TAX CREDITS
The tax system is a critical part of the safety net. More than one-third of all public supports for families in the United States are delivered through tax provisions. Some of the largest federal family tax credits, such as the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and Child and Dependent Care Tax Credit (CDCTC), support families by supplementing low earnings, assisting with the cost of raising children, or covering child and family care needs. These credits help offset a family’s federal tax liability and have refundable components through which a portion of each credit can be available as a cash refund, depending on family income. An increasing number of states and localities offer complementary, smaller versions of these work and care credits. Our research explores the anti-poverty effects of family tax policy at the federal and state level, as well as in New York City.
Tax credits can also impact poverty and improve family economic security and mobility through a range of broader mechanisms. Housing tax credits can help reduce the rent burden and improve secure and affordable accommodation for families. Education tax credits can lessen the costs of higher education and expand access. Negative income tax credits can establish an income floor to support vulnerable families and new tax credits for low-income workers can increase earnings in low-wage households. And policy proposals such as carbon tax can be structured in ways to reduce poverty—for example, if paired with a universal dividend (or cash benefit to all citizens) to offset any change in energy costs for families who would be least able to afford it. We examine policy design and potential anti-poverty effects of tax policy proposals across these areas as they continue to emerge.
Earned Income Tax Credit (EITC)
Created in 1975, and expanded a number of times since, the Earned Income Tax Credit (EITC) is now one of the largest federal anti-poverty programs. In 2018, it reached over 26 million households. The EITC is a refundable tax credit targeted for low-wage workers to supplement their earnings. The value of the credit is adjusted for income, marital status, and number of qualifying children. The credit is delivered to households once a year, in a lump-sum payment, at tax-time. EITC receipt does not affect eligibility for other means-tested safety net programs. Amidst the COVID-19 pandemic, temporary changes have increased the credit value and expanded access for low-income adult workers without children.
Child Tax Credit (CTC)
Created in 1997, and expanded a number of times since, the Child Tax Credit (CTC) is one of the largest federal investments in children. The CTC is specifically targeted for families with children and historically, the credit value was adjusted for income, marital status, and number of qualifying children. It was paid out annually, at tax-time, and was only partially refundable (after offsetting any federal tax liability, some families were able to receive a portion of the remaining credit as a cash refund). Amidst the COVID-19 pandemic, temporary changes have increased CTC benefit levels, made the full benefit available to children in the lowest income families, and introduced monthly installments of the payment.
Child and Dependent Care Tax Credit (CDCTC)
Created in 1976, and expanded a number of times since, the Child and Dependent Care Tax Credit (CDCTC) is a federal tax credit that helps offset some of the cost of child care and other family care needs. The value of the credit is dependent upon family income, the amount of qualifying expenses, and number of qualifying dependents. It has long been a non-refundable credit, used only to offset a family’s tax liability. This policy design limited access to the full benefit for low and moderate income families. Amidst the COVID-19 pandemic, temporary changes have increased the credit value and made the full credit amount available to families on the lowest incomes.
Tax Credits for Housing, Income, Energy, and More
In addition to the existing set of family tax credits, recent proposals have called for new worker and family income supplements. The tax system has also been identified as a potential vehicle for creating an income floor (through a negative income tax credit or dividend to provide a form of universal basic income) to support vulnerable families. And tax credits can also be used to support households with a range of other necessary expenses, from education, to rent, energy assistance, and more. We examine policy design and potential anti-poverty effects of tax policy proposals across these areas as they continue to emerge.
