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States Split on Taxing the Poor

Over the past two decades, a number of states have recognized the folly of taxing working-poor families deeper into poverty and, instead, have eliminated their income taxes on poor — and, in some states, near-poor — households. But our new survey finds that 13 of the 42 states with an income tax still tax two-parent families of four with earnings below the poverty line ($21,947).

In Alabama, a family of four with poverty-level earnings owed $468 this year. That’s a lot of money for a family struggling to make ends meet.

In New York, that same family was eligible for a $1,940 tax refund. New York is one of 17 states that not only avoid taxing poor families but also offer tax credits that provide refunds to three- or four-person families with earnings at the poverty line.

The credits, mostly state earned income tax credits, supplement these families’ low wages and help offset the other taxes they pay (like payroll, sales, gas, excise, and property taxes).

Unfortunately, a few states are scaling back tax credits for low-income working
families to help balance their budgets. That’s a bad move for those families as well as the state’s economy, as my colleague Jon Shure said in a previous post. (I’ll have more to say on this issue later.)