April 12, 2005
THE IMPACT OF STATE INCOME TAXES ON LOW-INCOME FAMILIES IN 2004
By Joseph Llobrera and Robert Zahradnik 
PDF of full report If you cannot access the files through the links, right-click on the underlined text, click "Save Link As," download to your directory, and open the document in Adobe Acrobat Reader.
Poor families in many states continue to owe substantial taxes as they file personal income taxes for the 2004 tax year. In a large number of the states that levy income taxes — in 17 out of 42 states — two-parent families of four with incomes below the federal poverty line continue to owe income tax. In 16 states, poor single-parent families of three pay income taxes. In addition, 31 of the 42 states 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 example, a two-parent family of four in Alabama with income of $19,311 — the 2004 poverty line for a family that size — owes $513 in income tax, while such a family in Hawaii owes $434 and in Arkansas $403. 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 Indiana, Kentucky, Michigan, Montana, Oregon, Virginia, and West Virginia.
There was no improvement in the taxation of poor families in 2004. Yet some states have enacted changes that will lessen the taxation of the poor in future years.
, which for 2004 levied the highest tax on a family of four at the poverty level ($652), enacted a low-income credit that, beginning in 2005, will shield poor families from paying income tax. Kentucky — with the fourth highest 2004 tax on poverty-level families — enacted a 20 percent non-refundable state Earned Income Tax Credit that will take effect in 2006. Virginia
In a few states, the income taxes on poor families have increased over the last decade. In
, Alabama , Arkansas , Iowa , Kentucky , Louisiana , and Virginia , the income taxes on families of four with poverty-level incomes rose between 1994 and 2004, even after taking inflation into account. The increase after the adjustment for inflation has been as much as 58 percent in West Virginia , 48 percent in Louisiana , and 29 percent in Arkansas . In each of these states, the reason for the tax increase is that personal exemptions, credits, or other features of the tax code designed to protect the incomes of low-income families from taxation have eroded due to inflation. West Virginia
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 taxes 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 impact of those taxes — only of income taxes. Moreover, such provisions tend to be quite modest and in most cases do not affect greatly taxes on low-income families.
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 reduced income taxes on the poor in the 1990s, and a 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 taxes on poor families is making a meaningful contribution toward "making work pay." 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 meet their expenses.
States that choose to reduce or eliminate income taxes 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.
Click here to view PDF of full report.
 Additional data analysis for this report was provided by Elizabeth C. McNichol, Michael Mazerov, David Bradley, and Karen Lyons.
 Kentucky’s low-income tax credit applies to families with incomes below the federal poverty guidelines set by the Department of Health and Human Services for administrative purposes. These guidelines are slightly lower then the poverty threshold for a two-parent family of four used by the Census bureau for statistical purposes, which is the poverty standard used in this analysis. As a result, in the future this report will show that Kentucky’s income tax threshold for a two-parent family of four is slightly below the poverty line.