When low-income families get tax refunds, that additional money can make dramatic differences in their well-being, economist Diane Whitmore Schanzenbach told a session at the NCSL Legislative Summit.
Schanzenbach, who directs Northwestern University’s Institute for Policy Research, says the refunds provided through the expanded child tax credit issued as part of the American Rescue Plan reduced child poverty by 40%.
(The EITC) has become one of the nation’s most effective tools for lifting low-income workers and their families above the poverty line. —Diane Whitmore Schanzenbach, Institute for Policy Research
And she says research shows that reducing poverty has extensive long-term benefits.
Those benefits include improved educational outcomes, including fewer school absences, higher standardized test scores and higher rates of high school graduation and college attendance; improved health across the lifespan; higher rates of employment and pay; and reduced crime.
The expanded federal child tax credit provided monthly payments of up to $300 for each child under age 5 and up to $250 for older kids under 18. Congress did not renew it at those levels when it expired Dec. 31, 2021. But Schanzenbach, who tracked food-hardship rates during the pandemic, says the payments cut by two-thirds the number of children whose families reported not having enough food, to 8% from 24%.
What’s more, she says, NCSL research shows that every $1 of tax credit generates $1.50 to $2 in local spending, as families tend to pay for immediate needs.
The federal earned income tax credit, or EITC, was established in 1975, and most states have some version of it to offer a percentage of the federal credit on state taxes, too. Brookings Institution economists have noted that, while it wasn’t billed as an antipoverty program, the tax credit “has become one of the nation’s most effective tools for lifting low-income workers and their families above the poverty line.”
The federal government enacted the child tax credit in 1997 to give more help to parents; it has also been shown to have significant benefits for families in conjunction with the EITC. Thirty-three states, the District of Columbia, Guam, Puerto Rico and some municipalities have EITC programs and 12 states have child tax credit programs, according to NCSL research.
Schanzenbach says that some versions of these credits simply offset what a low-income taxpayer might owe; if they make too little income to owe taxes, they get no benefit. But she said a refundable credit, like the one at the federal level, delivers the greatest economic benefit because it puts cash in hands that spend it in the community.
Oklahoma Offers Refundable Credit
Oklahoma offered EITC recipients a refundable credit equal to 5% of the amount they were eligible for through the federal credit, says Anthony Sammons, director of the fiscal staff in the state Senate.
“Working families are more likely to spend (the tax credits) in their local economy and at small businesses, more on food, transportation, apparel and services, even entertainment with their kids,” Sammons says.
When the Legislature suspended the refund aspect of its EITC in 2016 to address major budget shortfalls, it had a clear impact on low-income families, Sammons says.
“We saw a lot of people having to use more services when the tax credit was nonrefundable,” he says. Lawmakers offered bills every year to make the EITC refundable again, but it didn’t pass until 2021. According to the Oklahoma Policy Center, making the EITC refundable could benefit 200,000 families.
Colorado Taps Nonprofits
The nonprofit Colorado Fiscal Institute worked with state lawmakers in 2021 to expand both the state EITC and the child tax credit, says the organization’s deputy director, Esther Turcios.
The Legislature increased the EITC to 25% of the federal credit and made it available to anyone over 18; and, while the state had established a child tax credit in 2013, it hadn’t funded it until the reforms last year. Now the lowest earners can get a refund up to 30% of the rate they receive through the federal child tax credit.
Turcios says her organization worked with groups such as the Clayton Early Learning Center, which runs a preschool and numerous community programs, and the Colorado People’s Alliance, a member-led group that works for racial justice. She says it was important to ensure lawmakers heard from people who would most benefit from the tax credits.
The Colorado Fiscal Institute also created profiles of every legislator’s district with data on how many people receive the credit and its economic impact. The institute also helped identify ways to fund the expanded EITC and the child tax credit by finding loopholes determined to be wasteful, that don’t help the economy, create jobs or make Colorado competitive with other states.
“Everybody recognizes how important the credits are,” Turcios says. “It’s just that funding can be a sticking point.”
Both Turcios and Sammons say they need to spend more on outreach so every eligible taxpayer knows about the credits. Says Sammons: “These credits are only as powerful as families using them.”
Kelley Griffin is a writer and editor at NCSL.