Five Ways to Strengthen Tax Credits for Workers

The American Rescue Plan expands tax credits for working families, but many of these changes fall short of the need. Here's what state lawmakers can do to better support workers.

Published on May 17, 2021 in Economic Justice, Tax and Budget

The American Rescue Plan (ARP), which was signed into law by President Biden in March 2021, is set to provide critical relief to workers and families hard hit by the COVID-19 pandemic. The law, widely considered the biggest anti-poverty plan in decades, includes expansions to tax credits for workers, unemployment benefits, health coverage, and food and housing assistance.

Notably, this relief package substantially, but temporarily, expands two key tax credits: the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC). For the CTC, which helps working families offset the costs of raising children, the ARP expands eligibility to include all children with a Social Security number except those in households with the highest incomes and increases the maximum credit amount. In addition, ARP expands the Earned Income Tax Credit (EITC) for workers who do not claim dependent children by broadening age restrictions and increasing the maximum credit amount. Unfortunately, most of these changes are scheduled to expire after one year. Federal lawmakers should extend these investments to build a more equitable recovery and permanently strengthen these programs.

In the absence of permanent changes to address inequities in the federal EITC, access to this vital program remains limited: it has age restrictions for workers without dependent children, excludes immigrants, and can penalize survivors of domestic violence. In addition, the permanent version of federal CTC excludes many of the households who need it most. The good news is that New Jersey does not have to wait for the federal government to address these issues — the state can strengthen its own state-level tax credits. Here are five steps New Jersey lawmakers can take right now to improve the economic security and wellbeing of low-wage workers and families.

1. Stop Excluding Immigrant Workers Who File Taxes 

Both the federal and New Jersey EITC exclude immigrants who do not have a Social Security number (SSN)> altogether. As a result, tens of thousands of immigrant households are excluded from this program, even if they file taxes using an Individual Taxpayer Identification Number (ITIN). This arbitrary exclusion pushes immigrant households who are struggling to make ends meet further behind. New Jersey can make this tax credit more inclusive by removing this discriminatory barrier and extending access to New Jerseyans who would qualify for the credit but for the type of number they use to file their taxes. In addition to expanding access to the state EITC, New Jersey should also provide ITIN filers the value of their denied federal EITC so they receive the same total tax credit as other workers.

2. Permanently Remove Age Restrictions to EITC Eligibility

For workers without qualifying children, eligibility for the EITC is subject to age restrictions – workers who do not claim children as dependents are only eligible for the federal EITC if they are between the ages of 25 and 64. In 2020, New Jersey took an important step toward addressing this shortcoming by lowering the minimum EITC eligibility age for workers without qualifying children from 25 to 21. New Jersey can build on this progress by eliminating the age limits for workers without qualifying children altogether, allowing young people under 21 and seniors over 65 to benefit from this important program. The state should also address the gap created by the federal EITC’s narrow eligibility rules by providing these workers with the full amount of the federal EITC that they are denied.

3. Expand the EITC Income Eligibility and Increase Credit Amount for Workers Without Dependent Children

For workers who are not raising children at home, the EITC is limited in two big ways: the maximum credit amount is lower than for residents with children, and the income eligibility threshold is much lower, meaning fewer workers qualify. The maximum state EITC that a worker without dependent children can claim for the 2020 tax year is just $215 compared to $1,434 for a worker with one child. For the same tax year, the maximum income threshold is only $15,280 for a single adult – less than what a person earning the minimum wage and working full-time would have earned in 2020  – compared to $41,756 for a single worker with one child. New Jersey could provide a more meaningful boost for individuals earning low wages by raising the maximum credit amount for workers without qualifying children and by increasing the income cap to match the earnings of a full-time worker earning the minimum wage.

4. Expand EITC Eligibility for Domestic Violence Survivors

Individuals who file their taxes with the status “married filing separately” are ineligible for any EITC. This limitation penalizes some survivors of domestic violence; individuals who leave a relationship in the latter half of the tax year or have not legally divorced are typically required to file their taxes as married filing separately, and as a result, are not eligible for the EITC. By allowing tax filers who are unable to file a joint return because of domestic violence to claim the EITC, New Jersey can better support the safety and economic security of survivors.

5. Establish a State Child Tax Credit and Make the Child and Dependent Care Credit (CDCC) Fully Refundable

Regardless of whether or not federal lawmakers extend the temporary expansion of the federal CTC, New Jersey can build upon and address gaps in the CTC by creating a state version of this credit. In addition, New Jersey can make its current CDCC more inclusive by making this credit fully refundable.

Expanding Tax Credits for Workers  Benefits Working Families and the Economy Alike

Expanding access to New Jersey’s tax credits for working families would not only relieve financial hardship for low-wage workers ― many of whom are essential workers ― it would also serve as a fiscal stimulus. By putting money in the hands of people who need it and are likely to spend it immediately, these credits increase demand for goods and services, strengthening the broader economy and local communities across the state.