Looking at the Year Ahead: EITCs and CTCs

by Abby Ling

January 27 marked National Earned Income Tax Credit (EITC) Awareness Day, an annual event during which elected officials, advocates, and taxpayers share information about and voice their support for the Earned Income Tax Credit (EITC). This year, another tax policy joined the stage with the EITC:  the Child Tax Credit (CTC).

The momentum building around both federal and state EITCs and CTCs is evidence of how they are two of the most effective anti-poverty tools that policymakers can leverage today. Most promisingly, they enjoy bipartisan support, which was evident from their success in state legislatures across the political spectrum in 2022. Research conducted during and after the 2021 expansion of the federal CTC indicated that the enhanced tax credit reduced food insecurity, reduced child poverty, and increased work and entrepreneurship among parents. This year, supporters are working to bring the expanded CTC back, but policymakers have yet to find common ground—leaving this essential anti-poverty tool in limbo on the federal level.

The Federal Fights for Tax Credits

The 2021 American Rescue Plan (ARP) expanded the federal CTC to remove limitations and expand its reach to families disproportionately affected by poverty. Prior to the stimulus bill, families were unable to receive the full credit if they earned less than the eligible income level. The monthly checks supported families struggling to meet basic household expenses, such as groceries, childcare, and rent. Unfortunately, in a step backward, the monthly CTC expired at the end of December 2021—resulting in 3.7 million more children falling into poverty.

At the end of 2022, advocacy groups and supporters of the federal CTC eagerly waited for the Congressional omnibus spending package. Critically, corporate tax breaks and the re-expansion of the federal CTC were up for discussion. For months leading up to the end-of-year legislative decision, nonprofits, tax credit advocacy organizations, economic policy analysts, and others implored Congress to prioritize children over companies, particularly as corporate lobbyists fought to extend a 2017 tax law that gave companies massive tax deductions at the expense of everyday Americans. However, in a more promising turn of events, even though the federal CTC wasn’t expanded at the time, corporate tax breaks also failed to advance. With 2022 now in the rear-view mirror, tax credit advocates are taking lessons learned and looking to capitalize on upcoming legislative opportunities.

Momentum for Tax Credits Builds at State Level

The success of the federal EITC and CTC during the pandemic showcased the benefit of additional financial support to households living in poverty. It allowed families to work, to provide, and to thrive. But with the fate of another federal tax credit expansion uncertain, states have taken it upon themselves to advance their own tax credits. In 2022, 10 states enacted or expanded their CTCs, and 7 states and Washington, D.C. enacted or expanded their EITCs. However, state tax credits weren’t and aren’t meant to replace federal tax credits; instead, they are critical to supporting and supplementing them.

And while 2023 looks promising given an increase in the number of opportunities to progress tax policies that support more low- and middle-income families, proposed state EITCs and CTCs will face several rounds of scrutiny before any decisions are made.

Giving Everyday Families “Room to Breathe”

More states are in the process of proposing or implementing legislation to promote state tax credits and provide families with the same sense of security the federal expansion gave them. Additionally, several states are also looking for ways to improve existing state tax credits by using government resources to make them more widely accessible.

“The [expanded federal] CTC helped my wife and I tremendously… it’s given us a little bit more room to breathe. We are able to send our daughter to daycare… And we are able to save the extra amount of money towards the other end of improving our quality of life, not only for us, but for our daughter.” – Jason Carter, Cincinnati, Ohio

In New York, for example, thousands of eligible New Yorkers don’t claim the state EITC or CTC due to processing issues, lost documents, or unclear instructions. Gov. Kathy Hochul (D) plans to improve the process by implementing a “mobile document upload” and a direct deposit capability to avoid lost mail-in documents and decrease the risk of missed refunds.

While in Maryland, newly elected Gov. Wes Moore’s (D) first course of action in office included preserving the expansion of the state EITC to taxpayers using Individual Taxpayer Identification Numbers (ITINs) and expanding eligibility for the state CTC. This expansion will allow more taxpayers to receive and claim funds that will benefit themselves and their families.

In Montana, Gov. Greg Gianforte (R) is pushing tax credits to the forefront in his proposed $1 billion state budget, which would introduce a $1,200 CTC and an expansion of the state EITC from 3% to 10% of the federal rate.

Some states might find just as many challenges as opportunities to advance these tax policies—particularly as governors and state legislatures find themselves at odds not on the intent of enacting policies that will support and uplift families and individuals, but on what terms. Tax credit advocates are also struggling to combat dangerous narratives around tax credits: what they are, what they aren’t, and the stigma that surrounds them. But there is major coalition building happening, and bringing together activists, advocacy groups, government officials, small businesses, trade groups, and others, will be integral in bringing back expanded tax credits at the federal level and ensuring that further progress is seen at the state level in 2023 and beyond.