April 11, 1997

Most States Still Tax the Working Poor
After Five Years of Economic Recovery

by Elizabeth C. McNichol and Edward B. Lazere

Relieving income tax burdens on the working poor remained a low priority for many states, despite the fact that most states have had both the opportunity and the resources to correct the situation. In its annual study of state income tax burdens on working poor families, State Income Tax Burdens on Low-Income Families in 1996, the Washington D.C.-based Center on Budget and Policy Priorities found the majority of states with a personal income tax continue to tax poor families with incomes below the poverty line.

The 1996 poverty line was $16,021 for a family of four and $12,511 for a single-parent family of three. In 1996, more than a decade after the federal government stopped taxing poor families, the study found that:

• Of the 42 states with personal income taxes, 24 taxed poor two-parent families of four and 22 states taxed poor single-parent families of three.

• Seven states — Alabama, Hawaii, Illinois, Indiana, Kentucky, New Jersey, and Virginia — imposed income taxes on very poor families of three or four, those with incomes below half the poverty line.

• In states that impose income taxes on the poor, the average tax bill for a family with income at the poverty line was $223 for a family of four. For example, the income tax burden for a family of four surviving on poverty-level earnings was $545 in Kentucky, $476 in Hawaii, $409 in Indiana, $361 in Illinois and $283 in Michigan.

• In states that taxed poor families, the average level at which a family of four began to owe income tax was nearly $5,700 below the poverty line.

"Levying an income tax on the poor pushes families deeper into poverty, compounding the challenge of making ends meet," stated Elizabeth McNichol, director of the State Fiscal Project at the Center on Budget and Policy Priorities and co-author of the report. "Most poor families are working families. Policies that reduce the take-home pay of individuals struggling to support their families and stay off cash assistance undermine their efforts to remain self-sufficient."

Despite Strong Economy,
State Tax Policies Show Little Improvement Over Time

In this year's analysis, the Center examined how state tax policies affecting the poor and near-poor changed between 1991 and 1996. Few states that taxed the poor in 1991 have since increased their income tax thresholds enough to protect working poor families from taxation, the study found, despite a favorable economic climate and intense national emphasis on the need for poor families to support themselves through work. "Continuing to tax poor people is particularly troubling at a time when many states have enacted large income tax cuts for middle- and upper-income earners," McNichol said. "Improved state economies, which have prompted over half the states to enact income tax reductions in the last three years, provide states with a golden opportunity to address this inequity."

According to the report, a majority of states taxing the poor did raise their income tax thresholds between 1991 and 1996. But, in most states, these increases were not enough to keep pace with inflation and provide families in poverty with real tax relief. Between 1991 and 1996, the average state income tax threshold for a family of four increased only marginally — from 85 percent to 89 percent of the federal poverty line. The Center's study found that:

• Twenty-two of the 24 states with below-poverty income tax thresholds for families of four in 1991 continued to tax poor families in 1996, even if their threshold did increase. Only North Carolina and Iowa raised their thresholds enough to bring them above the poverty line, which is adjusted for inflation annually.

• In eight of these states, thresholds did not change at all or declined over five years. In these states — including Alabama, Indiana, Kansas, Kentucky, Virginia, Arkansas, Illinois and Hawaii — families with incomes at increasingly smaller percentages of a poverty-level income became subject to the income tax.

• Two states that did not tax poor families in 1991 now do so. Maine and Mississippi have allowed their income tax thresholds to erode, making poor families subject to taxation in 1996.

• States including New York, Maryland, Rhode Island, Vermont and Minnesota that had already removed poor families from tax rolls by 1991 have targeted additional income tax relief to the working poor in recent years.

Tax Policies that Reward Work

Among the states with tax policies that eliminate the tax burden on poor families, the report noted that Arizona, California, Connecticut, Maryland, Minnesota, New York, Rhode Island and Vermont had income tax thresholds of $20,000 or higher for two-parent families of four. These thresholds protect families with incomes roughly one-third above the poverty line. The study noted a number of successful policies used by states to provide tax relief for the working poor.

• Most importantly, a small number of states — including Minnesota, New York, Vermont and Wisconsin — provide refundable earned income tax credits for working poor families. State EITCs that allow a refund for families without tax liability serve to boost the incomes of families with low-wage workers and to offset the burden of other state and local tax bills. State earned income tax credit refunds can increase the take-home pay of working poor families by as much as $660 for a family of four.

• Eighteen states have adopted measures that specifically target tax relief on low-income families, though many of these are of limited size.

• Many states raise the tax threshold by allowing relatively large deductions from income through personal and dependent exemptions and standard deductions.

"This study identifies an opportunity for states as they seek to implement policies that make work pay for low-income families in the wake of the new welfare law," said Edward Lazere, co-author of the report. "If states do not take advantage of these relatively good times to reduce income taxes on poor working families, how will these families fare in the next economic downturn?"

State Ranking Tables

State Fiscal Project Partners — Local Contacts

Alabama: Kimble Forrister, Alabama Arise, 334-832-9060

Arkansas: Amy Rossi, Arkansas Advocates for Children and Families, 501-371-9678

Arizona: Dana Naimark, Children's Action Alliance, 602-266-0707

California: Jean Ross, California Budget Project, 916-444-0500

Illinois: Mike Burke, Voices For Illinois Children, 312-456-0600

Kentucky: Anne Joseph, KY Task Force on Hunger, 606-266-2521

Maine: Christopher St. John, Maine Center for Economic Policy, 207-622-7381

Maryland: Peter Berns, Maryland Association of Non-Profit Organizations, 410-727-6367

Massachusetts: Joanne Sullivan, Commonwealth Center for Fiscal Policy, 617-426-1228

Michigan: Sharon Parks, Michigan Budget and Tax Policy Project, 517-487-5436

Minnesota: Wayne Cox, MN Citizens for Tax Justice, 612-227-7647

New Jersey: Neil Upmeyer, Center for the Analysis of Public Issues, 609-924-9750

New York: Frank Mauro, Fiscal Policy Institute, 518-786-3156

North Carolina: Dan Gerlach, N.C. Budget and Tax Center, 919-856-2158

Virginia: Sue M. Capers, VA Coalition for the Homeless, 703-739-9365

This report was issued by the State Fiscal Project of the Center on Budget and Policy Priorities, a national nonpartisan research organization and policy institute that conducts research and analysis on a range of government policies and programs, with an emphasis on those affecting low- and moderate-income households. The State Fiscal Project, which was founded in 1992, prepares analyses and provides technical assistance on state tax and budget issues. The Center on Budget and Policy Priorities is supported primarily by foundation grants.