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Don’t Forget State Taxes

September 27, 2012 at 2:16 PM

Recent debates over who pays federal income taxes often ignore the fact that many people who don’t pay federal income taxes do pay lots of other federal taxes as well as state and local taxes.

Here’s one example:  while the federal government has largely exempted working-poor families from income taxes since the mid-1980s, file type icon our analysis finds that some 15 states require working-poor families of four to pay income taxes.

Taxing these families deeper into poverty not only makes it harder for them to support themselves, but also hurts the broader economy.

Research suggests that the less income that poor families have, the less likely that their children will succeed in the classroom and, later on, in the workforce.  That, in turn, makes it less likely that states, and the country as a whole, will have the skilled workforce needed to succeed economically in the future.  And that hurts us all.

9-27-12state.jpgState income taxes add to the already large share of their scarce resources that poor families contribute to fund public services.  Other taxes, such as federal excise and payroll taxes and state and local property and sales taxes, take a bigger bite out of the incomes of lower-income families than higher-income families.

Indeed, because states and localities rely heavily on sales and property taxes, the bottom 20 percent of taxpayers pay an average 12.3 percent of their income in state and local taxes — a larger share than any other income group and well above the 7.9 percent rate that the top 1 percent of taxpayers pay, according to research from the Institute on Taxation and Economic Policy (see graph).

The bottom line?  More states should follow the federal government’s lead and stop taxing the incomes of the working poor.  The tax system shouldn’t be an obstacle to working-poor families as they strive to climb into the middle class.