Minnesota bets on child tax credit to cut poverty. Will it work?
The prediction is bold: Gov. Tim Walz and DFL legislative leaders say a new child tax credit will slash child poverty in Minnesota by one-third.
“Minnesota is going to enact not just a nation-leading, but a global-leading child tax credit that will reduce childhood poverty faster than anyplace else,” Walz told a celebratory Capitol rally crowd days after the Legislature adjourned.
Statistically, the poverty rate decline is a real possibility based on research around the effects of a similar federal tax effort during the pandemic. But how it plays out on a more practical level — the ability for families to afford shelter, food and other essentials on a sustained basis — could be trickier and take longer to nail down.
“The poverty line itself is a somewhat blunt instrument on well-being,” said Economics Professor James Ziliak of the University of Kentucky’s Center for Poverty Research. “Because the way it's set up, if your household income is $1 below the line you're classified as being poor and if you're a dollar above the line you're classified as being not poor. But those households $1 below versus $1 above are going to be the same.”
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What is clear is that Minnesota is going all-in on the experiment. About $900 million in Minnesota’s next two-year budget will pay for the tax credit of up to $1,750 per child, with no limit on the number of children in a home who qualify.
It’s a program that Ziliak and other national experts on poverty say is unmatched by any state in terms of eligibility and payment size.
Professor Luke Shaefer, who directs the University of Michigan’s Poverty Solutions initiative, said he’ll be keeping close tabs on what results.
“It's not a silver bullet. It's not going to solve all of the challenges that we face, but no policy is. And this one is one that works. It is one that we should be able to see positive impacts in a year's time,” Shaefer said. “You can see those child poverty reductions relatively quickly.”
Not one size fits all
Because the credit is situational, not all families will receive the maximum. Once household earnings reach a certain level — $29,500 for single filers and $35,000 for couples — the credits start to taper. Calculations figure in an existing but modified working family credit. Having more children in a household provides more credits at higher allowable income limits.
For a couple with one child under age 17 and earnings of $35,000, they could expect about $1,000 more than they’re getting in working family credits now. A family with four children and making $90,000 that had been ineligible for the past forms of relief might get around $750 total in a child tax credit.
The credit is purposely elastic so it can touch more families but still send the most money to those with the tightest budgets.
Single parent households fare particularly well. For instance, a single parent of four making $40,000 would net about $4,200 more than current tax credits.
Unlike some other assistance programs where there is a disincentive to earning income, this delivers tax relief to families with parents in the workforce.
It’s fully refundable, meaning even if a filer owes less in taxes than the credit itself, the difference accrues to the taxpayer.
Recipients decide where to put the money, so there are no guarantees the child tax credit proceeds will be used on things for children. But experts say when the federal government did something similar during COVID-19, studies showed that money tended to go for basic needs.
The now-reduced federal credit amounted to a few thousand dollars extra for many families and was available in monthly installments.
‘Something they could rely on’
Initially, Minnesota's will be a once-per-year payment. The first will arrive when people file their 2023 tax returns early next year.
The Department of Revenue has authority to split it into installments, but Commissioner Paul Marquart said his agency isn’t administratively ready to do that and might not be for another year or more.
House Taxes Committee Chair Aisha Gomez, DFL-Minneapolis, said it will deliver a big lift even if delivered only once per year.
“We know that low income people rely on their tax returns to make big purchases. People put off getting medical attention, dental work done, fixing their car, buying clothes for their kids in anticipation of tax returns and these tax credits,” she said. “So we did want to give people something they could rely on moving forward.”
Advocacy groups are excited but cognizant they’ve got a communication challenge to apprise families of what they might be in line for.
Saint Paul Promise Neighborhood, which connects families with supportive services, is exploring how to partner with other groups or tax preparers to break it down, according to its director, Tiffany Scott Knox.
“Just making sure that it doesn't have implications to their other benefits and then just understanding how to navigate the system, I think is critical,” Scott Knox said. “And we have a lot of families [where] English is not their first language, but also not understanding the system and how the system works and how to navigate that.”
Classifying who is in poverty
Then, there are questions about how to best measure progress.
The poverty-reduction estimate is frequently touted by proponents. It comes from an analysis done by Columbia University’s Center on Poverty and Social Policy at the request of Minnesota officials.
That simulation estimated that Minnesota’s 6.9 percent child poverty rate — about 90,000 of the 1.3 million children in the state — could fall to 4.6 percent.
But even as the estimated decline of 33 percent made its way into press releases, speeches and interviews, the Columbia memo noted the conclusion was drawn from a small population sample size and had other data limitations.
“Given this, our estimates should be interpreted with caution and are less precise than they would be with a larger sample,” the center wrote to state Revenue Department officials.
The center did similar research when the federal government temporarily expanded and accelerated a child tax credit to assist families during COVID-19. The estimate of a roughly one-third drop in poverty was similar to what’s being projected for Minnesota.
Gomez, who helped craft the tax policy, expressed some discomfort in a recent interview about leaning too much into the projections around reduced child poverty.
“You don't want to get overly cute about getting your anti-poverty statistic,” she said. “We're just so aware that there are more families than that who are really struggling to make ends meet.”
“The federal poverty guidelines are so outmoded. I mean they're decades old. They don't reflect the reality of raising a family and the economy that we live in today,” she added.
Ziliak, the Kentucky professor, led a National Academies of Sciences, Engineering and Medicine committee that issued a report in March to the Census Bureau. It urged a rewrite of the Supplemental Poverty Measure — one of the data points used in the Minnesota projection — to include more financial measurements on both the income and expense side to better reflect current conditions of poverty.
Ziliak said while the line on poverty has to be drawn somewhere there is room for interpretation.
“It's also important to recognize how far above the line households are placed,” he said. “Because it's after they get above the line, how far above will really determine their financial security much more so than whether or not they're just classified in statistical poverty or not.”
A generational push
The University of Michigan’s Shaefer favors the creation of a dashboard that goes deeper into symptoms of poverty: Food hardship, access to quality child care and even credit scores or bank balances.
“Years ago, we only had poverty estimates from survey data that would often come out more than a year after the time period that that data was representing. Now, we just have many different kinds of data,” he said. “We're blessed with sort of this emergence of many different sources of data so you can track some of the impacts of programs like this.”
To Tiffany Scott Knox, a key measurement she’ll be watching as Minnesota’s tax credit rollout begins is basic household stability.
“How we would measure success for this is if our families are able to maintain their household and not have high mobility,” she said, noting how mobility can cause emotional distress among children and disrupt learning if school settings often change.
Marquart, the state revenue commissioner, said while the state might see a statistical drop in child poverty sooner it could be years before it contributes to better educational outcomes, improved health or pathways away from societal struggles with homelessness or crime. That, he said, could require long-term studies, too.
“This is going to be generational,” he said. “But you have to plant the seed to grow that tree today if you're going to enjoy the shade of it in 20 years.”