What’s the reason why some tax credits are non-refundable and other tax credits are refundable?
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Could be a number of things. One significant consideration is whether we want the government to more fully fund certain things versus potentially limited funding where a tax credit is capped at taxes owed. The Earned Income Tax Credit for example is fully refundable, and in many situations, there’s the potential for not only paying zero federal taxes, but getting additional funds from the government as well. The EITC is a welfare program of sorts, and while it’s hard to get into the minds of policymakers, it’s likely far more efficient to distribute all these funds directly as part of the tax filing and refund process rather than knocking tax liability down to zero and then having a second program to process the remainder of the “unused” funding that the government is willing to pay to EITC filers.
A non-refundable tax credit however, serves as an incentive to spend (or do whatever is necessary to earn the credit) only insofar as you have tax liabilities that equal or exceed the credit. While we can try to attribute some rationale to how policy and rule makers determine which are refundable and which aren’t, it likely comes down to lobbying and the need to meet projections.
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