Bipartisan Effort to Help Low-Income Families Work Toward Middle Class Falters

As the income tax filing deadline approaches, working-poor families in too many states continue to owe state income taxes.  Worse, decades of bipartisan progress in easing taxes on such families is in danger of sliding backwards, our latest survey finds.

Taxing the income of working-poor families makes little sense.  Instead of pushing workers deeper into poverty, states should support their efforts to climb into the middle class.  For one thing, raising the income of poor families boosts their children’s chances of academic success and their earning potential in adulthood.  And a stronger middle class is a key ingredient in any state’s long-term efforts to create a highly-skilled workforce and vibrant economy.

Since the early 1990s, many states have cut taxes on the working poor.  The number of states levying income taxes on working poor families has fallen by more than one-third, thanks to a successful, bipartisan effort among policymakers who recognized that such taxation is counterproductive.

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But progress faltered in 2010 and remained stalled in 2011 thanks in large part to massive state budget shortfalls as well as a crop of newly-elected, extremely conservative policymakers.  No new states exempted working-poor families from income taxes in 2011, and in most of the states where such families still pay income taxes, they saw their income tax bills increase.

This issue is particularly important in today’s economy.  Income inequality is near its highest level since the 1920s; wages for those at the bottom are not growing, even as those at the top have seen their incomes surge.

States’ lack of progress in the 2011 tax year means that last year:

• Fifteen of the 42 states with an income tax levied that tax on working, two-parent families of four with incomes at or below the poverty line, which is about $23,000 for a family of four.
• In a number of states, these working-poor families faced steep income tax bills— $548 in Alabama, $509 in Illinois, $331 in Hawaii, $274 in Oregon, and $273 in Georgia.
• Several states continued to tax families living in severe poverty.  Five states — Alabama, Georgia, Illinois, Montana, and Ohio — taxed the income of two parent families of four earning less than three quarters of the poverty line, or $17,264.

In some states, progress hasn’t just stalled; it has reversed.  Three states — Michigan, New Jersey and Wisconsin — raised taxes on working-poor families and individuals in recent years, even as they have cut taxes for corporations and/or wealthy individuals.

This year, North Carolina and Oklahoma are considering eliminating their state earned income tax credits (EITCs), which reduce the taxes of low-income workers while encouraging work and reducing poverty.

They should reconsider.  Instead of reversing course, states would be better off to preserve the progress they have made and build upon it as their budget outlooks improve.