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Some States Raising Taxes on Working-Poor Families

As I explained yesterday, states’ progress in improving the tax treatment of low-income families stalled in 2010, and a few states — Michigan, New Jersey, and Wisconsin — have acted over the past couple of years to raise taxes on these families.

Worse, in each of these states, the tax increase on low-income residents helped to pay for new tax cuts for businesses and/or wealthy residents, essentially shifting incomes away from the people who need it most.

  • Michigan is cutting its Earned Income Tax Credit (EITC) by over two-thirds beginning in 2012.  Had this change been in place in 2010, two-parent families of four with incomes at the poverty line (about $22,300 for a family of that size) would have seen their taxes go up by $680.
  • New Jersey reduced its EITC by one-quarter beginning in 2010, raising taxes for two-parent families of four at the poverty line by $243.
  • Wisconsin is scaling back its EITC by over one-fifth for families with two or more children beginning in 2011.  Had this change been in place in 2010, two-parent families of four with poverty-level incomes would have seen their taxes go up by $146.

Raising taxes on low-income families increases poverty and harms some of the people hit hardest by the recession.  It also weakens the economy, since these people tend to spend every dollar they receive, largely for basics like housing.  Less money for low-income residents means less money circulating through states’ economies at a time when demand is already depressed.

Raising taxes on low-income families also carries the risk of longer-term economic damage.  Research increasingly suggests that family income matters not only for poor students’ performance in the classroom, but also for their success as adults in the labor force.  By cutting the after-tax incomes of poor families, states may make it hard to develop the highly skilled workforce they will need to succeed economically in the future.

Over the last two decades as a whole, state income tax policies toward low-income families have improved considerably, as the maps below show.  States should make it a priority to preserve that progress during these difficult budgetary times and build upon it when the economy improves.