During the current 2024 legislative season, which is nearing its end, several US states have approved measures to expand refundable tax credits intended for children and families, with the aim of improving their economic well-being.
Colorado, Illinois, New York, Utah, and the District of Columbia are the protagonists of these initiatives, following a recent trend of supporting families through tax credits.
Refundable tax credits are an extremely powerful and transcendental tool for American households. These are tax benefits that allow taxpayers to reduce their tax bill by the amount of the credit and, if the credit exceeds the taxes owed, receive the difference as a refund.
Tax Credits Are an Important Foundation of Household Economies in the US
Unlike non-refundable credits, which can only reduce the tax bill to zero, refundable credits can generate an additional refund for the taxpayer, providing direct financial support even to those with low incomes or no tax debt.
In Colorado, Illinois and the District of Columbia, the new credits are fully refundable. This type of credit allows households to receive the full value of the benefit, regardless of their state income tax liability. This helps mitigate the impact of more regressive taxes, such as sales and property taxes, by improving fairness in state tax codes.
For nearly four decades, states have used EITCS to improve the economic security of low- and middle-income families. In 2006, New York pioneered the implementation of a state CTC with the creation of the Empire State Child Credit. Following the expiration of the federal expansions of the EITC and the CTC in 2022, many states took the initiative to continue and expand these programs on their own.
Since then, 12 states and the District of Columbia have created or expanded CTCs, while 17 states and the District of Columbia have done the same with EITCS. The popularity of these credits has led to a policy merger in some states, creating more impactful credits tailored to the specific needs of families.
There was also a significant movement in Child and Dependent Care Credits (CDCTCs) this year. These credits, although not refundable at the federal level, reimburse families for a portion of their child care expenses. States such as Kansas, Colorado, and Wisconsin have expanded their versions of this credit, offering both refundable and non-refundable options.
EITC Expansion in Colorado and the District of Columbia
In Colorado, an expansion of the Earned Income Tax Credit (EITC) was approved, increasing its counterpart to 50% of the federal credit by fiscal year 2024. In addition, the new Family Affordability Tax Credit was created, which will increase the existing Child Tax Credit in the state. This credit could provide up to an additional $3,200 per child in years of strong economic growth.
The District of Columbia will introduce a Child Tax Credit of $420 for each child under the age of 6, fully refundable. This measure seeks to support families with young children, a particularly vulnerable group.
New Refundable Tax Credits in Illinois and Expansion in Utah
Illinois created a new benefit through its existing EITC, increasing the credit for qualifying families with children under the age of 12. This additional benefit is designed to provide crucial financial support to working families with young children.
Utah also expanded its Child Tax Credit, although it is nonrefundable, to include four-year-olds, when previously the benefit was cut off at age three. This measure aims to provide relief to families with preschool-age children by providing ongoing financial support for an additional year.
Periodic Payments in Minnesota and Proposed Changes in New York
Minnesota, although it did not introduce new credits in 2024, developed the administrative structure to offer periodic payments of the historic Child Tax Credit approved in 2023. This approach aims to provide a steady flow of financial support throughout the year, rather than a one-time payment at tax time.
New York decided to provide a one-time boost to its Empire State Child Tax Credit for 2024 by temporarily increasing financial support to families. This measure is part of a broader effort to address the economic needs of families with children in the state.
Tax Innovations in Washington and Minnesota
Washington is the first state without an income tax to pass an EITC. This credit, unlike traditional ones, does not have a gradual implementation based on income, allowing wider access.
In 2023, Minnesota restructured its EITC, known as the Working Families Credit, to better align it with the new state CTC, creating a more integrated and beneficial system for working families.
Proposals in Illinois and New York
In 2024, Illinois introduced a new child benefit that increases the state EITC for households with a child under the age of 12, starting with a 20% match that will increase to 40% progressively.
In New York, lawmakers have discussed merging their Empire State Earned Income Credit with the EITC, seeking to better target benefits to lower-income families without penalizing other families.
