Give Ohio families a break with refundable tax credits

Every family in Ohio should be able to afford healthy food, a safe home, health care and the other elements of a good life. Ohio has the resources to make this a reality. Too often, however, our elected officials choose to use those resources to enrich their already wealthy supporters and do whatever else it takes to hold onto power.

State and federal policy choices have created and now sustain a low-wage job market, and opportunistic corporations continue to inflate prices. Federal lawmakers allowed expiration of the extraordinarily successful relief programs enacted during COVID. As a result, many Ohio families are struggling to make ends meet and Ohio children lack the resources they need.

Children who grow up in poverty are more likely than those from affluent families to do worse in school, have health problems and get involved with the criminal legal system later in life. Those outcomes ripple through Ohio’s families, communities and economy. Lawmakers have good options to stabilize family budgets, including changing the tax code. Instead, they continue to craft tax policy to benefit the already wealthy, leaving out or harming many taxpayers.[1]

This report outlines some of the harm done to all Ohio communities by policies that keep children and families from sharing the prosperity working people create. This paper also describes how state lawmakers can address many of these harms by passing a state child tax credit, also known as the “Thriving Families Tax Credit” (TFTC), and improving the state’s existing Earned Income Tax Credit (EITC).

These forms of targeted tax relief have the potential to bring tens of thousands of Ohio children out of poverty. They stand in stark contrast to the tax changes made by the Ohio legislature, which almost exclusively benefit the wealthiest Ohioans. The legislature’s recent approval of additional imbalanced tax changes reinforces the need for these credits.[2]

Child poverty and family economic insecurity are widespread in Ohio

In 2022, Gov. Mike DeWine said he wanted Ohio to be the best place to raise a family.[3] Data shows the state is a long way from that goal. In 2022, Ohio ranked 37th in childhood poverty, with about 18% of Ohio children — approximately 446,000 kids[4] — living below the federal poverty line.[5] One reason for the high rate of child poverty in Ohio is that many jobs pay too little to support a family. While some fast-food workers, cashiers and retail salespeople won better pay in 2022 due to the tightening labor market and unionization efforts, their median wages did not rise enough to make up for decades of employers and policy holding them down. Some 372,340 Ohioans worked in these occupations last year. These three jobs pay so little that a worker at the median income would qualify for and need food aid to feed a family of three.[6] These same workers were among the many left out when legislators slashed income taxes for higher-income households in House Bill 33, Ohio’s biennial budget bill.

Table 1 shows how legislators concentrated their income-tax cuts on households with high incomes. Earners in the top 20% received 85.4% of the more than $750 million in annual tax cuts from HB 33.[7] By contrast, Ohioans making less than $75,000 a year — 60% of households — only saw 0.8% of those cuts. In fact, a family of three with the median income in the state, about $62,000 annually, saw a slight tax increase.[8] Ohio policymakers know how to use the tax code to benefit Ohioans; they just keep using it to benefit their wealthiest constituents, at everyone else’s expense. We need lawmakers to change the way they use tax policy, so it helps those who need it most. By doing so they increase benefits for everyone.

Table 1

Federal tax credits made a difference in the lives of children and families

The federal EITC and child tax credit (CTC) have had an immensely positive impact on families throughout the nation. The EITC is a federal tax credit for low- and moderate-income working families and individuals that is designed to offset federal payroll and income taxes, raise living standards, and boost the incomes of low-wage workers. The CTC is a federal tax credit designed to help families offset the cost of raising children. The EITC and CTC have increased economic security for families by placing money directly into their pockets and providing parents with more stability and choices. According to the Center on Budget and Policy Priorities, these two tax credits have been linked with improved infant and maternal health, better school performance, and greater college enrollment.[9]

These federal credits share a crucial feature: Both are refundable. That means families get the full value of their credit, even if it’s more than they owe in taxes. For example, if a family owes $700 in income tax and qualifies for a $1,000 EITC, the credit covers the $700 they owe, and the remaining $300 is refunded to the family.[10] Refundable tax credits are more beneficial than nonrefundable tax credits in reducing economic insecurity because they put money directly into people’s pockets, which they typically circulate back into the economy by spending on groceries, gas and other necessities.

Earned Income Tax Credit (EITC)

By supplementing the income of low-paid workers, the federal EITC is a powerful tool within our tax system that helps families experiencing economic insecurity. In addition to the federal EITC, 31 states, including Ohio, have implemented their own state EITCs. They are popular because they are effective: EITCs have been linked to improved short- and long-term health outcomes for children, higher college attendance rates and greater earnings in adulthood.[11]

According to the Center on Budget and Policy Priorities, families typically spend their EITCs on bigger purchases such as car repairs, security deposits or routine bills and expenses.[12] Previous Policy Matters Ohio research also confirmed that many Ohio families used the federal EITC for living expenses such as housing, food, and utilities.[13] The ability to make these types of purchases relieves stress for many families who, without the EITC, could not have previously done so.

The EITC can also advance racial equity. In 90% of states, including Ohio, families earning the least pay a larger share of their income in state and local taxes than higher income families do.[14] Due to long-time discrimination in the labor market, inequitable educational opportunities and other injustices, Black and Latine[15] families are disproportionately represented in the 40% of Ohio families with the lowest incomes,[16] who were completely left out of recent state income tax cuts. A refundable state EITC can provide Black and Latine families a true tax cut and a tool to improve their standard of living. [17]

Child Tax Credit (CTC)

In the early stages of the COVID pandemic, the federal government increased the value of the CTC, made it fully refundable and dropped its earned income requirements. Qualifying taxpayers could receive the credit in monthly installments, which provided families with direct payments that assisted them in affording basic household expenses such as groceries, rent, gas, child care and other necessities. According to the Brookings Institution, parents also used the extra cash from the expanded federal CTC to reduce credit card debt, learn new professional skills and manage rising consumer prices.[18] In fact, census data shows that the national child poverty rate fell to a record low of 5.2% in 2021, in large part due to the expanded CTC.[19]

The success of the expanded federal CTC in reducing child poverty and family economic insecurity can be attributed to its status as a fully refundable tax credit. Making the CTC fully refundable allowed for it to be accessed by children from families with the lowest incomes. An estimated 19 million children in the United States live in households whose CTC will be worth less or eliminated because Congress allowed the expansion to expire.[20] In Ohio alone, an estimated 698,000 children – including 64,000 Latine children and 189,000 Black children whose families qualified under the expanded credit – have been left out of the full federal CTC.

With expiration of the expanded federal CTC it is all the more important states like Ohio step up and implement tax changes that invest in families and children throughout the state. Ohio’s leaders should provide taxpayers with a refundable thriving families tax credit and the option to choose between a 10% refundable state EITC or the existing nonrefundable 30% EITC.

A Thriving Families Tax Credit and a reformed EITC would help millions of Ohioans and reduce childhood poverty

On Oct. 3, 2023, lawmakers in Ohio introduced House Bill 290, which would create a Thriving Families Tax Credit in the state.[21] HB 290 would offer eligible Ohioans a refundable credit of $1,000 per year for children ages 0-5, and a credit of $500 per year for children ages 6-17. Families making up to $65,000 would receive the full value of the credit. The credit would begin to phase out for families making above $65,000 until it completes the phase-out at $85,000.

The Institute of Taxation and Economic Policy (ITEP), a national nonprofit research institute with a sophisticated model of the state and local tax system, has modeled the impact of HB 290’s Thriving Families Tax Credit. Table 2 shows who would receive a tax cut if HB 290 is implemented.[22]

Table 2

According to ITEP’s modeling, slightly more than 1.4 million children, about 60% of the children in Ohio, live in households that would be eligible for at least a portion of the TFTC. Families eligible for the TFTC would see their tax bills drop by $1,006 on average. These tax savings are even higher for taxpayers in the lowest-income 20%. Ohioans who get the credit in that group — those making less than $26,000 per year —would get an average tax cut of $1,114. Most of the tax credits would go to low- and moderate-income tax filers, and 97% of the total value of the TFTC would go to the bottom 80% of income earners. Standing in stark contrast to the income tax cuts in HB 33, the TFTC would provide a true tax cut to Ohio’s working-class families.

HB 290 would make progress in the fight against racial inequality. In Ohio, Black and Hispanic[23] families are overrepresented in the bottom 20% of earners. Overall, Black and Hispanic families make up 13.1% and 3.5% of Ohio’s population, respectively. However, among the bottom 20% of earners in the state, 20.3% of families are Black and 5.2% of families are Hispanic. In the bottom 20% of earners alone, roughly 135,000 Black and Hispanic children would benefit from the TFTC. In all, 83.7% of Black families and 79% of Hispanic families would receive at least some tax relief from the TFTC.

As introduced, HB 290 would provide targeted tax relief to low-income families. With no income requirement and full refundability, this guarantees the most economically vulnerable families will benefit from this tax cut. The phase-out provision will keep the overall costs of the TFTC down while keeping the benefits of the tax cut to families who stand to benefit the most.

According to ITEP, HB 290 would cost the state of Ohio roughly $910 million annually. Previous Policy Matters Ohio research has provided numerous ways to fund the TFTC.[24] One example could come through the elimination of the unproductive business income deduction, also known as the LLC loophole, which by itself would generate roughly $1 billion in revenue.[25] Another source of revenue could come from the restoration of higher income tax rates on those making more than $250,000 a year, who include less than 5% of tax filers and have received giant state income tax reductions over the past two decades. The introduction of either of these revenue raising mechanisms would cover the cost of providing tax relief to those in our state who would need it the most, also reversing some of the tax shift to lower- and middle-income Ohioans that has occurred in this century.[26]

The state could provide further tax relief for working-class Ohioans by reforming the state’s Earned Income Tax Credit. Ohio’s current EITC is set at 30% of the value of the federal EITC, but it is not refundable. As a result, individuals and families with little to no taxable income miss out on the full benefit of the EITC. Adding a 10% refundable option to the EITC would put Ohio in step with the growing national trend: 27 states, DC, and Puerto Rico already have refundable EITCs; only 4 other states have nonrefundable EITCs.[27] This would also allow individuals a choice in how they receive the credit: Tax filers could choose which option would be of greater value to them between the 30% nonrefundable option or receiving a refundable credit equal to 10% of the federal EITC.[28]

ITEP has modeled a 10% refundable EITC in Ohio, similar to their modeling of the TFTC. Key results are shown in Table 3.

Table 3

Roughly 1.9 million Ohioans, including over 700,000 children, would see a tax cut thanks to a refundable EITC. Those who qualify for the credit would see a $258 tax cut on average. This form of tax relief is also highly targeted: 99% of the total value would go to the bottom 80% of Ohio earners. This stands in stark contrast to who benefited from the income tax cuts passed in Ohio’s most recent budget legislation, where 99% of the value of the more than $750 million in tax cuts went to the top 40% of earners while a family of three making the median income in the state saw a slight tax increase.[29]

A refundable option to Ohio’s EITC would also make strides on racial inequality. Based on ITEP’s analysis, Black Ohioans who qualify will see an average tax of $277, while Hispanic Ohioans would see a $315 tax cut on average. Both groups would see higher-than-average tax cuts since they are both overrepresented among Ohio’s lowest-income 40%.

According to ITEP, the annual cost of a refundable EITC would be roughly $221 million. This price tag is substantially lower than the TFTC partially because of its limited reach. While the TFTC would benefit 1.4 million children, a refundable EITC would only benefit half that amount, roughly 700,000 children. However, it would especially benefit many of the poorest Ohioans who currently don’t benefit from the nonrefundable EITC. The $221 million cost is one Ohio can afford with accompanying taxation changes cited above or other shifts in tax policy, such as the reinstatement of a corporate income tax.[30]

In additional to providing targeted tax relief, a reformed EITC and a new TFTC could combat childhood poverty in the state. The Center on Poverty and Social Policy (CPSP) is a research center dedicated to studying the role of social policy in reducing poverty. The CPSP conducted an analysis of how a TFTC combined with a 10% refundable EITC would impact childhood poverty in Ohio. According to the CPSP’s analysis, the child poverty rate would drop by an estimated 16.3%. This would equate to roughly 48,000 children moved out of poverty.[31]

Conclusion and Recommendations

In Ohio, policy makers have far too often utilized the tax code to primarily benefit wealthy Ohioans. Recent cuts to the state income tax did little for everyday Ohioans and actually increased tax burdens for several others. It does not have to be this way. It is time our policy makers provide tangible tax relief for the average Ohio, not just the wealthy one.

Our policy makers can achieve this by enacting a Thriving Families Tax Credit and a 10% refundable state Earned Income Tax Credit. With policies like a TFTC and a refundable EITC, Ohio can put dollars back into the pockets of families who need it the most. These two tax credits will also make strides against childhood poverty in the state, lifting tens of thousands of children out of poverty.

The authors would like to thank Aidan Davis and Miles Trinidad from the Institute on Taxation and Economic Policy for their assistance and analysis.

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Bailey WilliamsEITCRevenue & BudgetTax Policy