Poor Families in Most States Pay Less Income Taxes Than in the Past,
But Substantial Burdens Remain

Report - (264K PDF - 61pp.) State Fact Sheets

Twenty of the 42 states with income taxes require families to pay taxes on earnings even if their incomes are below the poverty line, according to a new study by the Center on Budget and Policy Priorities. But 22 other states now exempt such working-poor families with three or four members from the income tax.

Since 1996 four states have stopped taxing the incomes of poor families, and eleven others have brought their thresholds up closer to the poverty line than they were in 1991.

Still, very poor families with incomes below half of the poverty line remain liable to taxation in four states. Thirteen other states levy income tax on families with full-time minimum-wage earnings — several thousand dollars below the poverty line.

The annual report assesses the impact of each state's income tax on low-income families with children for tax year 1999, the tax returns families are currently filing. It focuses on income tax thresholds, the income level at which a family would begin to owe state income tax. The report also evaluates trends in state income tax policies since 1991.

Tax year 1999 marks the first year in which the states' income tax thresholds are, on average, above the poverty line. The average of the states' tax thresholds for a family of four has risen from $11,736 in 1991, about 15 percent below the poverty line, to $17,117 for tax year 1999, just over the poverty line. The 1999 poverty line is $17,028 for a family of four and $13,290 for a family of three.

"It's encouraging to see states adopting tax relief for the poor," said Nicholas Johnson, co-author of the report. "But given the strength of state finances and the importance of assisting the working poor, low-income tax relief is less widespread than one might expect."

Many states are urging more families to make the transition from welfare to work, and welfare caseloads are declining. Recent evidence from several states shows that many welfare recipients have earnings little higher than the minimum wage and few benefits. A number of studies show that welfare recipients who find jobs have average earnings of $2,000 to $3,000 per quarter, or $8,000 to $12,000 per year. Many earn less.

"Many parents are working long hours for little money as they struggle to move out of poverty," said Robert Zahradnik, co-author of the report. "Targeting income tax relief to the poor is a simple and effective way to support those parents and help them meet the costs of child care, transportation and other work-related expenses."

States with below-poverty thresholds

Taxes paid by low-income families in the 20 states with below-poverty thresholds push them deeper into poverty. The report finds:

• The average level at which a two-parent family of four begins to owe tax in states that tax the poor is about $11,600, well below the 1999 poverty line of $17,028 for a family of four.

• Four states — Alabama, Illinois, Kentucky, and Virginia — impose an income tax on very poor families of three or four, those with incomes below half the poverty line. Those four states and nine others also levy income taxes on poor families earning no more than the minimum wage for full-time work.

• In the 18 states that tax a single-parent family of three with income equal to the poverty line, the average tax is $154. Seven states — Alabama, Hawaii, Illinois, Indiana, Kentucky, Virginia, and West Virginia — levy a tax of $200 or more on such families.

• In the 20 states that tax a two-parent family of four with income equal to the poverty line, the average tax is $219. In nine states — Alabama, Arkansas, Hawaii, Illinois, Indiana, Kentucky, Oregon, Virginia, and West Virginia — the income tax bill for such a family exceeds $250. In Kentucky, a family of four with poverty-level income owes $555 in state income taxes.

Some states relieving taxes on the poor; others allow taxation to increase

Several states that tax the poor did significantly raise their 1999 thresholds above 1998 levels, but the thresholds remain below the poverty line. In Delaware and New Jersey, the increases were enacted as parts of multi-year reductions, each of which are expected to eliminate income taxes on poor families in future tax years. Hawaii's 1999 tax threshold also increased by a substantial amount, although it remains below the poverty line.

By contrast, a few states have allowed taxes on the poor to increase.

• In eight states — Alabama, Arkansas, Kentucky, Louisiana, Montana, Oklahoma, Virginia, and West Virginia — the amount of tax owed by a family of four with poverty level income actually has increased between 1994 and 1999.

States with above-poverty thresholds

By contrast, the report finds a substantial number of states assisted low- and moderate-income working families by levying no income tax until a family's income was well above the poverty line or by offering refundable tax credits for low-income families.

• Ten states — Arizona, California, Colorado, Connecticut, Maryland, Minnesota, New York, Pennsylvania, Rhode Island, and Vermont — have tax thresholds over $22,000 for two-parent families of four, thus eliminating taxes for families with income up to at least 125 percent of the poverty line.

• Nine states — Colorado, Kansas, Maryland, Massachusetts, Minnesota, New Mexico, New York, Vermont, and Wisconsin — provide tax credits that offer refunds to poor families with no tax liability; the refunds help offset the impact of state and local sales and property taxes. Eight of those (all but New Mexico) offer state Earned Income Tax Credits. The 1999 refunds for families with poverty-level incomes were as high as $1,222 for a family of four with two children in Minnesota and as high as $910 for a family of three with two children in Vermont.

Tax relief policies

The report finds that states use a variety of methods to relieve income tax burdens on the poor. Most of the 22 states that do not tax the working poor for tax year 1999 allow relatively large deductions from income through personal and dependent exemptions and standard deductions. In addition, 28 states have adopted measures that specifically target tax relief on low-income families.

The design of tax relief can affect near-poor families as well. For example, the District of Columbia exempts poor families from the income tax, but has an unusual tax credit available only to the poor that leaves families with incomes 25 percent above the poverty line facing one of the nation's highest taxes ($906). By contrast, most states that exempt the poor phase in taxes gradually on families with income above the poverty line.

Although most state economies expanded through the 1990s and more than three-fourths of states with income taxes have cut those taxes significantly in the last four years, somewhat fewer states made it a priority to end the taxation of the poor. Many of the states with the largest income tax cuts in recent years chose to cut top tax rates or cut all tax rates in ways that provide a disproportionate benefit to higher-income taxpayers. Six of the states that have enacted personal income tax rate cuts in recent years still have income tax thresholds below the poverty line, and have not adopted measures to raise those thresholds significantly in the future. Those states are Hawaii, Michigan, Ohio, Oklahoma, Oregon, and Utah.

---

State Income Tax Burdens on Low-Income Families in 1999
State Group Contact List

---

The Center on Budget and Policy Priorities is a nonpartisan research organization and policy institute that conducts research and analysis on a range of government policies and programs. It is supported primarily by foundation grants.