November 10, 2025
Design Matters: Refundable Tax Credits are a Building Block for a Fairer Tax Code
Our state tax code is an essential tool to support our communities. However, Virginia still has an upside-down tax code, where people who are paid the least (lowest 20% of incomes) pay more taxes than the richest 1% in the state as a share of income. Tax credits help address unfairness in our tax code and are a long-standing tool to boost family cash and lower poverty. To make the most of these credits, policy design matters.
What is a refundable tax credit? What does refundable mean?
Refundable tax credits help families get more cash back — but how? “Refundable” means that the whole tax credit you qualify for is available to you, regardless of how much income tax you owe. A refundable credit can cover your income tax bill, and then any remaining credit is refunded to you. This is a key design choice. Many families with low incomes pay less in income taxes as a portion of their income, but pay more in other types of sales and property taxes. Refundable tax credits facilitated through the income tax code can help make up for more unfair taxes paid elsewhere.
Good refundable tax credits are:
Fully refundable. Every qualifying family can receive the full dollar value of their tax credit.
Targeted to lower and middle-income families. Phasing out the credit or cutting it off at certain incomes helps make sure that refundable credits are targeted at who they intend to help.
Responsive to family size. Credits that adjust based on family size recognize the cost-of-living differences for families with children.
Robust. Credits should be large enough to impact family finances.
Refundable tax credits are proven poverty-fighting tools
The long-standing federal Earned Income Tax Credit (EITC) is a refundable credit targeted towards low-income working families. To receive more of the credit, families have to make more income. Once families reach certain income levels, the credit phases out. The federal EITC is a celebrated and long-standing tool to lift families with children out of poverty. The federal EITC cut poverty for unmarried workers with three children by 20.5%, according to Congressional Research Service estimates using data from 2016.
When the federal Child Tax Credit (CTC), a credit targeted towards families with children, was temporarily improved in 2021, Congress increased the credit amount and made it fully refundable. Additionally, families who were paid too little to claim the previous credit were allowed to access the improved credit. The improved CTC was largely credited with helping to nearly cut child poverty in half that year to historic lows. Unfortunately, these improvements have since lapsed and child poverty has more than doubled.
Refundable credits in Virginia
While Virginia has a long-standing state EITC (set at 20% of the federal level), it was not refundable for many years. This meant that many of the families it was intended to help were being blocked from accessing the full credit. In 2022, state lawmakers created a new, smaller (15%), but refundable EITC option. Despite being smaller, this option was often more beneficial for families than the larger, but nonrefundable credit. In 2025, the larger credit amount was made refundable. However, this measure is set to expire after 2026, and making it permanent will require further legislative action. Lawmakers can also act to further improve the credit, including increasing the amount for workers without children and/or increasing the credit value overall.
Lawmakers have weighed proposals in recent years to create a refundable state-level child tax credit, or a Commonwealth Kids Credit, however no proposal was ultimately adopted. Lawmakers should continue to consider a state CTC to help boost family resources.
The state’s refundable EITC boosts income for families like Maya’s across Virginia
Maya is a single mother with two children, filing her 2025 Virginia income tax return. She works as a home health aid full-time, making the average annual salary for her profession in Virginia, $31,430.
She files her federal taxes, and gets a $5,450 refundable EITC.
Virginia offers a refundable EITC equal to 20% of her federal EITC, this is $1,090.
After taking the standard deduction, as well as personal exemptions for herself and her children, she owes $886 in state income taxes.
Because the state EITC is refundable at 20% of the federal credit, it pays her $886 tax bill, and the remaining $204 is refunded back to her, giving Maya more money to pay for school supplies, put food on the table, or help her family how she best sees fit.
If the state EITC were only ‘nonrefundable’, as it was for many years prior to 2022, it would only count towards her tax bill, and she would miss out on nearly 20% of the credit she qualifies for.
Categories:
Economic Opportunity, Policy Basics
