Earlier this week, Scioto released a new cost-benefit analysis looking at what the impacts of a state child tax credit might be for Ohio. We chose to estimate the impacts of a state child tax credit because the federal child tax credit that was introduced as part of the American Rescue Plan Act went away last year.
In its short time, that child tax credit was one of the most effective anti-poverty programs in decades, lowering child poverty to its lowest percentage ever recorded. Because it no longer exists at the federal level, we were interested in seeing how it could be implemented at the state level.
Our analysis looked at three different plans for administering a child tax credit that varied based on the age of children eligible for the credit and the size of the credit. In all three of the plans, we found that economic benefits outweigh costs of the program.
In addition to measuring the society-wide costs and benefits, we were also able to perform a distributional analysis to see exactly where these costs and benefits landed.
Unsurprisingly, the majority of the benefits were received by the recipients of the tax credit and the majority of the costs were borne by those who don’t qualify for the tax credit. An important result of this distributional analysis is that if we only look narrowly at the impacts on households that don’t receive the tax credit, we find that there are actually slightly negative net benefits.
This is not to say that the people who don’t receive the tax credit don’t see any benefits from this program. Things like the expected reduction in future crime benefit everyone in society as taxpayers and possible victims of crime. However, for the people who would not qualify for this credit, this probably isn’t the most efficient way to achieve those same benefits.
For the people who qualify for this tax credit, the benefits of the program are enormous. The most significant benefit is the expected increase in future earnings for children who grow up with this extra income. For a poverty program, the ability to keep people out of poverty in the future is extremely important, and this intervention achieves that goal effectively and efficiently.
Generally speaking, this program is a small loss for people who don’t qualify, and a much larger gain for those who do. Because the qualification criteria is based on income, we know that this program benefits those who are less well off and does not benefit people at higher incomes.
These insights should hopefully help policymakers understand exactly what tradeoffs come with this sort of policy. Yes, some upper-income households will have less resources and less ability to get the things they want. However, this is overwhelmingly offset by massive gains for those in our society who are struggling the most.
Our analysis also highlights the fact that the majority of the benefits for this policy are realized in the long-term. In the short term, this helps people who are currently in poverty get a little extra income. As an investment, we are helping today’s children stay out of poverty as adults, and reducing the future burden on our social safety net. Even though there are tradeoffs, once we add everything up we expect this policy to make our society better on net.