Tax credits are anti-poverty tools | Oklahoma Senate Interim Study | Oct. 10, 2024

OK Policy’s Fiscal Policy Analyst Aanahita Ervin spoke with lawmakers about how state tax credits can be an effective tool in reducing poverty. Ervin and OK Policy Research Director Anthony Flores both spoke during an Oct. 10, 2024, interim study in the Oklahoma Senate focused on decreasing poverty in Oklahoma. The following is a transcript of her comments. (Flores’ comments can be found here.) The full video of the interim study – IS-24-036, Decreasing Poverty in Oklahoma (Senators Kirt and Hicks) – can be viewed at the Oklahoma Senate website.

Comments from Aanahita Ervin, Fiscal Policy Analyst for the Oklahoma Policy Institute:

Hello everyone, my name is Aanahita Ervin, and I am the Fiscal Policy Analyst at the Oklahoma Policy Institute. At OK Policy, we use data-informed approaches to build toward an Oklahoma where all families can thrive. I will be presenting today on targeted tax credits and how they can be used as a tool to fight poverty in our state.

To give you an idea of what’s to come, we will first discuss what tax credits are, define some terminology, and go over how tax credits have been proven to alleviate poverty. Then we will discuss what tax credits are available to low-income Oklahomans and how we can improve those tax credits to provide more targeted relief to families who need it.

The tax system is a critical part of the safety net. More than one-third of all public support for families in the United States are delivered through tax provisions. Hence, tax credits can drastically decrease poverty. Let’s define some terminology around tax credits.

What are tax credits?

They are dollar for dollar amounts that reduce what an individual owes in taxes. These credits can be refundable or non-refundable.

Refundable means any credit amount left over after a person’s taxes are paid are refunded to the taxpayer. Non-refundable tax credits are less useful to low-income taxpayers because they tend to have low tax liabilities. Refundability allows low-income taxpayers to benefit from that surplus tax credit amount.

Lastly, regressive taxes are those that are applied uniformly to all income levels, which puts a higher burden on lower-income families because they pay a larger portion of their income in those taxes.

As my colleague Anthony illustrated, tax credits provide vital support and are proven to reduce poverty. Some of the largest federal tax credits reduce poverty by supplementing low earnings, assisting with the cost of raising children, or covering child care needs. State versions of these credits further boost those benefits.

The refundable tax credit amount allows families to meet their necessities and shifts their mindset from mere survival to planning for their future.

It also improves educational outcomes for children as they do better in school, are more likely to attend college, and expected to earn more as adults.

Lastly, the child tax credit and the earned income tax credit have been shown to have a positive impact on the labor market.

So with that, let’s talk about three tax credits in Oklahoma that are meant to help low-income families…starting with the Sales Tax Relief Credit.

The Sales Tax Relief Credit alleviates poverty by mitigating the regressivity of the sales taxes. Let’s look at how it works.

The amount of the credit has not changed in over three decades, staying at $40 per person. During this time, the Sales Tax Relief Credit has lost 60 percent of its buying power.

In the meantime, while the state has eliminated the state grocery sales tax, other state sales taxes, as well as county and city sales taxes, mean that low-income Oklahomans are still paying a lot in sales taxes.

The Sales Tax Relief Credit is only available to eligible families or individuals that make below a certain income. This table shows us where Oklahoma stands compared to other states that have some version of a sales tax relief credit.

It is clear that we are lagging significantly behind. We need to modernize our Sales Tax Relief Credit.

How can we do that?

The state can start by increasing the credit amount to $200 per person. Next, the income eligibility can be expanded to cover more households. Lastly, the credit should include a phase out scheme to help ease people off the credit and avoid benefit cliffs.

The Earned Income Tax Credit is a targeted way to boost economic security of households.

The Oklahoma Earned Income Tax Credit currently is 5 percent of the 2020 federal EITC amount.

Four out of six of our neighboring states set their state level credit at a higher percentage of the federal credit amount.

The EITC amounts change with the number of dependents a family claims. But to give people an idea of dollar amounts, a family with one dependent right now gets $179.

Re-coupling the state credit to the federal credit would increase the amount slightly to $211, but increasing it from 5 percent to 25 percent of the latest federal credit boosts the amount up to a little over $1,000 – an amount that can help cover overdue rent or a medical bill.

To do this, the Earned Income Tax Credit should be tied to the federal credit, expanded from 5 percent to 25 percent of the federal credit, and be made accessible to all taxpayers.

The last tax credit we will discuss is the Child Tax Credit, which can drastically reduce child poverty.

The Child Tax Credit was created to provide financial relief to low-income families with children. The Child Tax Credit expansion in 2021 reduced poverty by nearly a third in six months, illustrating how effective this tax credit can be.

Similar to the Earned Income Tax Credit, the Oklahoma Child Tax Credit is also 5 percent of the federal child tax credit credit amount. Unfortunately, the Oklahoma Child Tax Credit is non-refundable, so any surplus credit amount does not go back to families. Additionally, in Oklahoma, understanding and claiming the credit can require some specialized knowledge. Lastly, the Oklahoma Child Tax Credit is available to eligible families making less than $100,000.

The child tax credit needs to be modernized to better serve Oklahomans.

First, we need to make the Oklahoma Child Tax Credit refundable to make it more effective.

Next, we should create an Oklahoma Child Tax Credit independent of the federal credit because of the uncertainty around the continuation of the federal child tax credit. Decoupling the state credit from the federal credit removes uncertainty and gives Oklahoma more freedom to set the amount high enough to decrease state poverty levels and benefit families that need it most.

It helps the state of Oklahoma avoid the shortcomings of the federal CTC. Many other states have already implemented this successfully. However, this decoupling of the child tax credit from the federal credit is a long term undertaking.

So, in the short term, Oklahoma can improve its current child tax credit by increasing the amount to at least 45 percent of the federal CTC, or up to 60 percent. This would be comparable to other states, at $900- $1,200 per child.

With that, I conclude this presentation. Thank you for the opportunity to present in this interim study.