State Income Tax Burdens on Low-Income Families in 2002, 4/11/03

Despite years of tax-cutting at the state level, poor families in many states still face a substantial burden as they file personal income taxes for the 2002 tax year. In a large number of the states that levy income taxes — in 18 out of 42 states — two-parent families of four with incomes below the federal poverty line continue to owe income tax. In 15 of those states, poor single-parent families of three also pay income taxes. In addition, 30 of the 42 with an income tax still tax families with incomes just above the poverty line, even though such families typically have difficulty making ends meet.

In some states, families with poverty-level incomes face income tax bills of several hundred dollars. For instance, a two-parent family of four in Kentucky with income of $18,390 — the 2002 poverty line for a family that size — owes $606 in income tax, the highest tax on such a family in the country. A single-parent family of three in Kentucky with poverty-level income of $14,351 owes $370, second only to the tax on such a family levied in Alabama of $398. Such amounts can make a big difference to a struggling family. Other states levying tax of $200 or more on families with poverty-level incomes include Arkansas, Hawaii, Indiana, Michigan, Montana, Oregon, Virginia, and West Virginia.

Taxing the incomes of working-poor families runs counter to the efforts by policymakers across the political spectrum to provide more assistance to families seeking to work their way out of poverty. Many states have reduced income taxes on the poor over the last decade, and a narrow majority of states now exempt poor families from the income tax. The federal government has exempted such families since the mid-1980s.

Eliminating all or most state income taxes on working families with poverty-level incomes gives a boost in take-home pay that helps offset higher child care and transportation costs that families incur as they strive to become economically self-sufficient. In other words, relieving state income tax burdens on poor families is making a meaningful contribution toward "making work pay." Nearly a dozen states go even further; they not only exempt poor families from income taxation, but also provide a tax rebate that can help such families make ends meet.

Methodology

This report takes into account income tax provisions that are broadly available to low-income families and that are not intended to offset some other tax. It does not take into account tax credits or deductions that benefit only families with certain expenses, nor does it take into account provisions that are intended explicitly to offset the burden of a tax other than the income tax. For instance, it does not include the impact of tax provisions that are available only to families with out-of-pocket child care expenses or specific housing costs, because not all families face such costs. It also does not take into account sales tax credits, property tax "circuitbreakers," and similar provisions, because this analysis does not attempt to gauge the burdens of those taxes — only of income taxes. Moreover, such provisions tend to be quite modest and in most cases do not affect greatly tax burdens on low-income families.

States that choose to reduce or eliminate tax burdens on low-income families employ a variety 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.

Despite the advent of the recession and the associated state fiscal crisis, states are continuing to make some progress in income-tax treatment of low-income families. In 2002, the average state income tax threshold increased slightly relative to the poverty line, largely because two states — Utah and Oklahoma — stopped levying income taxes on families of three with poverty-level incomes. Oklahoma implemented a new state EITC that cut the tax on a family of four at the poverty line from $252 to $98. Indiana enacted a new state EITC that, when implemented in 2003, will reduce the tax on a family of four at the poverty line by nearly $200; Kansas expanded its existing EITC for 2002.

In a few states, fiscal difficulties are threatening the progress made in recent years in reducing income tax burdens on poor families. A state EITC in Colorado enacted in the late 1990s, for instance, was suspended for tax year 2002 due to insufficient state revenues, reducing that state’s income tax threshold for a family of four from $28,700 to $21,400. Similarly, the threshold in Illinois will decline in 2003 unless the legislature this spring renews an EITC that is scheduled to expire.

[1] Additional data analysis for this report was provided by Elizabeth C. McNichol, Michael Mazerov, Rose Ribeiro and Brad Angle.