As child poverty doubles, states launch or expand their own tax credits

The pandemic-era enhanced federal credit that lifted millions out of poverty expired in 2021

By: - September 23, 2023 11:11 am
Brianne Walker plays with her 3-year-old daughter, Jeannette, at A Place To Grow day care in Brentwood, N.H., in July 2021

Brianne Walker plays with her 3-year-old daughter, Jeannette, at A Place To Grow day care in Brentwood, N.H., in July 2021. Walker and her family qualified for the expanded child tax credit that was part of a pandemic relief package. (Elise Amendola/The Associated Press)

The federal pandemic-era child tax credit expansion lifted millions of children out of poverty in the second half of 2021. But Congress allowed it to expire at the end of that year, and new U.S. census data shows the child poverty rate more than doubled in 2022, erasing the record gains that were made.

“It wasn’t surprising because we knew this was coming,” said Megan Curran, policy director at Columbia University’s Center on Poverty and Social Policy. “But still, when you see the magnitude of the change, and you know how many kids that represents, it’s still shocking.”

Now states are stepping in. Since the federal enhancement ended, several states have launched or expanded their own child tax credits.

Six states have created new child tax credits (New Jersey, New Mexico and Vermont in 2022, and Minnesota, Oregon and Utah this year), while five more have expanded their existing credits, according to the Institute on Taxation and Economic Policy, a nonpartisan tax policy nonprofit. Currently 14 states offer child tax credits, and several others saw bills introduced this year.

“Child poverty has often been thought of as this status quo that can’t change,” said Curran. “But one of the most powerful lessons to take out of the horrible pandemic is that our policy decisions really matter, and we can make a huge difference in a short amount of time.

“We know what works and we know how to do it. This is a solvable problem.”

 

A new approach

In 2021, the American Rescue Plan Act temporarily expanded the federal child tax credit, increasing the maximum credit to $3,000 per child ages 6-17 and $3,600 per child under age 6. It was a significant bump from the previous $2,000-per-child credit.

The temporary expansion gave the credit in monthly cash payouts to about 6 in 10 U.S. households with children, rather than as one lump sum after taxes. And it made the full credit available to all low- and middle-income families making less than $150,000 for married couples ($112,500 for single parents). The previous credit excluded income earners at the lowest end of the spectrum.

After the payments began, the nation’s child poverty rate dropped by half in 2021 to a historic low of 5%, primarily thanks to the expanded child tax credit, according to researchers at the Annie E. Casey Foundation, a charitable organization focused on child well-being. The expansion helped lift 3 million children out of poverty, according to the U.S. Census Bureau, which found that most parents said they used the credit payments on child care, rent, utilities, food and school expenses.

“You saw this whole host of data coming from all sorts of places, showing these payments were having a positive and immediate effect on families’ basic needs, and how they were able to care for their children,” Curran said. “You were seeing particularly significant gains for families with lower incomes.”

While the federal tax credit expansion did lift children out of poverty in the short term, some analysts argue it could have had negative long-term effects if made permanent.

“What we worry about, with good reason given the evidence, is that a lot of families will receive that extra money and it will cause them to work less or to not work at all,” said Scott Winship, senior fellow and director at the Center on Opportunity and Social Mobility at the American Enterprise Institute, a center-right public policy think tank. Winship said a permanent expanded child tax credit also might discourage marriage and result in more families headed by single parents.

Two pieces of 2021 research from economists at the University of Chicago concluded that if the expanded child tax credit were made permanent, between 1.3 million and 1.5 million workers would exit the labor force. A 2021 analysis of census data from Columbia University researchers found that the temporary expanded benefits during the pandemic didn’t discourage parents from working, but Winship said the results might have been different if people thought the expanded credit was going to be permanent.

“It takes time for a lot of these behavioral changes to develop,” he said. “I don’t think 2021 is a very good test of what would happen in the long run.”

Winship added that he doesn’t think state-level child tax credits are a good idea, but that he’d rather see states experiment with different approaches to reducing child poverty than the federal government.

 

Who’s left out?

Now that eligibility for the federal credit has reverted to its pre-pandemic rules, low-income families are no longer receiving the full tax credit afforded to middle-income families.

For example, a married couple with two children must earn at least $35,900 per year to qualify for the maximum $2,000 child tax credit; a single parent with two children would have to earn $29,400 to qualify, according to the Center on Poverty and Social Policy. That means children whose parents get paid at or near the federal minimum wage of $7.25 an hour don’t qualify for the maximum credit.

About a quarter of children nationwide do not qualify for the maximum $2,000 credit because of their parents’ income. That includes a third of rural children; half of kids with a single parent; 40% of Black and Hispanic kids; and 90% of kids in households below the federal poverty level, which is about $30,000 per year for a family of four.

“We have programs for folks who struggle financially, but nothing replaces having your own funds to solve your own problems,” said Mercedes Elizalde, director of advocacy at Latino Network, a Latino-led advocacy organization based in Portland, Oregon.

Her organization advocated for Oregon’s new child tax credit, which gives an annual benefit of up to $1,000 per child up to age 5 for families who earn up to $30,000 per year. She said the Latino communities her organization supports tend to have a high proportion of families with young children.

“Having a tax credit that is specific to lower-income families and specifically helps families with multiple children is really beneficial when we know a two-kiddo household in our community is still pretty common,” Elizalde said.

She said she expects to see families use the funds for basic needs like food, clothes for school and utility bills.

“This is a way of buying shoes when their kiddos outgrow them or being able to cover a copay for a doctor’s visit,” she said. “It’s those little bits of money that are hard to plan for because you’re not always sure when you’re going to need them.”

 

Helping low-income families

Several states creating or expanding child tax credits have specifically targeted low-income families that fall through the gap in federal eligibility requirements.

“It’s a proven intervention,” said Minnesota Democratic state Rep. Aisha Gomez, who chairs the House Taxes Committee. Her committee put forward the child tax credit bill that became law earlier this year. “Poor people aren’t poor because they don’t work hard. Giving a little bit of extra money to folks who are experiencing poverty and aren’t being taken care of in our economy works, so we were happy to pick up where the feds unfortunately left off.”

Minnesota now offers a tax credit of $1,750 per child under 18 for single parents with incomes below $29,500 per year and married parents making below $35,000. The credit was passed as part of an omnibus tax bill that received no Republican support, but Gomez said she’d like to think if the tax credit had been a stand-alone bill that it would have received some GOP votes.

“Child poverty is one of those issues where I think there’s pretty widespread agreement that we have a role as the government to intervene when our system is failing families so acutely,” she said.

“What we’ve noticed is not only is there a huge explosion of interest [from states] in creating child tax credits in the last two years,” said the Center on Poverty and Social Policy’s Curran, “but there’s been interest in trying to craft them in a way that fixes some of the gaps the federal credit has historically had.”

Curran said her organization has been contacted by lawmakers in several states who said they were interested in child tax credits because they saw the significant poverty reduction that came from the federal expansion: “That really caught peoples’ attention.”

In nearly every state, a combination of the existing federal tax credit and a state credit up to $2,000 would slash child poverty rates by at least a quarter, according to an analysis from the Institute on Taxation and Economic Policy.

Elizalde said Latino Network will focus its efforts now on making sure people know about the new tax credit so they can take full advantage.

“This is going to be very impactful,” Elizalde said. “In a couple of years, we hope we can go back to the legislature and say, ‘Let’s increase that income cap and help more families.’ ”

This story was produced by Stateline, a States Newsroom affiliate.

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Anna Claire Vollers
Anna Claire Vollers

Anna Claire Vollers covers health care for Stateline. She is based in Huntsville, Alabama.

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