Can Refundable Child Tax Credits Effectively Reduce Child Poverty?

This article asks whether states can affordably implement a targeted, fully refundable Child Tax Credit (CTC) to reduce child poverty. Using data from the Current Population Survey Annual Social and Economic Supplement (2019–2023), the study simulates state-level CTC impacts and funding options, focusing on Temporary Assistance for Needy Families (TANF) Maintenance of Effort funds. Findings show that the average state could finance 61% of costs with existing TANF resources, with total costs under 2% of state tax revenues. The targeted CTC would reduce child poverty by about 10% and deep child poverty by 21%, outperforming other income-transfer programs.

The Policy Scientist’s Perspective

This article makes an important contribution to the literature by exploring whether states can independently implement a targeted Child Tax Credit to meaningfully reduce child poverty. The policy issue is critical given the federal retreat from expanded credits, and the study’s simulations show notable potential effects at relatively low cost. Its contribution lies in outlining a practical, state-level path forward. While the CPS data are strong for estimating poverty rates, the analysis relies on simulations rather than causal inference, leaving uncertainty about behavioral responses. Future research should employ causal designs or natural experiments to test impacts. Consistent with prior findings, the results suggest targeted refundable credits are among the most efficient policies for reducing child poverty.

Full Citation and Link to Article

Parolin, Z. (2025). Targeted Child Tax Credit: An affordable option for state governments to reduce child poverty rates. Journal of Policy Analysis and Management, 1–11. https://doi.org/10.1002/pam.70026

Central Research Question

The central research question addressed in this article is whether U.S. state governments can design and implement a targeted, fully refundable Child Tax Credit (CTC) that meaningfully reduces child poverty while remaining financially affordable within the constraints of state budgets. Following the expiration of the expanded federal CTC in 2021, which temporarily produced the lowest recorded child poverty rate in U.S. history, the study asks if states could fill the gap by leveraging existing fiscal tools, particularly Temporary Assistance for Needy Families (TANF) Maintenance of Effort (MoE) funds, to deliver similar anti-poverty benefits. The author explores both the feasibility of such a program and its potential size effects on reducing child poverty and deep child poverty.

Previous Literature

The research builds on a substantial body of scholarship examining the impact of the CTC and related income support programs. The 2021 federal expansion of the CTC demonstrated that full refundability and increased benefit levels significantly reduced child poverty (Curran et al., 2023; Parolin & Filauro, 2023). Prior studies highlight that extending benefits to families with little or no earnings accounted for much of the reduction in poverty rates, and that the reform’s anti-poverty impact was historically significant (Maag et al., 2023; Pilkauskas et al., 2023). At the same time, research shows that such expansions are politically vulnerable and fiscally costly at the federal level, making them difficult to sustain. Studies of other income transfer programs, including SNAP and the Earned Income Tax Credit (EITC), demonstrate varying degrees of effectiveness, but few match the efficiency of the CTC in directly reaching low-income families. In addition, state-level efforts to implement their own versions of the CTC have emerged in recent years, with 16 states adopting refundable credits by 2025. However, states’ approaches vary widely in generosity, refundability, and phase-out design, often creating benefit cliffs or budgetary tensions (Ahmad & Landry, 2023). Literature on TANF has also documented how state spending has shifted away from direct cash assistance since welfare reform in the 1990s (Hahn et al., 2024), suggesting untapped potential in reorienting funds toward direct poverty alleviation. Thus, this article contributes to the ongoing discussion by providing a targeted proposal that could maximize poverty reduction while remaining affordable for states.

Data

The analysis relies on microdata from the Current Population Survey’s Annual Social and Economic Supplement (CPS ASEC), pooling data from reference years 2019, 2022, and 2023 to simulate poverty impacts under the Supplemental Poverty Measure (SPM). The SPM is chosen because it accounts for tax credits and near-cash transfers, making it more comprehensive than the Official Poverty Measure (OPM). The author also draws on administrative data from the U.S. Department of Health and Human Services regarding states’ TANF Maintenance of Effort spending, as well as National Conference of State Legislatures summaries of state-level CTC policies. Appendix tables and simulations explore variation across states, considering differences in cost of living, TANF budgets, and existing uses of MoE funds. Additional sensitivity analyses use alternative CPS ASEC combinations to check robustness. Together, these data sources allow the author to estimate both the affordability of a targeted state-level CTC and its potential anti-poverty effects.

Methods

The study employs microsimulation methods to estimate how a targeted, fully refundable state-level CTC would affect child poverty and deep child poverty across states. The proposed CTC is structured to align with the refundable portion of the federal CTC, offering $1,600 per child (based on 2023 tax parameters, later updated to $1,700 in 2024) with no earnings requirement for eligibility. Benefits phase out at the same income thresholds at which the federal CTC fully phases in, ensuring complementarity and avoiding increased marginal tax rates for low-income parents. Simulations estimate the proportion of costs that could be covered by TANF MoE funds not currently used for direct cash assistance, with remaining costs compared to states’ total tax revenues. The analysis also compares the targeting efficiency of the proposed CTC to other programs such as SNAP, TANF, and the EITC. Key outcome measures are the percent reduction in child poverty and deep child poverty rates under the SPM framework. While the study provides strong descriptive evidence, it does not employ causal inference methods, and thus the results should be interpreted as simulated projections rather than estimates of realized causal impacts.

Findings/Size Effects

The findings show that a targeted state-level CTC could deliver substantial reductions in child poverty at relatively low fiscal cost. On average, states could cover 61% of the program’s costs with TANF MoE funds alone. For 18 states, these funds would fully cover the program, while for five states, they would cover less than 20% of costs. Even in the least favorable scenarios, the remaining costs amount to less than 2% of total state tax revenues, and in most states less than 1%. The anti-poverty effects are notable: the average state would see a 10% reduction in child poverty and a 21% reduction in deep child poverty. Nine states would experience reductions exceeding 15% in overall child poverty, and seven states would see declines of more than one-third in deep child poverty. Nationally, if all states adopted the program, child poverty would fall from 12.9% to 11.8%, and deep child poverty would drop from 3.5% to 2.8%. Importantly, the targeted CTC outperforms SNAP, TANF, and the EITC in terms of efficiency. Roughly 61% of benefits flow to families in poverty, compared to 54% for SNAP, 41% for the EITC, and 56% for TANF cash assistance. For deep poverty, the targeting advantage is even stronger, with 36% of benefits reaching deeply poor families versus 25% for SNAP, 9% for the EITC, and 35% for TANF. The cost per person lifted from deep poverty under the targeted CTC is estimated at $11,675, far lower than SNAP ($18,825), the EITC ($25,364), or TANF ($17,003). The proposal also avoids benefit cliffs that plague some existing state CTCs, aligning more smoothly with the federal benefit structure and maintaining work incentives. These results underscore that states could significantly reduce poverty with a modest financial commitment, achieving higher efficiency than most existing income transfer programs.

Conclusion

The study concludes that state governments have both the fiscal capacity and policy design tools to implement a targeted, fully refundable CTC that meaningfully reduces child poverty. By leveraging TANF MoE funds and structuring benefits to complement federal tax credits, states can deliver cash support that avoids work disincentives and administrative burdens. The projected 10% decline in child poverty and 21% decline in deep child poverty make the policy a compelling option, particularly given its efficiency relative to other transfer programs. However, limitations remain. The analysis does not capture potential behavioral responses, though prior research on the 2021 federal CTC and state EITC expansions suggests minimal labor market impacts. There are also trade-offs in reallocating TANF MoE funds from childcare or welfare services, which could produce other social costs. Furthermore, tying state-level benefit design to the federal CTC creates risks if federal benefit levels change in the future. Despite these caveats, the article provides a significant contribution by demonstrating that ambitious state governments need not wait for federal action to address child poverty. Follow-up research using causal inference methods—such as natural experiments or randomized controlled trials—would help confirm the simulated results, especially regarding long-term effects on employment, family stability, and intergenerational mobility. Overall, the article reinforces the growing evidence that refundable tax credits are among the most powerful tools for combating child poverty, and it provides policymakers with a feasible blueprint for state-level implementation.