STATES PROGRESS IN REDUCING
INCOME TAX BURDENS ON POOR
But Tax Relief for Poor Families Still Overdue in Many States
Three fewer states levied income taxes on poor working families in 1997 than in 1996, according to a new study of state income taxes. These changes left 21 states, or half the states with an income tax, still imposing income taxes on working poor families of four with two children.
The annual study, published by the State Fiscal Project at the Center on Budget and Policy Priorities, assesses the impact of each state's income tax on poor families. It focuses on the income tax threshold in each state, which is the income level at which a family would begin to owe state income tax. This year's report also evaluates trends in state income tax policies since 1991, when the nation's economy began its current expansion.
The report finds that in 1997 the income tax threshold for a family of four with two children was above the poverty line in 21 states — exactly half of the states with an income tax. For single-parent families of three, the state income tax threshold was above the poverty line in 22 states. The 1997 poverty line was $16,405 for a family of four and $12,804 for a single-parent family of three.
The three states raising their thresholds above the poverty line between 1996 and 1997 were Maine, Massachusetts, and Pennsylvania.
Only modest progress has been made in relieving income tax burdens of poor families since 1991, despite the opportunities for relieving tax burdens on the working poor provided by the strong economic growth and robust fiscal health enjoyed by most states and despite the large number of tax cuts for other income groups that have been enacted in recent years. In the years between 1991 and 1997 some states raised their thresholds above the poverty line, while others allowed their thresholds to slip below the poverty line. On net, the number of states taxing poor families has dropped by only three over the six year period, from the 24 states that imposed income taxes on poor families in 1991 to the 21 states doing so in 1997.
Six additional states with below-poverty tax thresholds in 1991 significantly raised their thresholds in the 1991-1997 period but still tax poor families. The states are Delaware, Georgia, Indiana, New Jersey, Oregon, and Utah.
"The progress states have made is laudable," says Nicholas Johnson, co-author of the report and an analyst at the Center's State Fiscal Project. "But what's truly surprising is that more states haven't taken advantage of a strong economy and higher-than-expected revenues to provide more tax relief to the working poor."
States Making Slow Progress Since 1991
Although most state economies expanded through the 1990s and nearly half of the states enacted significant personal income tax cuts in the last four years, few states made it a priority to end the taxation of the poor. Nine of the 12 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. Four of the states — Michigan, New Jersey, Ohio, and Oregon — that enacted the largest personal income tax cuts in recent years still have income tax thresholds below the poverty line.
Seven states with below-poverty thresholds in 1991 — Alabama, Arkansas, Hawaii, Illinois, Kansas, Kentucky, and Virginia — had not increased their tax thresholds at all by 1997. (Arkansas' and Kentucky's thresholds are scheduled to increase in future years.) As a result, income tax thresholds in these states have fallen further and further below poverty as the poverty line is adjusted each year to account for inflation. Thirteen additional states raised their thresholds to some degree, but the amount of the increase did not bring these states' thresholds above the poverty line.
In 1997, low-income families in states with below-poverty thresholds were pushed deeper into poverty. The report finds:
The average level at which a two-parent family of four began to owe tax in these states was $10,176, well below the 1997 poverty line of $16,405 for a family of four.
In 1997 six states — Alabama, Hawaii, Illinois, Kentucky, New Jersey, and Virginia — imposed an income tax on very poor families of three or four, those with incomes below half the poverty line. Those six states and seven others also levied income taxes on poor families earning no more than the minimum wage.
For families of three with incomes at the poverty line, the average income tax liability was $167 in states with below-poverty tax thresholds. In each of five states — Alabama, Hawaii, Illinois, Indiana, and Kentucky — working families with poverty-level earnings paid an average tax of $250 or more.
Working families of four with incomes at the poverty line paid an average state tax bill of $243 in the states with below-poverty tax thresholds. In each of six states, including Alabama, Arkansas, Hawaii, Illinois, Indiana, and Kentucky, the income tax bill for such a family exceeded $350.
By contrast, the report finds low-income families in 1997 fared better in states that levied no income tax until a family's income was well above the poverty line:
Nine states — Arizona, California, Connecticut, Maryland, Minnesota, New York, Pennsylvania, Rhode Island, and Vermont — had tax thresholds of $20,000 or higher for two-parent families of four, eliminating taxes for families with incomes up to approximately 125 percent or more of the poverty line.
Six states with tax thresholds above the poverty line went even further. Massachusetts, Minnesota, New Mexico, New York, Vermont, and Wisconsin had state tax credits that provide refunds to low-income families with no tax liability. The 1997 refunds provided to families with incomes at the poverty line in these states were as high as $678 for a two-parent family of four and $868 for a single parent with two children. These refunds helped offset the impact on poor families of state and local sales and property taxes.
A number of states with income tax thresholds that were still below the poverty line nonetheless significantly increased the thresholds during the past two years. Indiana more than doubled its income tax threshold between 1996 and 1997, and Oregon enacted a new non-refundable earned income tax credit that raised its income tax threshold for families of four from $11,400 in 1996 to $14,000 in 1997.
These states used a variety of policies to relieve income tax burdens on the poor. Most of the 21 states that did not tax the working poor allowed relatively large deductions from income through personal and dependent exemptions and standard deductions. Twenty-three states had adopted measures that specifically target tax relief on low-income families.
State Taxes and The Rise of the Working Poor
The report's findings arrive when many states are reducing welfare caseloads and urging more families make the transition from welfare to work. "Too many states fail to consider the impact of state tax systems on poor families as a part of the welfare reform debate," says Elizabeth McNichol, director of the Center's State Fiscal Project and a co-author of the report.
"Eliminating state taxes on low-income families boosts take-home pay to help offset the higher child care and transportation costs families incur as they strive to become economically self-sufficient."
The report notes the impact of state tax systems has been increasing in recent years as the number of working poor families has grown across the United States. The poverty rate for working families with children climbed from 7.7 percent in 1979 to 11.0 percent in 1996, two years at equivalent points in the business cycle, an increase of 40 percent.
"More states should address the problem of taxation of poor families," notes McNichol, "both in the interest of fairness and in order to further the objective of allowing parents who work to support their families adequately."
| State
Income Tax Thresholds for Single-Parent Families of Three, 1997 Poverty Line = $12,804 |
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| Tax Imposed Below Poverty Line | No Tax Below Poverty Line | ||||
| Rank | State | Threshold | Rank | State | Threshold |
| 1. | Illinois | $3,000 | 21. | North Carolina | $13,900 |
| 2. | Alabama | 4,600 | 22. | Colorado | 14,000 |
| 3. | Hawaii | 4,800 | 22. | District of Columbia | 14,000 |
| 4. | Kentucky | 5,000 | 22. | Idaho | 14,000 |
| 5. | Virginia | 5,400 | 22. | New Mexico | 14,000 |
| 6. | Montana | 7,300 | 22. | South Carolina | 14,000 |
| 7. | Michigan | 7,500 | 27. | Pennsylvania | 14,300 |
| 7. | New Jersey | 7,500 | 28. | Mississippi | 14,400 |
| 9. | Indiana | 8,000 | 29. | Maine | 14,500 |
| 10. | Oklahoma | 8,700 | 29. | Nebraska | 14,500 |
| 11. | Missouri | 9,000 | 29. | North Dakota | 14,500 |
| 12. | Ohio | 9,700 | 32. | Wisconsin | 15,100 |
| 13. | West Virginia | 10,000 | 33. | Massachusetts | 16,400 |
| 14. | Georgia | 10,500 | 34. | Iowa | 16,500 |
| 15. | Delaware | 10,600 | 35. | Arizona | 19,100 |
| 16. | Arkansas | 10,700 | 35. | Connecticut | 19,100 |
| 17. | Louisiana | 11,800 | 37. | Minnesota | 19,300 |
| 18. | Oregon | 12,000 | 38. | California | 20,400 |
| 18. | Utah | 12,000 | 39. | New York | 21,100 |
| 20. | Kansas | 12,400 | 40. | Maryland | 22,500 |
| 41. | Rhode Island | 22,900 | |||
| 41. | Vermont | 22,900 | |||
| Average Threshold 1997 | $8,525 | Average Threshold 1997 | $16,882 | ||
| Amount Below Poverty | 4,279 | Amount Above Poverty | 4,078 | ||
Note:
A threshold is the lowest income level at which a
family has state income tax liability. In this table, thresholds are rounded to the
nearest $100. The 1997 poverty line is an estimate based on the actual 1996 poverty line
calculated by the Census Bureau adjusted for inflation. The threshold calculations include
earned income tax credits, exemptions, and standard deductions. Credits that are intended
to offset the effects of taxes other than the income tax or that are not available to all
low-income families are not taken into account. |
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State Income Tax Thresholds for Two-Parent Families of Four, 1997 Poverty Line = $16,405 |
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Tax Imposed Below Poverty Line |
No Tax Below Poverty Line |
||||
| Rank | State | Threshold | Rank | State | Threshold |
| 1. | Illinois | $4,000 | 22. | Iowa | $16,500 |
| 2. | Alabama | 4,600 | 23. | North Carolina | 17,000 |
| 3. | Kentucky | 5,000 | 23. | Wisconsin | 17,000 |
| 4. | Hawaii | 6,100 | 25. | Massachusetts | 17,400 |
| 5. | New Jersey | 7,500 | 26. | Colorado | 17,500 |
| 6. | Virginia | 8,200 | 26. | District of Columbia | 17,500 |
| 7. | Indiana | 8,500 | 26. | Idaho | 17,500 |
| 8. | Montana | 8,800 | 26. | Maine | 17,500 |
| 9. | Michigan | 10,000 | 26. | New Mexico | 17,500 |
| 9. | West Virginia | 10,000 | 26. | South Carolina | 17,500 |
| 11. | Missouri | 10,200 | 32. | Nebraska | 17,900 |
| 12. | Arkansas | 10,700 | 33. | North Dakota | 18,000 |
| 13. | Ohio | 12,000 | 34. | Arizona | 20,000 |
| 14. | Oklahoma | 12,200 | 35. | Pennsylvania | 20,600 |
| 15. | Louisiana | 12,300 | 36. | Minnesota | 21,600 |
| 16. | Delaware | 12,700 | 37. | New York | 22,300 |
| 17. | Kansas | 13,000 | 38. | Maryland | 22,900 |
| 18. | Georgia | 13,100 | 39. | California | 23,800 |
| 19. | Oregon | 14,000 | 40. | Connecticut | 24,100 |
| 20. | Utah | 14,900 | 41. | Rhode Island | 24,400 |
| 21. | Mississippi | 15,900 | 41. | Vermont | 24,400 |
| Average Threshold 1997 | $10,176 | Average Threshold 1997 | $19,662 | ||
| Amount Below Poverty | 6,229 | Amount Above Poverty | 3,257 | ||
Note: A threshold is the lowest income level at which a family has
state income tax liability. In this table, thresholds are rounded to the nearest $100. The
1997 poverty line is an estimate based on the actual 1996 poverty line calculated by the
Census Bureau adjusted for inflation. The threshold calculations include earned income tax
credits, exemptions, and standard deductions. Credits that are intended to offset the
effects of taxes other than the income tax or that are not available to all low-income
families are not taken into account. |
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| Special attachments to this release and report include individual state fact sheets providing graphic information on each state’s tax threshold rankings and related analysis of each state’s tax policies. The report contains full state-by-state rankings of income tax thresholds for families of three and four, including rankings of taxes owed by families at minimum wage levels and the poverty line. |
Budget and Policy Groups Providing Local Comment
Alabama
Arizona
Arkansas
California
Georgia
Illinois
Indiana
Kentucky
Maine
Maryland
Massachusetts
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Michigan
Minnesota
Missouri
New York
New Jersey
North Carolina
Oklahoma
Ohio
Oregon
Utah
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