NC Budget and Tax Center

State-level tax credits could help N.C. reduce child poverty

In North Carolina, 43 percent of children of all races live in poor or low-income homes. Respectively, 64 percent of N.C.’s Black and Hispanic/Latinx children live in poor or low-income households. Experiencing poverty during childhood has lifelong implications for a person’s physical and mental health, exposure to violence, educational attainment, and future financial security. Tax credits for working families, like the Child Tax Credit, are known to improve a child’s immediate and long-term well-being and access to opportunity.

Expanding state-level Child Tax Credits has the potential to reduce child poverty in North Carolina by 44 percent, while reducing deep child poverty in our state by 56 percent. That is equivalent to lifting 138,000 North Carolina children out of poverty, and 58,000 children out of deep poverty.

Unfortunately, the Child Tax Credit does not currently reach about one-third of the families and children at the federal level despite recent changes to the federal Child Tax Credit under the Tax Cuts and Job Act because they are part of households that earn too little to claim the full credit.

A new report from the Institute on Taxation and Economic Policy finds that states can both decrease childhood poverty and repair tax code inequities by filling in gaps left by the federal credit. In many states, including North Carolina, the poor and low-income residents pay a larger share of their income toward taxes than the state’s wealthiest residents.

North Carolina’s child tax credit was repealed and replaced with a deduction.  As the Department of Revenue reports, this change “expands the number of taxpayers who may benefit from the State tax deduction by increasing the federal adjusted gross income (“AGI”) limit for each filing status. It also provides five deduction amounts, as opposed to the previous two credit amounts.”  The impact of this change was to make the tax benefit available to higher-income taxpayers, but it didn’t necessarily increase the value of that tax benefit for all who claim it, particularly for middle-income taxpayers.

In order to maximize the significant documented benefit of the Child Tax Credit while helping to address the inequities of our state tax code, North Carolina could create a state level credit that would enhance the federal credit up to key thresholds for households and ensure that families — regardless of their income tax liability — are provided with a boost to provide for their children’s healthy development.

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