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April 10, 2013

Working Family Tax Credits Are Good – Could be Better – for Virginia’s Kids and Economy


We’ve written before about how the Earned Income Tax Credit encourages people to work.  Now there’s evidence it helps their children succeed, too.

Children whose parents receive the federal Earned Income Tax Credit (EITC) do better in school and are more likely to attend college and to earn more as adults, according to a new report from the Center on Budget and Policy Priorities. 

The Child Tax Credit (CTC), a related credit that helps with the costs of raising children, also plays a major role in supporting working families as they strive to reach the middle class.

The impact on kids and families in Virginia is substantial. According to the report:

  • 614,000 Virginia households benefited from the EITC in 2010;
  • 457,000 Virginia households benefited from the CTC in 2010;
  • Combined, the credits lifted 160,000 of Virginians out of poverty that year, including 85,000 children.

Not only do these credits help children – our future workforce – succeed in the long run and get the education and skills they need for successful careers, they also help keep parents in jobs. Numerous studies have found that the EITC promotes work. For example, EITC expansions between 1984 and 1996 were responsible for more than half of the large increase in employment among single mothers during that period, one study found. 

Not only that, but these targeted tax credits also likely increases children’s work effort and earnings once they reach adulthood. For example, raising a poor family’s income by $3,000 a year (a fairly typical amount for a poor family to receive from the CTC and EITC) between a child’s prenatal year and fifth birthday is associated with a 17 percent significant increase in the child’s earnings in adulthood, another recent study found.

The strong success of the federal tax credit in helping hard-working Virginia families and kids also points out the shortcomings of the state version, called the Earned Income Credit (EIC). Virginia allows families who receive the federal EITC to take 20 percent of the value of that credit and apply it against the state income taxes they owe.

That’s a good start, but when a low-wage worker is eligible for an EIC that more than eliminates their state income bill, they don’t get the full benefit of the state EIC. That’s because our state EIC is not refundable.  That’s a big difference between our state EIC and the federal EITC and most other state earned income credit programs. We know low-income households pay a higher share of their income in state sales and excise taxes. And it’s going to get even worse for these households soon because these are the very kinds of taxes that were increased in the recently adopted transportation funding package.

By making the state EIC refundable, low-wage workers would receive the remaining credit they are owed in the form of a tax refund which would help offset those other taxes they’re paying like gas and sales taxes. With more cash to spend, low- and moderate-income workers are able to put money back into the local economy.

The Earned Income Tax Credit and Child Tax Credit are effective tools that support work, lift families and children out of poverty and give children from low-income families a better chance at success. Not only should we continue to support them, we should make sure that the state programs that complement them are as effective as they can be, too.

–Michael Cassidy, President & CEO

The Center on Budget and Policy Priorities’ full report, Earned Income Tax Credit Promotes Work, Encourages Children’s Success at School, Research Finds can be found here.

The Commonwealth Institute

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