Policymakers have begun to discuss tax reform as provisions of the Tax Cuts and Jobs Act (TCJA) set to expire in 2025. A new presidential administration and Congress will shape the future of our tax code, particularly how it distributes wealth and income across households. This presents an opportunity for economic justice groups to advocate for tax policies that provide relief to low- and moderate-income (LMI) families and carve a path towards economic mobility.
There are three particular federal tax credits that can be leveraged to increase investment in underserved communities and alleviate poverty. Economic justice advocates should pay close attention to these policies as discussions around tax reform take shape: the Child Tax Credit (CTC), Low-Income Housing Tax Credit (LIHTC) and the New Markets Tax Credit (NMTC).
The Child Tax Credit
What is the CTC?
The Child Tax Credit (CTC) aims to alleviate poverty among children. Households can claim up to $2,000 for each child under the age of 17, as long as the child is a US citizen.
Single parents with a gross adjusted income above $200,000 and married couples above $400,000 receive a partial credit, with the total value of the credit decreasing by $50 for every $1,000 of income above those thresholds. At the other end of the income spectrum, families with less than $2,500 in earnings do not receive any credit. Above that $2,500 income floor, the value of the CTC phases in at 15 cents per dollar of earnings.
Households can receive a refund of up to $1,600 per child if the credit exceeds taxes owed. Children who are ages 17-18 and full time college students ages 19-24 are also eligible for a nonrefundable credit of $500. However, families with very low or no income are not eligible to receive the CTC.
The Impact of the CTC
90% of families with children received an average CTC of $2,390 in 2022, according to the Tax Policy Center.
As strong as that ratio may appear, the 10% wholly or partially excluded from the program comprise an enormous number of Americans. Roughly 19 million children under age 17 did not experience the full benefits of CTC because their household incomes were too low: Almost 17 million children received less than the full $2,000 credit while nearly 2 million received no credit at all. These children are disproportionately Black and Latino. Many also live in rural areas. In 2021, the American Rescue Plan briefly expanded the CTC to be $3,600 per child ages 5 and younger and $3,000 per child ages 6-17, and also made all families with no or low income eligible. This version of the CTC reduced child poverty by more than 30% with the largest declines being among Black, Latino and Native American children.
What’s Next for the CTC?
When the TCJA expires, the CTC will be reduced to $1,000 per child – thus putting millions of children back into poverty.
Economic justice advocates have an opening to push for an expanded CTC like that of the Rescue Plan. Two pieces of legislation currently in Congress would expand CTC to Rescue Plan levels. The Working Families Tax Relief Act in the Senate and the American Family Act in the House would make the $3,600 credit fully available to low-income families and increase the maximum credit amount. A third bill, the Tax Relief for American Families and Workers Act, would increase the CTC but more modestly. The latter bill passed the House earlier this year but was blocked by the Senate.
The Low-Income Housing Tax Credit (LIHTC)
What Is the LIHTC?
The Low-Income Housing Tax Credit (LIHTC) subsidizes the development of affordable rental housing units across the country. The Treasury Department provides state housing agencies with credits under the program which are then awarded to affordable housing developers through a competitive process. The developers then sell their LIHTCs to private investors in exchange for the equity needed to finance the construction of affordable housing.
The Impact of the LIHTC
The LIHTC is instrumental to generating affordable housing for renters – and to supporting the wider job market. Over the past three decades, the LIHTC has not only financed the development of more than 3 million affordable rental homes, but also supported 6.3 million jobs. LIHTC projects generated over $257 billion in tax revenue and $716 billion in wages and income between 1986 and 2022.
As with the CTC’s impressive 90% reach, however, the overall picture is less heartening than the LIHTC’s topline statistics might suggest. There remains an urgent national affordable housing crisis. There are nearly 7 million more extremely-low income families than there are housing units they can afford. That supply shortage owes in part to rising construction costs. Wages have also risen slower than rents: about 12.1 million low-income households, which constitute half of all renters, spend more than 50% of their monthly income on rent. Expanding LIHTC would enable the construction of more affordable housing units, better satisfying the high demand and reducing rental costs.
What’s Next for the LIHTC?
Economic justice advocates should take note of the Affordable Housing Credit Improvement Act (AHCIA), introduced in 2023 in both chambers of Congress with strong bipartisan support. The bill would restore the 12.5% increase to the maximum cap on LIHTCs provided to state housing agencies. Congress ordered that cap increase in 2018 but let it expire in 2021. The bill would also increase the annual amount of LIHTCs allocated to states by 50%, phased in over the next two years. AHCIA would also ease the burden on developers by lowering the private bond financing threshold for LIHTC projects to 25%. The AHCIA focuses on allocating LIHTC to “hard-to-reach” areas such as rural communities, Native lands and high-poverty neighborhoods.
The New Markets Tax Credit (NMTC)
What is the New Markets Tax Credit (NMTC)?
The New Markets Tax Credit (NMTC) aims to attract investment into economically distressed communities. The Treasury Department’s CDFI Fund awards NMTCs to community development entities (CDEs), such as CDFIs, through a competitive process. The CDEs sell these tax credits to private investors in exchange for equity investments. The CDEs use the capital from the equity investments to provide affordable, flexible loans to businesses in low-income communities. CDEs have also used the capital to finance projects like construction of affordable housing, health care and manufacturing facilities.
The Impact of NMTC
The NMTC is a highly efficient mechanism for increasing the flow of private capital into underserved communities, generating $8 of private investment for every dollar of taxpayer expense. Since 2003, more than $136.3 billion of investments made from NMTCs has been deployed to low-income communities. The NMTC program has generated more than 1.2 million jobs in high-poverty areas, and constructed or improved nearly 5,000 health centers, nonprofits and community facilities.
What’s Next for NMTC?
Since its inception in 2000, Congress has periodically reauthorized funding for the NMTC program. The NMTC program will again expire in 2025. Amidst discussions for tax reform, advocates are calling on Congress to pass the New Markets Tax Credit Extension Act of 2023, which would permanently extend the NMTC program. The time it takes for Congress to reauthorize the NMTC program can cause lapses in funding, which may disrupt a CDE’s ability to strategically plan and implement community development projects. A permanent NMTC program would enable CDEs and investors to commit to and finance long-term projects that can have a larger impact on economically distressed communities and facilitate wealth-building.
Looking Ahead
The changes that the new Congress makes to the tax code will shape the economy for the next decade. Large corporations have the loudest voices in these debates – which is why it is vital for economic justice groups to push for expanding tools like the CTC, LIHTC and NMTC. The tax code sets the direction of not just economic growth but of how that growth will be shared. Protecting and expanding these three programs will increase investment in underserved communities and more evenly distribute wealth among middle- and lower-income households.
Manan Shah is a Government Affairs Associate at NCRC.
Photo by Kelly Sikkema on Unsplash.
