The High Cost of Raising Kids and State Tax Solutions

Tax Notes reporter Kennedy Wahrmund discusses how states are increasingly turning to tax policy to address the high costs of raising children. 

For more, read Wahrmund's article in Tax Notes, "Tax Policy Becoming a Key Tool in States’ Pro-Family Strategies."

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Credits
Host: David D. Stewart
Executive Producers: Jeanne Rauch-Zender, Paige Jones
Producer: Jordan Parrish
Audio Editor: Laura Kondourajian

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Transcript

David D. Stewart: Welcome to the podcast. I'm David Stewart, editor in chief of Tax Notes Today International. This week: child support.

We've recently discussed the high costs of raising children and what governments can do to help. Increasingly, state governments are turning to tax policy as the best vehicle for addressing those high costs. So as states look to tackle rising costs, what can we expect from their programs and credits?

Joining me now to talk more about this is Tax Notes reporter Kennedy Wahrmund. Kennedy, welcome to the podcast.

Kennedy Wahrmund: Hi, David. Thanks for having me.

David D. Stewart: All right, so set the scene for us, what's led states to start thinking about tax policy as the best way to help families?

Kennedy Wahrmund: Yeah, absolutely. So the trend really amped up recently as states were leaving the pandemic with revenues that were stronger than expected, while also simultaneously seeing families struggle with increased food, housing, and childcare pricing. Many of the states who have adopted child tax credits really accelerated their adoptions and their expansions after seeing the immediate and direct effects that the temporary federal child tax credit in 2021 had on families' finances.

David D. Stewart: So what sort of things are we seeing states offer?

Kennedy Wahrmund: So states are essentially offering income tax credits to families with children, usually under a specific age to help alleviate costs associated with raising the children.

David D. Stewart: So this sounds sort of familiar. I know there is a federal child tax credit policy. Could you tell us: How does that factor into this state action here?

Kennedy Wahrmund: Yeah, absolutely. So following the postpandemic era of COVID and all of that, the federal government had expanded their credit that was offered. And so they were offering $3,600 per child under the age of six, and then $3,000 for children 6 through 17. And so when that expired in 2021, states kind of ended up picking up the responsibility by creating or continuing their own versions of the credit. And with other pandemic era relief, what states were seeing is that the temporary federal increased credit was assisting in driving the national child poverty rate down to as low as 5.2 percent, which was a record low at the time.

Research also found that the expansion reduced hardship across racial and ethnic groups with particularly large reductions among Black, Latino, Native American, and Alaskan Native children. One of the analysts that I talked to actually also pointed out that research has linked refundable tax credits such as the child tax credit and the EITC [earned income tax credit] to improve childhood nutrition, educational outcomes, and future earnings.

David D. Stewart: So what states are we talking about here? Which ones are taking action on this?

Kennedy Wahrmund: Yeah, absolutely. So there are 17 different states currently that offer it, including D.C. So we've got states like Maine and New York and D.C. and California, all sorts of different places really kind of all over the country. It's not just pigeonholed into one spot.

David D. Stewart: And are we seeing some variety within those states of how they're addressing this?

Kennedy Wahrmund: Yeah. So every state kind of has their own idea of what's the best way to execute a [child tax credit]. For example, the credits all have really different age requirements for children. So there are some states that say under 18 is great. And then other states say under 12. And then, there are also different financial allotments.

So like Maine, for example, offers $300 per qualifying child based on state-level adjusted [gross] income. And then New York, you can reach up to $1,000 just depending on different factors like income and age, like I mentioned. Other credits in different states are flat dollar amounts or percentages of the federal child tax credit creating a really wide variation in the actual monetary value that families receive.

David D. Stewart: And I know one of the big discussion points in the federal tax credit was refundability. So how have states dealt with that?

Kennedy Wahrmund: Right. So most of the states that offer a child tax credit have made that credit refundable. Twelve of the 17, including D.C., have made it refundable. Minnesota, for example, created a refundable child tax credit in 2023 designed in part to reduce child poverty. Oregon and Washington have also recently expanded family-focused tax credits. Two separate analysts that I spoke with actually pointed out those developments as examples of states increasing support for families through tax policy. There are also some states like Colorado, New York, Maine, and Vermont that have recently passed legislation offering refundable credits, which then allow eligible households to receive the full benefit, even if their tax income liability is low, whereas other states like Georgia and Utah have recently enacted or expanded nonrefundable versions of those tied to income thresholds or age limitations.

Currently, there are at least 26 states plus the District of Columbia that also offer child and dependent care tax provisions. So many of those are modeled in part after the federal child and dependent care tax credit . This is a vast change from 2020, where only six states offered those tax credits.

So one of the analysts that I spoke to said childcare related credits function really differently from child tax credits because families must be able to already afford childcare in the first place, to claim the reimbursement through the credit. So that structure can really limit the benefits for lower-income families who can't front the costs, she explained.

David D. Stewart: And what are we hearing from the tax community about the use of state tax policy to deliver these benefits?

Kennedy Wahrmund: Yeah, so they have differing opinions on it. Similarly to how I mentioned that states all have their own ideas of what's best, so do the analysts. Some argue that nonrefundable credits can only provide limited benefits to households with small income tax liabilities, because the credit can only offset the taxes that are owed. And then they also argue that refundability is key since most states rely on sales and property taxes, which consumes a larger share of income for lower-income households and that refundable credits are more effective at reducing poverty, therefore helping families meet their needs.

David D. Stewart: Is there an argument against this refundability?

Kennedy Wahrmund: There's definitely some question of if it's the best route to take. Some of the policy analysts have wondered whether the expansion of targeted refundable credits are the way to go as they can just add more complexity to tax systems.

David D. Stewart: So what issues come up when lawmakers are debating these policies?

Kennedy Wahrmund: So some of the issues that come up are workforce participation, and what they say is that childcare costs are typically a constraint on workforce participation, specifically for parents with younger children. People and lawmakers specifically in states like Utah have referenced this during legislative debates over family tax policy expansions. So that tends to be a big one.

A lot of states are using other means of helping families through tax policies, such as private education incentives. So in addition to child tax credits, many states are expanding tax policies that are friendly towards private education, like education savings accounts and scholarship tax credits. These can be relatively controversial though, as opponents tend to argue that most of these programs primarily benefit families that are already enrolled in private school and then supporters will retort that they allow families greater flexibility in choosing a school that fits their needs. And so for instance, the scholarship tax credits are ones that offer people who donate to a scholarship for private education and income tax credit on their own income taxes. So that's also where people tend to make the argument that they're not benefiting families who need help and they're only benefiting people who are already preenrolled in private school education.

David D. Stewart: Are there other tax policy mechanisms that are under consideration aside from tax credits?

Kennedy Wahrmund: Yeah. So some of the experts have brought that question up. They are asking, are broad tax cuts more efficient right now than targeted tax credits? Supporters generally argue that tax credits help manage the rising costs of raising children, but we've also heard that reductions to marginal tax rates can be generally more effective at promoting long-run economic growth, because they increase incentives for work and investment. There are arguments that targeted tax credits are narrower in scope and just add complexity to tax systems and can create ongoing fiscal obligations for states.

David D. Stewart: And so where do we expect this policy to go in the future?

Kennedy Wahrmund: There's a little bit of a mixed consensus on it. Analysts generally agree that family-focused tax policy will remain at the forefront of issues in state legislatures, but they tend to differ on what future expansion could look like. Some say that lawmakers see child tax credits as long-term investments in their communities, but then others point to states facing projected deficits, leaving them with less room to fund these large targeted programs.

David D. Stewart: Well, it seems like there's been a lot of development in just the few years since the pandemic, so this is going to be an area where I'm sure we'll see a lot more going forward. Kennedy, thank you so much for being here.

Kennedy Wahrmund: Thank you again for having me.

David D. Stewart: That's it for this week. You can follow me online at @TaxStew, that's S-T-E-W, and be sure to follow @TaxNotes for all things tax. If you have any comments, questions, or suggestions for a future episode, you can email us at podcast@taxanalysts.org. And as always, if you like what we're doing here, please leave a rating or review wherever you download this podcast. We'll be back next week with another episode of Tax Notes Talk.

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