North Carolinians deserve the credit

Sally Hodges-Copple • October 07, 2024

How a bold Child Tax Credit can slash child poverty, boost well-being, and help our state economy thrive

No matter where we come from or what we look like, we all want to be able to provide the basics for our children: healthy food to eat, a safe place to sleep, and the clothes and school supplies that they need to succeed.

Despite strong state performance in job growth and employment, too many households in North Carolina are struggling to make ends meet and cope with the rising cost of living — especially those with young children. Widespread low incomes and elevated poverty rates are preventing families from meeting their needs, reaching their potential, and contributing their full talents to our communities. The prevalence of this financial hardship has direct consequences for the long-term well-being of children and our state’s economy.

The costs of child poverty are high, but a sound policy tool backed by decades of research is readily available to state lawmakers: a bold and generous state Child Tax Credit (CTC). This policy enjoys strong support from North Carolinians, with more than 80 percent saying child tax credits for middle- and low-income families would support well-being in their community.

A CTC worth $1,900 per child under 6 and $1,600 per child aged 6-17 would represent an enormous step forward for North Carolinians’ well-being. It would lift more than 100,000 children above the poverty line, reducing child poverty by nearly one-third.

A generous CTC would be cost effective and a boon to our state’s economy, with every dollar spent reducing child poverty today expected to lead to much larger savings on the future societal costs of poor health, child maltreatment, and more.

Too often in our state’s recent history, North Carolina has fallen short on harnessing the power of cash to deliver well-being to families. Policy choices that have tilted our tax code toward corporations and the wealthiest few while doing away with tax credits for low-income families have been a step in the wrong direction. Likewise, our state’s dedication of large portions of Temporary Assistance for Needy Families (TANF) dollars to child welfare rather than basic assistance has overlooked the role of income in preventing child neglect.

A generous state CTC would turn a new page for thousands of NC families. The body of research on this policy proposal is overwhelming and clear: When policymakers increase incomes for those who have been most left behind by the status quo, the benefits radiate outward from individuals, to families, to entire communities and economies. While the benefits of tax cuts for corporations largely remain with shareholders and executives, research on low- and moderate-income tax credits shows an unambiguous boost to children’s well-being that benefits us all.

Conventional measures of economic success conceal high levels of financial hardship among NC families

In recent years, national rankings have rated North Carolina highly as a state for business, based on traditional measures of economic success such as GDP growth, job growth, worker productivity, and state credit ratings and reserves. Strong performance in these areas, however, has not translated to measures that speak more directly to residents’ well-being, with the same national rankings rating the state poorly in categories such as quality of life and cost of living.¹

Inadequate incomes are one of the clearest indicators that economic policies in North Carolina have not delivered well-being for the average family. The median worker in our state earns $48,500, thousands of dollars short of what is needed to cover the basics and raise children amidst a high cost of living.² Workers’ pay varies widely across the state: In counties like Burke and Wilkes, the median worker earned less than $37,000 in 2023.

Pay this low is inadequate to meet basic needs, especially when lawmakers have not done enough to address the rising costs of housing and child care and have failed to rein in corporate greed. The available data indicates that families with children are especially vulnerable to the mismatch between wages and costs: As Figure 1 shows, households with children in North Carolina report having a somewhat or very difficult time paying for usual household expenses at much higher rates than households without children.

FIGURE 1:

Of particular concern in North Carolina is the prevalence of low-income and poverty. In 2023, nearly 1 in 3 North Carolinians were considered low-income, making less than 200% of the poverty threshold, or $62,400 a year for a family of four.³ About 1 in 8 lived below the poverty threshold — less than $31,200 for a family of four. Most troubling is the more than 1 in 6 North Carolinian children who live in poverty. Due to structural barriers that block North Carolinians of color from accessing high-wage jobs at the same rate as white North Carolinians, considerable racial disparities persist in the state’s poverty rate. As Figure 2 shows, while fewer than 1 in 10 white residents live in poverty in North Carolina, the rate is about 1 in 5 for Black and Latine residents and 1 in 4 for American Indian residents.

FIGURE 2:

Elevated levels of poverty are costly, both for the families and children who experience it and for our communities at large. A 2019 study by the National Academies of Sciences conducted a comprehensive review of the literature and concluded that “income poverty itself causes negative child outcomes, especially when it begins in early childhood and/or persists throughout a large share of a child’s life.”⁴ In particular, the study noted poverty’s negative impact on birth outcomes, child and adult health outcomes, and children’s educational outcomes.

Researchers have also attempted to measure the economic costs of child poverty to society at large. One 2018 study estimated the annual costs of child poverty in the United States at over $1 trillion, or 5.4 percent of GDP.⁵ These costs came from crime and incarceration, reduced earnings, and increased costs associated with ill health, child homelessness, and child maltreatment. The study went on to estimate that for every dollar spent reducing childhood poverty, the country would save at least $7. Findings like these show that when our policies ensure North Carolinians have adequate income to buy nourishing food, stay safely housed, and access health care and child care, our economy will benefit from the contributions we all have to offer.

North Carolina can implement a generous state CTC to slash child poverty and boost our economy

Experience at the federal level and across the states is demonstrating the power of CTCs

In the face of high costs of raising children and elevated child poverty rates that will have economic repercussions for years to come, the North Carolina General Assembly should act with urgency to pass a generous and fully refundable Child Tax Credit (CTC). A child tax credit boosts incomes by reducing the state income taxes that an eligible family owes; a fully refundable credit means that families with incomes too low to have an income tax liability still receive the full value of the credit as a refund. A bold state CTC would build on the success of federal policy and align North Carolina with the wave of states that have approved CTCs in recent years, putting more cash in the hands of parents and caregivers who are struggling to make ends meet.

First enacted in 1997, the federal CTC has a proven track record as a poverty-busting tool, lifting an estimated 2 million children above the poverty line each year.⁶ When the CTC was temporarily expanded in 2021 as part of the federal response to the COVID-19 pandemic, the maximum credit increased to $3,600 per child under 6 and $3,000 per child up to 17. Researchers found that as a direct consequence of the expansion, child poverty in North Carolina plummeted by more than 40 percent in just one year.⁷ North Carolinian children, caregivers, and local economies might have continued to benefit from this dramatic reduction for years to come, but Congress allowed the expanded CTC to expire and revert to its previous structure. The national child poverty rate more than doubled in the following year.

Many states, however, learned from the success of the expanded federal CTC and created or expanded their own state-level credit. Fourteen states now have a state CTC;⁸ while the size and design of the credit varies greatly, experts agree on the features that increase a CTC’s effectiveness in reducing child poverty. Figure 3 summarizes these features, which include full refundability, a larger credit for very young children to support a period of critical development, and availability of the credit to each child in a household without regard to family size.⁹

FIGURE 3: Features that increase the effectiveness of a Child Tax Credit in reducing child poverty

Source: Figure adapted from ITEP’s 2022 report, “State Child Tax Credits and Child Poverty: A 50-State Analysis”

Among the 10 states that have a refundable CTC with per-child benefits, the size of the credit for young children ranges widely, as Figure 4 shows. In Tax Year 2024, Maine offers the lowest per-child refundable credit at $300, while Colorado offers the highest at $3,200.¹⁰ As additional states adopt or expand their CTC with each passing year, North Carolinians — and particularly households with children — are increasingly left behind relative to cash policies nationwide.

FIGURE 4:

Eliminating the Corporate Income Tax doesn’t help NC workers or business owners

Most of the companies that pay the corporate income tax in North Carolina operate in multiple states and have profits of more than $25 million — 72 percent of all corporate income tax collections in our state come from these companies.
These highly profitable companies, not small businesses or local entrepreneurs, will get a windfall when the corporate income tax is eliminated.
Because corporate income taxes are mostly passed on to affluent shareholders or to highly-paid executives — many of whom do not reside in NC — more than 9 of every 10 dollars from this cut will flow to out-of-state residents.
In return, most workers and local business owners will see no benefit.¹¹

A bold investment of $2 billion in a well-structured CTC would lift 100,000 NC children above the poverty line, choosing communities over corporations

Rather than fall behind as other states strengthen their cash policies and slash child poverty, North Carolina should implement a generous state CTC and improve our upside-down tax code in the process. Recent polling has found that more than 4 out of every 5 North Carolinians believe that child tax credits for middle- and low-income families would support well-being in their community.¹¹ By halting the scheduled elimination of the state corporate income tax and instead keeping it at its current 2.5 percent rate — already the lowest in the country among the 44 states with this tax¹² — North Carolina could increase available revenue for a bold, generous and fully refundable state Child Tax Credit that would reduce child poverty by nearly one-third. Since North Carolinians making less than $22,000 pay nearly 11 percent of their income in state and local taxes compared to just 6 percent for those making over $700,000, a CTC would also make progress toward a more equitable tax code.¹³

Under current state law, the state corporate income tax is scheduled to be eliminated in 2030, meaning that highly profitable multinational corporations will pay zero dollars in state income tax that year. The cost to public well-being will be considerable: By 2031, our state will have $2 billion less in public dollars available to meet community needs, a number that will grow each year after. Losses from scheduled reductions in the personal income tax rate are even larger and will also disproportionately benefit the rich: By 2031, North Carolina’s public coffers will have $11 billion less in revenue each year due to these cuts.¹⁴ That’s a total of at least $13 billion combined from the personal and corporate tax cuts that North Carolina won’t have annually after scheduled cuts go into effect.

Instead of further enriching corporations and wealthy out-of-state shareholders, North Carolina could realize a greater return on investment by establishing a state CTC. The preservation of public funds that would come from keeping the tax on highly profitable corporations would help North Carolina to create a CTC that:

Is fully refundable
Has a maximum value of $1,900 per child under 6 and $1,600 per child aged 6 to 17
Phases out at a gentle rate of 5 cents per $1 in income above $35,000
Gives the maximum credit to kids whose caregivers work in some of our state’s most essential but also poorly-compensated jobs – health aids, cooks, cashiers, and child-care workers — while still reaching middle-income households at a reduced credit level.
Costs $2.17 billion¹⁵

The exact value of the credit would depend greatly on household composition and income. Figure 5 illustrates how the credit’s value changes with income for a household with one adult and one child.

FIGURE 5:

Unsurprisingly, the poverty reduction impact of a CTC is closely related to the per-child credit size, with larger credit sizes leading to greater poverty reduction. A North Carolina CTC of $1,900/1,600 per-child would lift more than 100,000 kids above the poverty line, reducing child poverty in the state by nearly one-third. In total, 65 percent of all North Carolinian children would benefit from the CTC, including more than 95 percent of children in households with incomes below about $80,000. By targeting resources to greatest need while still reaching a majority of children, this CTC would lay a strong foundation of economic opportunity from which our state’s children could grow and thrive.

FIGURE 6:

The body of evidence on the effectiveness of well-targeted tax credits is long-standing and robust

While more than 40 years of research has found that income tax cuts for corporations may have a small effect — but more likely no impact — on economic growth,¹⁶ tax credits that provide much-needed cash to low- and moderate-income families have a robust body of research backing their effectiveness for both near- and long-term outcomes.

In the near term, tax credits like a state CTC reduce child poverty and alleviate financial hardship

In the near-term, federal tax credits such as the CTC and the Earned Income Tax Credit (EITC) have been shown for decades to effectively deliver financial support and alleviate poverty for millions of U.S families, including those who participate in traditional safety net programs such as TANF. In 2023, the federal EITC and the refundable portion of the CTC together lifted 6.4 million people in our country above the Supplemental Poverty Measure (SPM) poverty line.¹⁷

Experience with the federal CTC has also yielded lessons on how families spend their credit. Recipients of the expanded federal CTC spent the bulk of their additional income on basic needs and child-related spending, such as housing, food, child care, and school supplies.¹⁸ The research is clear that the most effective credits arrive in monthly payments to help smooth spending and meet household needs year-round. The flexibility of cash is key: Households experiencing low incomes know best what their families need, and unrestricted cash payments like tax credits empower them to prioritize spending on what they and their children need most.

The Supplemental Poverty Measure (SPM)

The U.S. Official Poverty Measure (OPM) was developed in the 1960s and is a bit outdated. It only counts certain kinds of cash as income – like wages and social security – while leaving out newer policies that help people meet their needs. The SPM updates this by counting a greater variety of benefits – like tax credits and housing subsidies – as income.

The OPM also defines the poverty line as three times the cost of a minimum food diet from 1963, in today’s dollars. The SPM updates this definition to reflect the needs of a modern household – food, clothing, shelter, and more – and adjusts the costs based on geography.¹

In the medium- to long-term, a generous CTC would have wide-ranging benefits for North Carolinians

The benefits of tax credits like CTCs go beyond poverty reduction. A sizeable body of research on tax credits for low- and moderate-income families has found that these policies are linked to improved health outcomes, school performance, and more.¹⁹ Studies have found that these credits are associated with increased birth weights, reduced prevalence of low-weight births, and increased gestation.²⁰ Black mothers in particular experience larger percentage point reductions in the probability of low birth weight and increases in gestation duration.²¹

The CTC has been shown to improve food security and healthy eating,²² and is associated with reduced symptoms of depression and anxiety, especially among caregivers of color.²³ Receipt of these credits also has important implications for child welfare: Studies on the CTC and EITC have found improved home environment quality for children of unmarried mothers,²⁴ a lower likelihood of child injuries requiring medical attention,²⁵ and improvements in child behavioral health.²⁶

The impact of tax credits for low- and moderate-income families extends to education, employment, and earnings. In one study, an additional $1,000 in EITC household income for teenaged children increased the likelihood of completing high school, completing college, and being employed as a young adult.²⁷ Earnings in adulthood also increased for these children.

Guaranteed income pilots nationwide are providing further evidence for the effectiveness of direct cash

Dozens of guaranteed income programs nationwide are further demonstrating the effectiveness and efficiency of direct cash transfer programs, building on the success of tax credits in reducing poverty and improving well-being. These programs provide eligible participants with regular, no-strings-attached cash payments for a specific period of time. Eligibility is typically geared toward populations with great need, such as pregnant women in Flint, people experiencing homelessness in Denver, or formerly incarcerated residents of Durham.

Early results from one randomized control trial conducted in Illinois and Texas found that the largest dollar-amount increases in spending in response to cash transfers were on basic needs — food, rent, and transportation.²⁸ In alignment with findings on the health impacts of tax credits, the same study found improvements in short-term indicators of health among recipients, including increases in food security and decreases in stress, mental distress, and problematic alcohol use.²⁹

Two particularly striking findings illustrate the contributions that are made to communities when all residents — particularly those who have been most left behind by previous policies – have the income that they need to meet basic needs and set their sights higher. First is the impact of additional cash on rates of entrepreneurship. As a result of the program in Texas and Illinois, Black participants were 26 percent more likely to have started a business while female participants were 15 percent to have done so, a significant increase in entrepreneurial activity with real benefits for local economies and communities.³⁰ Second is the impact of additional cash on providing financial support to others. While guaranteed income participants increased spending on basic needs the most in dollar amounts, their greatest percentage increase in spending was on support to others. Recipients increased their spending on others by 26 percent relative to the control group, including gifts to family and friends, loans to others, charitable donations, and alimony payments.³¹

These findings underscore that when public policy increases incomes for those who have been most left behind by the status quo, the benefits radiate outward from individuals, to families, to entire communities and economies. Tax credits and guaranteed income programs give families the flexibility to meet their needs in the way they see fit, without the stigma and bureaucracy that plague traditional safety net programs. While the benefits of tax cuts for corporations largely remain with shareholders and executives, research on the EITC, CTC, and guaranteed income programs show an unambiguous boost to children’s well-being that provides returns for years to come.

NC’s track record on cash is one of the worst in the nation; a bold CTC would change that and make tax codes fairer

Despite overwhelming evidence on the positive impacts of tax credits for families — and the emergence of similar findings from guaranteed income experiments — North Carolina’s policy record on income supports lags much of the rest of the country.

NC lawmakers eliminated the EITC while adopting regressive tax reforms

Nationwide, 31 states have implemented a state-level EITC to boost incomes and introduce more progressivity into state and local tax codes that tend to be tilted towards the wealthy few. After first establishing a state EITC in 2007 — more than 20 years after the first state had done so — North Carolina in 2013 had the second-lowest EITC among states with the credit at 4.5% of the federal credit, behind only Louisiana. The following year, lawmakers eliminated it and implemented a larger package of regressive tax reforms, making North Carolina the only state ever to have repealed an EITC. In the year before its elimination, the state EITC was claimed by over 900,000 North Carolinians, benefiting 1.2 million children.

NC leaders went on to pass additional tax reforms that tilted the state’s upside-down tax code further toward the rich, doing away with the graduated income tax structure that had been in place for almost a century in favor of a flat, lower personal income tax rate. They also slashed the state corporate income tax rate and put it on track for elimination. The benefits of these cuts have largely accrued to the wealthy, while the costs have been enormous and widely felt. If lawmakers had maintained 2013’s personal and corporate income tax rates, the state would have raised over $16 billion more in public revenue in 2024 to fund public schools, child care, and affordable housing. In contrast, as Figure 7 shows, a state CTC would make North Carolina’s tax code more equitable, with 93 percent of tax cuts from the CTC going to low and middle-income households, whose annual incomes are under $81,000.

FIGURE 7:

NC uses TANF in large part to fund child welfare system, rather than preventing neglect with cash assistance

North Carolina also compares poorly with other states in the percentage of Temporary Assistance for Needy Families (TANF) funds dedicated to cash assistance. While TANF’s predecessor program — Aid for Families with Dependent Children (AFDC) — was administered almost entirely as a cash assistance program for families experiencing extremely low incomes, national welfare reform in 1996 transformed AFDC into TANF. Along with new restrictions concerning duration of benefits and work requirements, the reforms delivered TANF to states as a block grant, which meant the funds had a variety of allowable uses beyond cash assistance.

When TANF began, cash assistance was the single largest use of TANF funds in North Carolina, as it was in all states.³² Since then, the share of North Carolina’s federal and state TANF spending dedicated to cash assistance has plummeted to just 5 percent, ranking 46th among the states and Washington, D.C., for percent of TANF funds spent on basic assistance.³³ North Carolina instead spends the majority of its TANF funds on child care and child welfare. As Figure 8 shows, the share of TANF spending dedicated to these two purposes in North Carolina is far above the share dedicated to them nationally. While our child care and child welfare systems are important and worthy of investment, they could be better supported by direct state funding, freeing up TANF funds to deliver the benefits that accrue to families and children when direct cash assistance is increased.

FIGURE 8:

Notably, over 5 times as many TANF dollars are spent on child welfare in North Carolina as are spent on cash assistance. Statistics consistently show that neglect is the most common type of maltreatment experienced by children in our state, representing two-thirds of all cases.³⁴ Neglect — which experts say occurs when a primary caregiver fails to provide for the needs of a child in areas such as adequate clothing, food, shelter, and safe environments — is in turn highly correlated with poverty and the toxic stress that financial hardship produces in families.³⁵ A substantial body of research has found that increased access to TANF reduces risk for child maltreatment and child welfare system involvement.³⁶

North Carolina has been backwards when it comes to tax credits and cash. Instead of making our tax code more equitable, we’ve made it less equitable by doing away with the EITC and giving tax cuts to the wealthiest. Instead of adequately funding our child care system with state dollars, we’ve minimally propped up the system with federal TANF funds that have lost almost 50 percent of their value since 1997 due to inflation.³⁷ And instead of following research that shows cash empowers families to meet their most pressing needs and create better home environments for their children, we spend just 5 percent of TANF funds on cash assistance while spending 27 percent on a child welfare system that would be significantly less burdened if child poverty were eradicated. A bold and generous Child Tax Credit represents an opportunity to turn the page on this history and start delivering for North Carolina families and kids.

Conclusion

A state Child Tax Credit is by no means the only action that lawmakers need to take to start addressing the cost of living for our state’s families. While it will aid families in paying for things like housing and child care, additional policies can and should be enacted to lower the costs of these essential goods and services directly. The state should adequately fund the Housing Trust Fund to increase the supply of affordable housing and should directly fund child-care providers with state dollars, rather than cobble together inadequate support from non-state funding streams. Lawmakers could also address the other side of the equation in the mismatch between pay and prices by increasing the state minimum wage, which still sits at just $7.25 an hour. At the federal level, policymakers will have the opportunity to expand the federal Child Tax Credit and end tax giveaways to wealthy corporations when the Trump tax cuts expire in 2025 – and they should seize it. North Carolinian parents and caregivers work day in and day out to care for their children and their communities. As they labor to raise the next generation, our state should have their back and recognize their contributions with a state Child Tax Credit.

No child should grow up in poverty in a state as prosperous as ours. And when corporations and the super wealthy pay what they truly owe through taxes, no child will.

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Sally Hodges-Copple

Public Policy Analyst (She/her/hers)

[email protected]

Sally produces research and analysis to deepen understanding of the causes and consequences of poverty and systemic racism in North Carolina, and builds the will to act on policy solutions that advance the well-being of all people and communities.