States Should Implement Tax Credits Over Deductions to Support Families
By Ashley Burnside
The tax code is a vehicle to raise the funds needed to invest in public goods. It can also be used to support families, promote opportunity, and reduce poverty. But the details matter: some tax policy options are more equitable, while others are more regressive—meaning that people with high incomes disproportionately benefit. States should prioritize fully refundable tax credits, like a state Child Tax Credit (CTC) or state Earned Income Tax Credit (EITC), over tax deductions that primarily benefit families with higher incomes.
The temporary expansion of the federal CTC in 2021 achieved unprecedented success in reducing child poverty, food insecurity, and financial stress among families. These achievements have generated increased interest in state-level CTCs. Numerous states have implemented their own CTCs in recent years, and proposals are currently being considered in several more, in both Democratic- and Republican-led states.
However, some states, like Ohio, have proposed deductions as an option for supporting families with children, rather than a credit.
There are important differences between deductions and credits, how they impact taxpayers, and which taxpayers they best support:
- Deductions reduce the amount of a person’s income that is taxed.
- In comparison, tax credits directly reduce the amount of taxes someone owes. A fully refundable credit ensures taxpayers receive the credit even if they have little to no earnings.
Deductions are a regressive option, especially compared to a fully refundable credit, because deductions benefit higher-income families more. Itemized deductions also disproportionately benefit white taxpayers compared to Black and Latinx taxpayers. Deductions reduce taxable income for a taxpayer. Their value differs based on the filer’s tax bracket.
For example, moderate-income taxpayers who are in the 5 percent bracket will only see their taxes reduced by $50 if they receive a $1,000 deduction. Higher-income taxpayers in the 10 percent bracket will see their taxes go down by $100 if they receive that same deduction. And a lower-income worker who does not owe state income taxes—or who takes a standard deduction—would not benefit at all.
Refundable state tax credits, such as a state CTC and/or a state EITC, that are targeted toward individuals and families with lower incomes are successful options to lessen poverty and promote prosperity. When states implement a fully refundable CTC, it makes the credit available to families with little to no earnings.
Such policies can also advance racial equity. Due to barriers like generational poverty and low wages, Black and Latinx children are more likely to be in families with the lowest incomes. Their income level would leave them ineligible for a partial credit, but they would benefit from a fully refundable credit. Ideally, states should target their state CTC programs to families with the lowest incomes and those who have up to moderate earnings, rather than prioritizing families with higher incomes.
As states consider tax reform policies during this state legislative session, some options will do more than others to promote equity and wellbeing. To best support children and families, states should implement state CTCs and EITCs that are fully refundable, rather than deductions.