Wednesday, October 29, 2008

Analysis of state income taxes on families in poverty

For many years, the federal government here in the states has not charged income tax to families in poverty. But about half of the states still do charge income tax to single parent families.

One of our favorite think tanks the Center on Budget and Policy Priorities has a dizzying array of stats and figures, so I will let them hand them to you in our snippet.

But let's highlight the point of all this. Not charging income taxes to those in poverty will help them get out of it. Also, it will make finding work more appealing. If they don't have income taxes, it will help offset the other costs of work, such as daycare or gas.

Some states levy income tax on working families in severe poverty. Nine states — Alabama, Georgia, Hawaii, Illinois, Indiana, Michigan, Montana, Ohio and West Virginia — tax the income of two-parent families of four earning less than three-quarters of the poverty line ($15,902). And six states — Alabama, Hawaii, Louisiana, Michigan, Montana, and West Virginia —tax the income of one-parent families of three earning less than three-quarters of the poverty line ($12,398).

In some states, families living in poverty face income tax bills of several hundred dollars. A two-parent family of four in Alabama with income at the poverty line owes $423 in income tax, while such a family owes $409 in Hawaii, $325 in Oregon, and $258 in West Virginia. Such amounts can make a big difference to a family struggling to escape poverty. Other states levying tax of more than $200 on families with poverty-level incomes include Illinois, Indiana, Iowa, Michigan, and Montana. At the other end of the spectrum, a growing number of states offer significant refunds to low-income working families, primarily through Earned Income Tax Credits.

Between 2006 and 2007, states’ tax treatment of poor families improved in a number of states, but worsened in others. Twelve states implemented measures to shield more low-income families from the income tax or to reduce the taxes they owe. Alabama, Arkansas, New Jersey, and West Virginia — which in 2006 levied some of the highest taxes on low-income families — made major improvements in 2007.

Unfortunately, a number of other states increased income taxes on poor families, though by smaller amounts. The reason for these tax increases is that provisions designed to protect low-income families from taxation — including standard deductions, personal exemptions, and low-income credits — were not increased to keep up with inflation.

Future years are set to bring continued improvement. A number of states have enacted reforms that will reduce taxes on low-income families in the near future. Between 2008 and 2010, the District of Columbia, Indiana, Louisiana, Maryland, Michigan, New Jersey, North Carolina, Oklahoma and West Virginia each will improve their income tax treatment of the poor. If these changes were in effect in 2007, the number of states taxing poor families of four would have been 15 rather than 18, and the number taxing poor families of three would have been 11 rather than 15.

States seeking to reduce or eliminate income taxes on low-income families can choose from an array of mechanisms to do so. These mechanisms include state Earned Income Tax Credits (EITCs) and other low-income tax credits, no-tax floors, and personal exemptions and standard deductions that are adequate to shield poverty-level income from taxation. Some states go beyond exempting poor families from income tax by making their EITCs or other low-income credits refundable. These policies provide a substantial income supplement to families struggling to escape poverty, and they are relatively inexpensive to states, since these families have little income to tax.

The link to the full study can be found here.

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