Taxing the Poor: State Income Tax Policies Make a Big Difference to Working Families

by Seth Hartig, Curtis Skinner, Mercedes Ekono, National Center for Children in Poverty, November, 2014

In his 2013 State of the Union address, President Obama called for policy change to ensure that “no one who works full-time should have to live in poverty.”1 However, a new NCCP analysis of state tax policy finds that a significant number of states continue to push the working poor deeper into poverty by imposing income tax liabilities on poverty-level earnings – liabilities that in some states reach hundreds of dollars.

(Hawaii income taxes cost a single parent of two children $272 at poverty level.  A two-parent family with two children pays $317 at poverty level.  Only Alabama charges more.)

With Census-determined poverty thresholds set well below what families realistically need to make ends meet, any tax liability is very burdensome for poor families. Recognizing this, a growing number of states are following the federal government’s lead by:

(1) adopting tax codes that set the threshold for incurring any income tax liability at a level well above the federal poverty threshold, and

(2) using refundable income tax credits – primarily state Earned Income Tax Credits (EITCs) – to provide a financial boost to low-income families.

In contrast to states that tax the poor, these states provide income supplements to poor families that can reach almost two thousand dollars.

Given the broad bipartisan support for the EITC and the credit’s proven effectiveness in strengthening the economic security of working families, state governments should adopt or expand EITCs and other tax credits for low-income families and revise tax codes to eliminate the possibility that low-income families incur any state income tax liability.

State Income Tax Policies for the Poor Vary Widely

Table 1 (link) and the accompanying maps compare the income tax burdens or refunds across states that are incurred by families of three and families of four living at the federally defined poverty threshold, and demonstrate enormous variation across states in the tax burden imposed on poor families. Notably, some states provide refundable tax credits modeled on federal income supplements to help lift these families out of poverty, including the Earned Income Tax Credit (EITC) and the Child Tax Credit. Other states impose significant income taxes on families in poverty, countering federal efforts to make work pay through progressive tax policy.

In all, sixteen states imposed tax burdens on families of four living at the poverty threshold. In six of the states – Alabama, Georgia, Hawaii, Illinois, Montana, and Oregon – the tax burdens for these families exceeded $200. In contrast, fifteen states gave families of four with earnings at the poverty threshold income supplements, primarily by means of state Earned Income Tax Credits (see below). Thirteen of the states provided supplements exceeding $200 to these families and six – Maryland, Connecticut, the District of Columbia, Vermont, Minnesota, and New York – provided supplements exceeding $1,000.

A smaller number of states collected income tax from single-parent families (who have a lower poverty threshold). Nine states imposed tax burdens on these families, with three of those states – Alabama, Georgia, and Hawaii – taxing at a level exceeding $200.

Conversely, eighteen states gave these poor, single parent families income supplements instead: fourteen of these states provided supplements exceeding $200 and seven gave their families more than $1,000. At opposite poles, New York State gave families living at the poverty threshold nearly $2,000 in supplementary income, while living at poverty cost families upwards of $400 in income tax in Alabama....

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