State Income Tax Burdens on Low-Income Families in 1997:
Assessing the Burden and Opportunities for Relief

I. Summary

Seven years into the current economic recovery, states are making modest new progress in relieving the income tax burden on working families with incomes below the poverty line. Three fewer states levied income taxes on poor working families in 1997 than in 1996. As a result of the changes in these three states — Maine, Massachusetts, and Pennsylvania — it can no longer be said that the majority of states tax the incomes of working poor families. In 1997, the income tax threshold — the income level at which income tax is first owed — was above the poverty line for two-parent families with two children in exactly half of the 42 states imposing income taxes.(1) The 1997 income tax threshold for a single working parent with two children was above the poverty line in a majority of states.

At a time when states are urging more families to make the transition from welfare to work, such progress in relieving state income tax burdens is welcome. Eliminating all state income taxes on working families with below-poverty incomes results in 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 families below the poverty line is making a meaningful contribution toward "making work pay."

The progress that was made last year in removing income taxes from poor families in three states is part of a longer and broader trend. Four states that imposed income taxes on families with below-poverty incomes in 1991 no longer do so. Six additional states with tax thresholds below the poverty line in 1991 have since increased the thresholds by amounts greater than the increase in the poverty line in the 1991-97 period. As a result, the share of poor families' income subject to tax in these six states is smaller today than it was in 1991.

Still, progress has by no means been universal. Of the 24 states that taxed the income of some poor families in 1991, at the deepest point of the last recession, 20 continue to tax them today, seven years into the economic recovery.

More than a decade ago, the federal government recognized that taxing poor families was counterproductive and unfair. As part of federal tax reform in 1986, virtually all families below the poverty line were relieved of federal income tax liability. By 1997, approximately half of the states implemented this same policy.

Many of the states that have not yet removed state income taxes from poor families have not made it a priority to do so. Most state economies expanded through the 1990s and most states experienced robust fiscal condition. As a result, 20 states enacted significant personal income tax cuts in the last four years. But 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 have enacted the largest personal income tax cuts in recent years still have income tax thresholds below the poverty line.

Further tax reductions are under consideration or discussion in many states. Today's generally healthy fiscal conditions provide an opportunity for many more states to remove poor families from the income tax rolls, if they make such action a priority.


Tax Thresholds

This report 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.

Taxes on Poor Families

The impact of state income tax policy on poor families' budgets can be significant. Levying an income tax on the poor pushes families deeper into poverty, compounding the challenge of making ends meet.


Tax Relief Strategies

States used a variety of methods to relieve income tax burdens on the poor. States generally chose the strategies that fit best with their overall policies and philosophies of taxation.


Recent Changes in Taxation of Poor Families

States have made noteworthy progress in relieving state income tax burdens on the poor during the last two years.

Changes in Thresholds 1991-1997

Between 1991 and 1997, the dollar amount of the income tax threshold increased in the majority of states. Small changes in the nominal value of a threshold, however, will not necessarily protect a working poor family from taxation. The poverty line is adjusted upward each year as the cost of supporting a family rises. Changes in income tax thresholds must be judged by whether the change has been sufficient to relieve families living in poverty from taxation or to maintain such relief.

End Notes

1. The District of Columbia is treated as a state in this report. The two states that tax only interest and dividends (New Hampshire and Tennessee) are not included among the 42 states with income taxes for purposes of this report.

2. Despite having the lowest threshold, Illinois did not impose the highest tax bills on families at the poverty line or minimum wage income. Some states that had thresholds higher than Illinois but that still taxed families with minimum-wage or below-poverty income levied taxes at higher tax rates than did Illinois. Those higher rates resulted in higher tax bills.

3. Georgia's low-income credit is also refundable and leads to a net refund to families with a minimum wage income. However, the maximum credit is not sufficient to fully offset tax liability at a poverty-level income, so that families with incomes at the poverty line pay Georgia pay income tax.

4. Two of these states — Arkansas and Kentucky — have enacted tax changes scheduled to go into effect in 1998 or later that would raise the income tax threshold, but the changes will be insufficient to raise thresholds above the poverty line. Other states are considering similar changes.

Chapter I. Summary
Chapter II. State Income Taxes on Poor Families in 1997
Chapter III. Recent Changes in State Income Tax Burdens on the Poor
Chapter IV. Strategies for Relieving State Tax Burdens on Poor Families
Chapter V. Conclusion
Appendix I: State Earned Income Tax Credits in 1997