino, and American Indian and Alaska Native children — and narrowed the differences in poverty rates between them in 2021. (See Figure 7.) A 50-state analysis estimates that a state child tax credit of $2,000 or less (with a 20 percent boost for children under age 6) that’s available to families regardless of earnings would reduce the child poverty rate by at least 25 percent in almost all states.^[15]

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Meanwhile, state and federal EITCs serve a larger number of white households than any other racial or ethnic group (due in part to population size) but they reach a larger proportion of people of color relative to their population size. And the EITC has an outsized impact in reducing poverty rates for households of color. Due to historical and ongoing racial discrimination, many people of color are overrepresented in work with low wages and face obstacles to building economic security, leading to families struggling to afford the basics and respond to financial emergencies.^[16] The EITC helps shrink these disadvantages by lifting low pay. The average state EITC benefit for households headed by a person of color was $120 higher than for white, non-Hispanic households, a recent study found, and state EITCs lift a larger share of people of color and Hispanic populations above the poverty line.^[17]

Help children and families thrive. The income from tax credits like the EITC and Child Tax Credit help children from birth throughout their lives. For instance, research links children in families receiving such income to having better childhood nutrition, as well as higher school enrollment, test scores, high school graduation rates, rates of college entry, and earnings into young adulthood.^[18] EITCs and child tax credits also may play a particularly important role in helping children of color do better in school and access postsecondary education. Families of color, particularly Black and Latino households, were more likely to use the Rescue Plan’s expanded Child Tax Credit payments for their children’s long-term educational outcomes, such as saving for college and covering K-12 tutoring costs.^[19]

Evidence also suggests that additional income from tax credits can support families in meeting the full range of their children’s needs in the short and long term. Studies have found that more generous state EITCs are associated with improved birth outcomes, and states with EITCs that provide the full credit filers are eligible for regardless of tax owed had improved women’s health and healthier birth weights.^[20] Even temporary aid to families with low incomes can reduce short-term stresses (which can have long-term consequences), such as hardship events like eviction, food insecurity, or loss of transportation.^[21] During the initial monthly payments of the temporarily expanded federal Child Tax Credit in 2021, the number of adults living with children and reporting that their household didn’t have enough to eat fell significantly.^[22] Individuals with higher incomes can also more easily afford healthy recreational activities, quality housing, and other opportunities that contribute to their overall well-being.

Boost local economies. Child tax credits and EITCs help families who earn low wages keep up basic spending. This has been particularly important given increases in energy and food prices in the last two years arising from supply chain issues and the war in Ukraine, leading to many families experiencing hardship and causing some local businesses to struggle. Families typically spend their EITCs partially on bigger purchases such as a car repair or a security deposit on an apartment, and partially on routine bills and expenses.^[23] The most common way people used the monthly payments of the temporarily expanded federal Child Tax Credit was for food, utilities, clothing, rent or mortgage, and education-related costs such as school supplies, books, tuition, afterschool programs, and transportation to school.^[24] When families can keep up basic spending, this in turn helps their local and state economies.

Contrary to some predictions, there is no evidence that the expanded federal Child Tax Credit meaningfully reduced parents’ employment. Most parents received the monthly Child Tax Credit payments starting in July 2021, after which there was no obvious sign of a relative decline in parents’ employment. And rises in employment were similar for the share of adults in families with and without children under 18, both at full time for whole year and among those working the equivalent of at least half the year (1,000 hours), according to Census data.^[25] Furthermore, two recent studies examining the issue found that the expanded credit did not meaningfully reduce parents’ employment,^[26] in keeping with a number of other analyses that found no meaningful impact on employment.^[27] Over 95 percent of families who are currently left out of the full federal Child Tax Credit because their earnings are too low have a parent or caretaker that is working; is between jobs, elderly, ill, or has a disability; or has a child under age 2.^[28]

State child tax credits and EITCs also play a role in bolstering family economic security so that more people can create innovative products and services, benefiting individuals and state economies in the long term.^[29] Economic insecurity is linked to a range of bad outcomes for children, such as higher stress levels and lower educational achievement, and weakens young people’s likelihood of realizing their economic potential as adults. Working to raise household income and make sure families can access the supports they need is a straightforward way for policymakers to foster more long-term innovation and to improve children’s outcomes and their likelihood of future success.

States Can Build Stronger Futures by Enacting and Strengthening Child Tax Credits and EITCs

Several design aspects of the federal Child Tax Credit and EITC constrain its potential to boost income and help struggling families make ends meet. These aspects in turn limit state credits that are based on these federal credits in whole or in part. A family who earns less than $2,500 receives no federal Child Tax Credit, and a single parent with two children who earns between $2,500 and roughly $30,000 receives only a partial credit. The child credit is only partially refundable, which means that the lowest-income families may not receive the credit’s full value. For people without children in the home, the federal EITC has age restrictions, is small, and phases out at too low of an income level. Both federal credits restrict eligibility for people or children who have ITINs, with the Child Tax Credit excluding children who have ITINs and the EITC excluding individuals and families if any member has an ITIN.

The Rescue Plan temporarily addressed some of these challenges by making the maximum value of the Child Tax Credit available to children in families with low or no earnings, raising the maximum credit and boosting it for children under age 6, and extending the credit to 17-year-olds. It also temporarily expanded the age range of workers eligible for the EITC without children to include younger adults aged 19-24 (excluding students under 24 who are attending school at least part time), as well as people aged 65 and over, and raised the income limit for such workers to qualify. Both expansions were for 2021 only. Congress should take action to expand the federal Child Tax Credit, and the EITC for adults not raising children, and states should continue to improve state credits for workers without children in the home in the meantime.

States can lessen these constraints in their own versions of the credits and take steps to improve the equity of their tax systems by:

• Enacting new, refundable credits. Eleven states have enacted a state child tax credit, and 31 states plus D.C. and Puerto Rico have created a state EITC. Given both credits’ benefits for families, communities, and states, and the need to continue supporting families through this phase of the pandemic recovery, now is an ideal time to act for states that haven’t yet enacted either credit. (See Appendix Table 3 and 4 for estimating the cost of creating a new credit.)
• Making credits refundable (if they are not already). Eight states offer refundable child tax credits, and 26 states, D.C., and Puerto Rico follow the federal practice of offering an EITC that is refundable to families with low earnings in a given year. Without this feature, state child tax credits and EITCs fail to offset the other substantial state and local taxes that families pay, such as sales and property taxes.
• Ending exclusions for individuals using ITINs. States should make their credits more inclusive for people regardless of their immigration status, as six states have already done for their child tax credits and nine have done for their EITCs. That would help expand economic opportunity for all their residents and support essential workers earning low pay who are immigrants. Federal policymakers excluded millions of immigrants from many of the emergency pandemic supports they enacted in 2020 and 2021. Looking at the EITC specifically, many of those same people are ineligible because they lack Social Security numbers and file taxes with an ITIN. If more states with EITCs enacted this change, it would help at least 1.1 million households. (See Table 1.)

In addition, the following principles should guide states as they design their own child tax credits:

• Provide a flat amount per child with a phase-out at higher incomes. This structure is simple to calculate and understandable for families. The full credit should be available to families whether or not they have earned income, with a phase-out beginning at higher levels of income, when families are on more stable footing. The Rescue Plan’s temporary expansion began to phase out the credit at incomes ranging from $75,000 to $150,000 depending on filing status.
• Adjust the credit for inflation so that it maintains its value over time. Especially given the rapid price increases in the past year-plus, this provision ensures that the credit would be available to help families with any increases in the cost of food, fuel, and other necessities. (The federal EITC upon which most state EITCs are based is already adjusted for inflation each year, although as noted the 2017 tax law changed the inflation measure to one that erodes the credit’s value over time.^[30])

• Provide a credit for all children aged 0 to 17, with an extra boost for children aged 5 and under. There are compelling reasons both to offer a credit that is available to all children aged 0 to 17 and to boost the credit for families with young children. The Rescue Plan took this approach in 2021, offering a credit worth $3,600 for children 5 and under and $3,000 for all other children through age 17.

  Families with very young children tend to have lower incomes and experience higher poverty rates than households without children, due to the difficulty of balancing caregiving needs and the need to earn income.^[31] In addition, research has found links between poor nutrition and severe stress in early childhood and worse health outcomes later in life. An increased child tax credit for families with young children can boost family incomes when families most need the support, and support children’s health and development in their earliest years.

  And providing a child tax credit for all children up to age 18 recognizes that expenses increase as children age, with the highest expenses for families falling in teenage years.^[32]Furthermore, additional income such as what the child tax credit and EITC provide has been linked to better educational outcomes while children are in school and may improve higher education access and outcomes.^[33]

   

Furthermore, states should expand EITCs for working adults without children in the home and eliminate age restrictions for these individuals. The federal EITC has limited reach and benefits for people paid low wages who don’t have children in the home, even though they are integral members of their communities and local economies, and many are non-custodial parents or likely future parents. The Rescue Plan increased the federal EITC for low-paid working adults who are not raising children at home from about $540 to $1,500, increased the income limit for these individuals to qualify, and expanded the age range to include younger adults aged 19-24 (excluding students under 24 who are attending school at least part time), as well as people aged 65 and over. An estimated 17.4 million low-paid adults without children across the country benefited from the expanded credit, including roughly 9.7 million white, 3.6 million Latino, 2.7 million Black, and 816,000 Asian workers.^[34]

States need not wait for an expansion of the federal credit for working adults without children in the home. Colorado, D.C., Maine, Maryland, Minnesota, and New Mexico have all reduced age restrictions; California and Illinois and New Jersey have eliminated them for workers 18 and older; Puerto Rico has for workers aged 19 and older; and California, D.C., Maryland, and Maine have increased the credit amount for working adults without children in the home.

A provision of the Rescue Plan that limits states’ ability to cut taxes while spending federal pandemic aid through 2026 should not limit states’ ability to enact and improve their state credits. The rule allows states to reduce revenues by less than 1 percent of their 2019 budget, adjusted for inflation; most proposed credit expansions would be less.^[35] 

Appendix