While April 15 marks the traditional end of tax season, the positive effects of tax programs will be experienced throughout the year. The federal tax code provides direct support to families and individuals, with credits designed to improve the well-being of families with children and of working people with limited incomes.
In 2021, expansions of federal tax credits designed to help parents and low-income workers assisted both the people receiving them directly and the economy overall. The NH Fiscal Policy Institute reviewed the economic effects of two key credits.
Earned Income Tax Credit
The Earned Income Tax Credit (EITC) was designed to increase the incomes of people who are working but who earn relatively low wages from their jobs. It effectively increased the benefit of working by providing a tax break, including a refundable credit, corresponding to income level.
The American Rescue Plan Act (ARPA) expanded the EITC for tax year 2021. The EITC typically excludes workers outside of the age range of 25 to 64 years, but the one-year ARPA expansion made many workers aged 19 to 24, as well as workers older than 64 years, eligible for the EITC.
The EITC amount was increased for workers without children in their homes, who previously were only eligible for a much smaller credit.
Preliminary estimates from the Center on Budget and Policy Priorities indicated the EITC expansion could benefit 66,400 Granite Staters without children, including about 6,500 workers of color, and bring $43 million into the state economy.
Child Tax Credit
While the EITC expansion is significant, ARPA also included a much more substantial, but also temporary, expansion of the Child Tax Credit (CTC). The CTC typically provides credits to parents with dependent children up to age 17, with reductions in the credit’s value for families with high or very low incomes.
For tax year 2021, ARPA expanded the CTC’s value, increasing the prior maximum of $2,000 to as much as $3,600 per child for families with young children. ARPA also made the credit fully refundable, meaning families could receive the full amount even if they had very little or no taxable income or tax liability. Additionally, the credit was expanded to include 17-year-old children.
The delivery mechanism for the CTC was also enhanced, with portions of the credit arriving in monthly payments from July to December 2021, totaling half of the entire estimated credit for eligible families. This payment structure likely better enabled families to meet regular expenses, rather than waiting to receive a single payment after filing their annual taxes.
Due to the expanded credit size and the full refundability of the CTC, the credit is expected to have a much larger role in reducing child poverty. Separate estimates from the Urban Institute and the Center on Budget and Policy Priorities projected child poverty in NH would be reduced by 39% and 50%, respectively. Approximately 85% of children in NH, or 221,000, will benefit from this expansion.
The Niskanen Center projected the CTC expansion will bring an additional $286.8 million in federal funds to NH’s residents and economy.
Making the Credits Work
These expanded tax credits increased the resources available to NH workers and families, who were then able to support regional businesses by spending these resources locally.
However, for these credits to work, people needed to know they are eligible and how to claim the credits. The U.S. Internal Revenue Service estimated that, for tax year 2018, nearly one in five Granite Staters eligible for the EITC did not claim it, and that 7,745 children in NH who were likely eligible for the CTC lived in households that did not claim the credit in 2019.
Many 2021 credits may go unclaimed as previously ineligible people may not know they were eligible under the expansion or need to take action to claim the credits.
Employers can play a role by helping ensure their employees are aware of credits and the ways in which they can find assistance in claiming them. Credits can help support the financial stability of the workforce, and are associated with long-term benefits, such as improved health outcomes for children as well as higher incomes later in life.
These expanded tax credits were temporary, but their positive effects can be long-lasting. Leveraging millions of additional federal dollars through the tax code can support a more inclusive economy and robust recovery for individuals, families, and businesses in the Granite State.
– Phil Sletten, Senior Policy Analyst