Stay Informed!

Tax Credits for Working Families

Overview

To augment low wages, state governments have increasingly used tax credits to help families escape poverty and put them on a path to prosperity. Tax credits available to low-and moderate-income families, such as the Earned Income Tax Credit (EITC), Child Tax Credit (CTC), and Child and Dependent Care Tax Credit (CDCTC), reduce the regressive tax burden on the working poor, put more money in their pockets, and make saving for the future possible. States should adopt versions of the EITC, CTC, and CDCTC that piggyback on the federal credit. Ideally, state credits should be fully refundable so that all low-income families, even those without a tax liability, can benefit from the credit.

Policy Ratings

To see state-by-state policy data, click here.

Elements of a Strong Policy

CFED considers a state’s tax policy for working families strong if it meets the following criteria:

1. Has the state enacted an EITC policy? A first step that states should take to is to get a state EITC – no matter how small – on the books. Even a relatively small credit will make a difference for some low-income families and can lay the groundwork for subsequent expansion.
2. Is the credit refundable? Refundability is the single most important component of the EITC. Because families with very low earnings are likely to have little or no state income tax liability, only a refundable credit reaches them, giving them an added incentive to work and helping to offset the other state taxes they pay.
3. Is the credit at least 15% of federal EITC? Credit levels should be large enough to ensure that working poor families receive adequate support to benefit from the program. Primary considerations in setting a state credit level include the affordability of the program for the state, the level of tax relief desired and the size of the desired income boost for poor families.
4. Has the state enacted a state CTC or state CDCTC? The CTC and CDCTC help working families offset the rising cost of caring for children or dependents. States should create state-level CTCs and CDCTCs that piggyback on the federal credits. Ideally these credits should be fully refundable and represent a significant percentage of the federal credits.