In 2021, the American Rescue Plan (ARP) briefly however considerably expanded the federal youngster tax credit score (CTC), and youngster poverty fell from 9.7 p.c to five.2 p.c. Since then, state policymakers throughout the nation have labored on setting up a CTC for their very own states.
The truth is, 12 of the 15 present state CTCs had been both enacted or expanded after the ARP was handed.
Nonetheless, the construction and dimension of those credit varies considerably. State credit score quantities vary from $100 to $1,750 per eligible youngster, and a few credit are broadly obtainable to most households whereas others are extra narrowly focused at households with low earnings or younger kids.
To assist state decisionmakers perceive the coverage selections concerned in designing a brand new or expanded credit score, we used the Tax Coverage Middle state tax mannequin to investigate 36 variations of a hypothetical youngster tax credit score in 4 states that at present don’t present one: Illinois, Michigan, Nebraska, and Virginia.
Listed here are three classes from our new report on state child tax credits:
1. A state’s present tax insurance policies can have an effect on who advantages from a CTC
A nonrefundable credit score can solely profit households with taxable earnings, and tax system options that cut back taxable earnings, resembling a normal deduction, fluctuate considerably throughout states.
For instance, Nebraska presents a beneficiant customary deduction, and meaning many low-income Nebraska households pay little or no state tax. Nonetheless, it additionally means a big share of low-income Nebraska households wouldn’t profit from a nonrefundable CTC.
In distinction, if a refundable credit score exceeds a family’s state earnings tax legal responsibility, the family receives the surplus quantity as a refund cost from the state. Thus, refundable CTC proposals we analyzed tended to ship a bigger share of their complete tax advantages to households with lower than $30,000 in adjusted gross earnings (AGI) in comparison with nonrefundable credit score proposals.
2. Age restrictions can assist ship massive, broad advantages, however to a smaller share of households
Each technique for limiting the income value of a state CTC comes with a tradeoff. Nonrefundable credit typically don’t profit households with the bottom incomes, tight earnings phase-outs limit the profit to solely low-income households, and small credit score quantities present comparatively small advantages to eligible households.
Limiting the CTC to households with younger kids reduces the general share of households benefiting from the credit score, however it permits the state to offer a comparatively massive tax reduce to households with a variety of incomes for a diminished annual income value. Michigan’s outcomes, age-restricted CTCs usually offered a bigger common annual tax reduce than CTCs obtainable to all kids youthful than age 17 at related annual income prices.
3. Most youngster tax credit present a big share of their complete tax profit to middle-income households
Center-income households usually see a comparatively massive share of a CTC’s complete tax profit as a result of the scale of the tax reduce is determined by the variety of eligible kids within the family and never the family’s earnings stage (because it does with a person earnings tax price reduce).
Additional, whereas some coverage levers stop low-income households from benefiting (nonrefundable credit) and a few stop high-income households from benefiting (earnings phase-outs), a big share of middle-income households usually profit from a state CTC until the earnings phase-out is about at a really low stage.
Taken collectively, Tax Policy Center state tax model estimates for varied credit in Illinois, Michigan, Nebraska, and Virginia present how policymakers can choose and select quite a few variations of a state CTC to seek out the proper model of the credit score for his or her state.
Particularly, they’ll resolve the quantity of the credit score, age eligibility guidelines for youngsters, earnings limitations for the filer, and whether or not or not the credit score is refundable. In brief, making these insurance policies extra beneficiant will increase advantages to eligible households or broadens the assist throughout extra households, however at a better annual income value.
Policymakers ought to concentrate on these tradeoffs and select in accordance with their very own particular fiscal circumstances and coverage priorities.