Can Colorado’s expanded tax credits shrink poverty and support work?

Common Sense Institute (CSI) released a new study Thursday examining the expanded child-related tax credits in Colorado and how they impact poverty and incentives to work.

According to the study — authored by Tamra Ryan, CSI Coors Economic Mobility Fellow; Cole Anderson, CSI Research Analyst; and Jade Gromer, CSI Daniels Junior Fellow — low-income families in Colorado are set to receive substantial boosts to their household finances following state and federal tax reforms.

“In addition to federal expansion of the social safety net through earned income tax credits (EITC) and Child tax credits (CTC), Colorado has also followed suit, expanding its CTC and EITC tax credit programs by more than $1 billion annually,” said Ryan, whose study is titled “Colorado’s Expanded Tax Credits Targeting Lower Income Families: Can They Shrink Poverty and Support Work?”

“This report examines the expanded tax credits in Colorado and how they impact poverty and incentives to work,” Ryan said. “The true test of these measures will be whether they can break cycles of poverty by strengthening the incentive to work, rather than simply elevate some people’s incomes above the statistical poverty line.”

Among the findings: 

• 10X growth in five years in poverty-reducing tax credits: Between 2021 and 2025, Colorado’s spending on child tax credits and earned income tax credits to support lower income workers and families will have grown from $97 million to $1.1 billion. This amounts to a 6% increase in the state’s general fund expenditure, given that the credits are funded by TABOR refunds. Federal spending on CTC and EITC credits is in addition to this amount.
• The structure of the expanded state tax credits supports low-income earners the most and mitigates some of the impacts of benefit cliffs. The new refundable tax credits for a single parent with one child under 6 will equal a 127% increase in income if making $4,000, 66% at $9,000 of income, 25% at $24,000 of income, and 5% at $49,000 of income. Combined with the federal benefits, the effective increase more than doubles at most income levels.
• Case data from Torch Tech shows that the new state tax credits decrease or eliminate deficits between income and expense for families at the lowest income levels. For an earner making $16/hr., the deficit falls from $4,250 to $363 under new state tax credits. Whereas workers earning less than $24/hr. faced deficits, on average, under prior levels of tax credits, the increased credits neutralize the average deficit at just $21/hr.
• A single parent with a child under 6 can receive $4,400 even while not generating any income. Studies of the subject show mixed results, but important questions remain about the long-term impacts of large refundable tax credits on poverty levels.
• Both the scale of the increase in credits and the decision to use the child tax credit as a basic income program, merit enhanced reporting and impact monitoring. If the programs can deliver on their intentions of reducing childhood poverty without disincentivizing work, then policymakers should weigh making them permanent fixtures of the state budget. Given the use of taxpayer TABOR refunds, reporting should also inform the need to institute an income or minimum hours of work threshold.

The study also recommends areas for further study and reform concerning the manner in which the state pays those credits and the sustainability of funding. Recommendations include collecting and reporting data, weighing benefits of moving to monthly payments, examining merits of pathways to permanent funding.

Read the full report here.