For six months last year, the United States had a child benefit program that provided families hundreds of dollars each month for every child that they were taking care of. Unlike the child benefit regime that preceded it, last year’s program did not exclude low-income families from eligibility. This made the program fairer and more effective at reducing child poverty.
The effort to extend the program beyond last year recently failed to pass Congress, causing many to conclude that a poor-inclusive child benefit regime has no chance of being enacted in the foreseeable future. But this conclusion is not quite correct.
It would be easy and cheap for state governments to fill in the gaps left by the current federal child benefit system so as to effectively extend the benefits to the poor. Indeed, in many states, the government could accomplish this by merely tweaking their state-level Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) programs.
In this brief paper, I first describe the current federal child benefit system, then explain how states can strategically supplement it so as to include the poor, and lastly provide a list of states where such reforms are the most likely to occur.
The federal government has two main cash benefit programs for children.
The first is the Earned Income Tax Credit (EITC), which provides an annual lump sum payment to families with children based on their earnings, marital status, and number of children. The below graphs illustrate the parameters of the EITC for the 2022 tax year.
The second program is the Child Tax Credit (CTC), which, like the EITC, provides an annual lump sum payment based on families’ earnings, marital status, and number of children. The below graph illustrates the parameters of the CTC for the 2022 tax year.
When combined, these benefits provide a maximum of $5,306 for a single parent with one child. But this maximum benefit is not available to individuals earning less than $20,130 in 2022 and the very poorest children are eligible for no benefits at all. The below graph illustrates the phase-in structure of the child benefit regime and the way that this structure deprives low-income families.
States can and do create their own tax credit programs. Twenty-nine states currently have these kinds of programs. In 2023, the number will grow to 32 states.
But right now almost all of these state tax credits double-down on the phase-in design of the federal tax credits.
For example, in New York State, families with children are eligible for a state EITC benefit equal to 30 percent of the federal EITC and a state CTC benefit equal to the greater of 33 percent of the federal CTC or $100 per kid.
The below graph shows what these benefits look like when stacked on top of the federal benefits.
New Yorkers that reside in New York City are also eligible to receive a city-level EITC benefit equal to 5 percent of the federal EITC.
The below graph shows what this program looks like when stacked on top of the federal and state programs.
States and municipalities should not design their tax credits to mirror the phase-in structure of the federal tax credits. Phasing in the benefits in this way causes severe child poverty without increasing employment at all.
States should instead design their tax credits so as to counteract the exclusion of poor children in the federal EITC and CTC.
For example, New York State should scrap its current CTC and EITC and replace it with a new NYS CTC that fills in the gap left by the federal programs. The below graph illustrates what this would look like if the new NYS CTC was designed so as to ensure that all low-income parents were eligible for the maximum amount available under the Federal EITC and CTC.
By filling in, rather than mirroring, the gaps in the federal program, the new NYS CTC would effectively recreate the structure of the federal child benefit regime that operated in 2021. The new NYS CTC is also likely to be less expensive than the current NYS EITC and CTC. Any net savings from this change should be plowed into providing additional NYS CTC benefits to all families with children, not just those that fall into the federal gap.
Here, I have used New York as an example, but the analysis is applicable to virtually all 29 (soon to be 32) states that have tax credit programs. Each one of those states could reform their state-level EITC and CTC programs to strategically supplement the federal regime so as to effectively make it fully inclusive of the poor.
There are currently 15 states (including DC) where the Democrats control every legislative chamber and the executive. Of those states, 13 currently have a state EITC and 1 will have a state EITC beginning in 2023.
In the below table, I have sorted these 15 states according to the Democratic share of seats in the least Democratic legislative chamber.
|State||Democratic Share of Decisive Legislative Chamber||Governor||State EITC?|
|3||Dist. of Columbia||85%||Democrat||Yes|
If Democrats are seriously committed to the idea of a child benefit regime that includes the poor, then these 15 states should be willing to make the reforms discussed above.
The failure to extend the 2021 federal Child Tax Credit was a significant setback for the country, but not an insurmountable obstacle to creating a child benefit regime that includes poor children. Minor and inexpensive tweaks to state tax credit programs could effectively extend the federal child benefit regime to poor families. This kind of state-level policymaking is where child benefit advocates should focus their attention over the next few years.