Some States Are Fighting Rising Child Poverty With Tax Credits

One of the highlights of the American Rescue Plan Act was the federal Child Tax Credit, or CTC, that lifted 3 million children out of poverty. It led to a historic low in the child poverty rate in the second half of 2021, with parents saying that they used the credit payments on rent, child care, utilities, food and school expenses. The credits were effective because they reached the people they needed to target — more than two-thirds of very-low-income families received monthly CTC payments, according to a survey by University of Michigan researchers.

But Congress allowed the credit to expire at the end of 2021, and the child poverty rate more than doubled in 2022, completely reversing any progress, according to recent U.S. Census Bureau data. Black and Hispanic child poverty, which had dipped below 10% in 2021 for the first time in U.S. history, rose to 17.8% and 19.5% in 2022, respectively.
 

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These dramatic increases were “the direct result of the policy choice to allow pandemic-era relief programs like the Child Tax Credit to expire,” said Economic Policy Institute researchers Kyle K. Moore and Adewale A. Maye in a recent report.

A number of states have now moved to fill the gap with their own programs. New Mexico is among the worst states for child poverty. Nearly a quarter of the children are poor due to economic inequality, high rates of working poor and a lack of funding for early childhood education and higher education, say anti-poverty advocates in the state. The federal credit helped lift about 38,000 children out of poverty in the state in 2021, and the powerful effect of that benefit — and its abrupt expiration — inspired the state to join others in enacting a new state child tax credit in March 2022.

The state Legislature expanded the credit in the spring. In April, New Mexico Gov. Michelle Lujan Grisham signed a bill that increased the value of the state’s CTC to up to $600 a month per eligible child, a credit amount that will be adjusted annually for inflation.

Families have not yet received the benefit, which kicks in next year. But based on the powerful effect of the federal CTC two years ago, many families in the state are eagerly awaiting the state credit.

“It was so positive for families in New Mexico,” said Amber Wallin, executive director of New Mexico Voices for Children. “It helped them pay bills, buy groceries and face the economic challenges of the pandemic. Seeing how much of a difference it made, state lawmakers shifted into gear and passed the credit.”

She believes the credit will help alleviate the stubborn poverty in the state, noting that 67% of the jobs in New Mexico pay less than $12 an hour and that 18% of children live in families that lack a high-school diploma. It will also help make up for some of the social service cuts in recent years: Since 2010, the state cut K-12 education and higher education spending by 30% and slashed enrollment in child care systems by 27%, Wallin said. All of those factors put enormous economic pressure on families, who often feel powerless to improve their circumstances, she said.

New Mexico joins five other states in creating new child tax credits. New Jersey and Vermont did so in 2022, and Minnesota, Oregon and Utah did this year. Five more states expanded their existing credits. Altogether, 14 states offer child tax credits.

The surge in activity doesn’t surprise social science researchers, who have found that child tax credits are associated with reduced poverty, higher financial and household stability, improved child and maternal health, and better education achievement, according to the Institute on Taxation and Economic Policy.

“When you have more resources when you’re young, your future will be so much brighter,” said Aidan Davis, the state policy director at ITEP. The credits “allow families to build financial stability and live their lives with dignity. Less stress generally leads to better future outcomes, and financial breathing room can go a long way to creating a healthy environment for kids.”

The states’ credits vary in their amount and refundability, from New Mexico’s fairly modest credit of up to $600 per child and Oregon’s credit of $1,000 per child to Minnesota’s credit of $1,750 per child. Those credits are refundable, meaning that families can receive a refund even if they don’t owe taxes.

“In Minnesota, their framing around creating and designing the CTC was to ensure that they were getting the steepest child poverty reduction possible — up to one-third reduction when it goes into effect,” Davis said. 

Poverty advocates in Minnesota are encouraged that the process was set up to get families all the money at once during tax season and may include advance payments. “Just having this extra little bit helps people make ends meet,” said Kasey Wiederich, financial capability manager in the city of St. Paul’s Office of Financial Empowerment. The office helps city residents build equitable economic stability. “People are able to pay their bills, save a little bit of it for next month and pay for those necessities. I think having that additional amount of money can make a huge difference for families.”

Other states, such as Utah, have nonrefundable tax credits, which make them less accessible to families in poverty since they cannot be used by families that have little state income tax liability but who may pay a lot in sales and property taxes. 

To maximize the effect of such CTCs, they should be fully refundable, not include an earnings requirement, be indexed to inflation and offer the option of advanced payments, Davis said. And to repeat the historic halving of child poverty, the majority of states would require a monthly base credit value of between $3,000 and $4,500 per child, including a 20% percent increase for young children, ITEP said.

Some poverty advocates prefer a more ambitious approach. “I’m glad to see New Mexico dipping its toes in on this level, but it’s not sufficient,” argued Jennifer Ramo, executive director and founder of the poverty advocacy lab New Mexico Appleseed. “What New Mexico families need is money and mental health support. These tax credits are helpful but what people need is income.” She advocates cash transfer initiatives  such as ones in the New Mexico towns of Cuba and West Las Vegas, in which her group paid homeless students $500 a month to go to school. The initiatives were  effective, she said.

Conservatives have expressed concern that child tax credits prompt recipients to work less or even give up working, citing University of Chicago research estimating that making the expanded federal child tax credit permanent would result in more than 1.3 million workers exiting the workforce. But when reseachers at the National Bureau of Economic Research analyzed 2021 census data for a working paper, it found that the pandemic-related CTCs did not have that effect: “We find no evidence that the monthly CTC benefits led to a reduction in employment or labor force participation in the six months during which the benefits were distributed.”   

The spike in child poverty across the country prompted some congressional Democrats to call for a return of the expanded tax credit. Among them was  U.S. Sen. Michael Bennet of Colorado, who called the credit a “wise investment” for the country.

“The benefits to America are extraordinary,” Bennet said in a news conference this month. “The idea that the richest country in the world wouldn’t want to end childhood poverty for its own sake defies my imagination.”

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