More Jurisdictions Are Creating Child Tax Credits

Washington, D.C., has endured a series of economic shocks over the last few years, from the COVID-19 pandemic to mass cuts to the federal workforce to the recent government shutdown. Local officials are hoping a new tax credit can help families weather the financial turbulence.

This fall, Washington, D.C., became the first locality to adopt a local child tax credit, a version of a federal credit that allows families to reduce their tax liabilities by a certain amount for each dependent child in their care. The local credit gives Washington families up to $1,000 per child depending on household income, targeted at families earning less than $100,000 per year. Backers say the credit, coupled with an expanded local match for the federal Earned Income Tax Credit, will reduce poverty in the district.

“We know that when you raise the economic floor for families, you improve academic outcomes and health outcomes,” says D.C. Councilmember Zachary Parker. “This is a proven policy.”

Few policies in recent years have had a more direct impact on child poverty than the temporary expansion of the federal Child Tax Credit in 2021. Congress expanded the credit, which it had established in 1997, as part of a package of measures to promote economic stability during the pandemic. Under the American Rescue Plan Act enacted by President Joe Biden, the credit nearly doubled in size to $3,600 per child. Congress also made it refundable, meaning families would receive the credit as a direct payment even if they didn’t owe any federal taxes, and distributed part of the credit as monthly payments directly to eligible families.

Researchers have found that the expansion of the credit was responsible for a drastic reduction in child poverty. The number of children living in poverty was cut in half from 2020 to 2021, shrinking to its lowest-ever level on record, according to a report from the Center on Poverty and Social Policy at Columbia University. When the expansion lapsed, rates of poverty and child poverty spiked again.

Some conservative groups in the past have argued against expanding the child tax credit, considering it a disincentive for economically productive activity. It also comes with a cost. One pre-pandemic estimate suggested that the federal child tax credit reduced tax revenues by more than $118 billion.

Interest From States

Still, the evidence of the credit’s impact on poverty has inspired a flurry of interest at the state level. Seventeen states offer some type of child tax credit today, and more than a dozen other state legislatures under Republican and Democratic control have considered related legislation in recent years. Most recently, Georgia created a credit allowing families to claim up to $250 per child under the age of six.

The policies vary widely, both in terms of the size of the credits and the eligibility criteria for families. Researchers say those differences affect the impact they have on low-income families. Simpler credits — flat amounts that phase out at higher income levels — are easier to understand and more likely to be claimed, says Samantha Waxman, the deputy director of state policy research at the Center on Budget and Policy Priorities, a left-leaning think tank. Refundable credits also reach more people. Credits that aren’t refundable, like the federal Child Tax Credit in its current form, don’t benefit the lowest-income families who owe little or no federal tax.

“That is a really important source of the credit’s ability to make these impacts on poverty and help families thrive,” Waxman says.

‘It’s Been a Fight’

Washington, D.C.’s effort to create the first local credit comes amid a bout of upheaval for both the city’s finances and the broader regional economy. Local policymakers spent part of this year working to “decouple” the local tax code from federal tax cuts adopted by the Republican-controlled Congress. That should prevent hundreds of millions of dollars in revenue losses for the district. Meanwhile other revenue losses, cuts to the federal workforce and threats to federal safety net programs are making low-income Washington residents more vulnerable.

“There’s sort of a perfect storm brewing for folks who are on low incomes,” says Erica Williams, executive director of the DC Fiscal Policy Institute, which proposed an early version of the district’s child tax credit. “We really feel like we need to be taking local action to do something about that.”

The D.C. Council initially approved a version of the child tax credit in 2024. Mayor Muriel Bowser, who recently announced she won’t seek a fourth term, later eliminated funding for it in a budget proposed earlier this year. This year, Parker, who represents one of the city’s lower-income wards, sought to restore the local credit in an expanded form. It helped that the debate was undertaken outside the normal budget process, when many priorities are competing for appropriations, Parker says. There has also been more pressure on the city to protect poor people as the federal government cuts safety net programs.

“I think timing mattered a lot,” Parker says. “There was a policy window open because of the federal government’s actions.”

Parker says it’s possible that funding for the tax credit could be eliminated again. But it has broad support in the district, and he believes once it goes into effect, the results will show it’s worth the cost.

“It’s been a fight,” Parker says.