Children First: An Economic Analysis of Governor Katie Hobbs’ Child Tax Credit
With the 2022 election in the rear-view mirror, Arizona now has a democratic governor for the first time in over a decade. While our previous research note focused on Hobbs’ tax cuts, her child tax credit is likely to have the greatest impact on Arizona’s economy and society at large. As explained on her campaign website, Hobbs’ tax credit would give $250 per child each month, for a total of $3,000 per year, to families making up to $100,000 per year, with a budget cost of $147 million. Economists who have analyzed her plan claim that doing so would put more money in the pocket of parents and allow stay-at-home parents to enter the workforce. However, beyond these direct effects, Hobbs’ plan would have a broader and deeper impact on the economy and Arizona families than one might think, from alleviating the current labor shortage to pulling tens of thousands of families and children out of poverty. To understand why, let us explore the impact of tax credits on people’s incomes, their behavior, and their collective effect on the economy.
First, tax credits need to be differentiated from tax deductions and exemptions. Tax credits work by crediting a dollar amount to the taxpayer if they meet certain criteria, in the child tax credits case by having one or more child dependents. In contrast, deductions work by allowing a taxpayer to subtract categories of expenses, such as charitable donations or retirement contributions, from their total tax liability. Exemptions work like deductions but are usually set at a fixed amount and are for permanent involuntary conditions such as blindness, old age, and those supporting dependents parents or ancestors in nursing homes or via their own labor. Note that unlike tax deductions, tax credits do not reduce a taxpayer’s taxable income and that their final tax bill come April 1st would remain unchanged.
Looking at the numbers make the financial benefits of these distinctions clear. Taxpayers making $75,061 a year, which was the median income for families with children under 18 in Arizona in 2021, would usually pay $1,419.36 in state income tax annually based on a 2.55% tax rate accounting for a standard deduction of $19,400. A $3,000 tax deduction would lower the income they have to pay taxes on to $52,661, which equates to a tax bill of $1,342.86, or an overall annual savings of $76.50. In contrast, taxpayers receiving the $3,000 child tax credit payment would still have a tax bill of $1,419.36, but would nevertheless receive monthly payments worth $3,000. Based on these calculations, a taxpayer would save 39 times more money with a tax credit than a tax deduction. In addition, Hobbs’ child tax credits scales based on the number of children. For example, a taxpayer with two child dependents would receive $500 per month, for a total payment of $6,000 annually.
While this financial help might only be a fraction of a household's budget, the sheer cost of raising children makes these credits critical for helping families and single mothers and fathers. For instance, the Department of Agriculture’s most recent report on child expenses estimated that a two-child, middle-class, married couple family spends $12,980 per child per year, with 63%, or $8,177.40, going to housing, food, child care, and education. For this hypothetical family, Hobbs’ tax credit would cut the cost of raising both children by almost a quarter. Additionally, since they would be receiving this money on a monthly basis, the family’s consumption would be smoothed over the year and allow them to factor the tax credit into their medium and long-term financial decisions. It would also greatly reduce Arizona’s 12.8% poverty rate, with an estimated drop of 5.2% if Hobbs’ plan produces the same effects that the American Rescue Plan did when it expanded the Child Tax Credit for 2021.
However, children are as expensive in time as they are in money. For example, in 2021 parents spent on average two and a half hours dedicated solely to caring and helping their children. Furthermore, mothers and fathers spent on average seven and five hours respectively caring for their children while doing other activities such as chores or working from home. These high demands have contributed to the 11.5% gap in labor force participation rates between men and women, which stand at 68% and 56.5% respectively. Women’s low workforce participation rate has also been exacerbated by the COVID-19 pandemic as school and daycare closures kept children at home. The rate is currently sitting at its lowest level since the 1970s.
Applying the current rates to Arizona’s current population and gender demographics, increasing women’s workforce participation rates to match men’s would increase the number of available workers by more than 400,000. The sheer size of the potential impact, even if it is smaller than expected, is more than enough to fill the state’s 220,000 unfilled job openings. Furthermore, the child tax credit would not just increase workforce participation for women, but for Arizonans in general. After all, children may be cared for by someone other than their mother, including by fathers, other relatives like aunts and uncles, and other people who the child’s parents trust. If the money from the tax credit is used to fund daycare attendance or to purchase child care services, these individuals would be freed up to enter the workforce as well.
One important caveat though is the tax credit’s price-tag of $147 million. Although this price might seem steep, the program will partially pay for itself through reinvestment into the economy and increased tax revenue. After all, since two of the largest expenses for families are food and rent, the tax credit is likely to increase their consumption, which would lead to increased rent and sales tax revenues. The increased financial security of families would also lessen the financial load on other, more expensive parts of Arizona’s welfare system. For instance, the Department of Economic Security, which administers the state’s food and housing assistance programs, is currently allocated almost a billion dollars. Making sure that families do not need to access its resources in the first place would free up much of this funding to improve its existing programs or to reallocate it back into the broader budget without affecting the quality of its services.
Overall, the impact on Arizona from the Hobbs’ child tax credit is a net benefit for families as it puts more money in people’s pockets. It also benefits society as a whole as it decreases poverty, increases workforce participation, and lessens the burden on the state’s safety net. And most importantly however, is that these benefits last. Increased food and housing security will improve educational outcomes and lessen familial anxiety and stress that curbs physical and mental development. This will further raise workforce participation rates as those with high school degrees are more likely to enter the workforce than those who do not, and will permanently move people out of poverty and the state’s welfare system. In other words, by directly supporting children and their families, we are not just helping them but helping secure Arizona’s future economic prosperity.