In an effort to help families work their way out of poverty, most of the United States do not tax the incomes of working-poor families. A handful of states do, however. 24/7 Wall St. examined a new report from the Center on Budget and Policy Priorities to identify the states that tax the poor the most.
The decision of these states to continue taxing the poor is notable because most states have stopped. Over the past two decades, there has been a widespread, bipartisan effort to roll back taxes on working-poor families. Today, only 15 states still tax families with incomes that are at, or below, the federal poverty line — currently $23,018.
However, the effort to reduce taxes on the poor has stalled, according to the CBPP. In 2011, no new states exempted working-poor families of four — the benchmark family unit used in the study — from income taxes. Worst still, in almost all 15 states, these taxes have increased.
The number of states that continue to tax poor, working families remains too high, Phil Oliff, policy analyst at the CBPP and coauthor of the report told 24/7 Wall St. “That makes it harder for those families to pay for basic necessities like food and clothing; it makes it more difficult for them to afford work related expenses like child care and transportation costs; and it’s bad for the state’s economy.”
While the average median income of the residents of these states varies, a number are particularly poor relative to the rest of the country. States such as West Virginia, Georgia and Alabama have among the highest poverty rates in the country. As a result, a larger percentage of these states’ populations are affected by taxes on poor families. According to Oliff, “States should be helping poor families to work their way into the middle class, not taxing them deeper into poverty.”
24/7 Wall St. identified 10 states that tax two-parent families of four living at the poverty line at the highest rate, based on CBPP’s report, “The Impact of State Income Taxes on Low-Income Families in 2011.” All of these states also tax families with incomes that place them below the poverty line. For each state, we also included the income level below the poverty line where families would not be taxed. In addition to this, we included the poverty rate and median household income for each state, based on data from the U.S. Census Bureau.
These 10 states tax the poor the most.
10. West Virginia
> Income tax on working-poor: $151/yr.
> Lowest taxable income: $22,400 (97% of poverty line)
> Poverty rate: 17.6% (6th highest)
> Median household income: $38,218 (2nd lowest)
West Virginia is among the country’s poorest states. It has both the second-lowest median household income in the nation and the sixth-highest poverty rate. Despite this, the state’s tax code does not help poor families. A family of four living at the poverty line must pay $151 in income tax. West Virginia also taxes families of four making 125% of the federal poverty line at least $730 per year — among the largest amounts in the country.
> Income tax on working-poor: $162/yr.
> Lowest taxable income: $16,600 (72% of poverty line)
> Poverty rate: 14.8% (17th highest)
> Median household income: $45,090 (17th lowest)
Ohio is one of only five states in the country that taxes the income of two-parent families of four that make less than three-quarters of the poverty line. That is, families earning $16,637 a year or more are taxed. Additionally, Ohio is one of only a few states where a family of three in which the employed person works a full-time minimum job wage must pay income tax.
> Income tax on working-poor: $205/yr.
> Lowest taxable income: $19,200 (83% of poverty line)
> Poverty rate: 14.2% (24th highest)
> Median household income: $44,613 (16th lowest)
Single-parent families of three who are at the poverty line receive tax credits in Indiana. Two-parent families of four at the poverty line, however, must pay $205 in income tax. If they make 125% of the federal poverty line, they must pay more than $500 per year — among the country’s highest amounts.
> Income tax on working-poor: $240/yr.
> Lowest taxable income: $12,500 (54% of poverty line)
> Poverty rate: 14.6% (19th highest)
> Median household income: $42,666 (11th lowest)
Residents of Montana frequently have among the lowest incomes in the nation. The state’s median household income of $42,666 is significantly lower than the national amount of $50,046. A family of four at the poverty line has to pay $240 in taxes. That amount has increased significantly since 1994. Montana also has the lowest rate of income at which it will tax families. A two-parent family of four earning $12,500 a year, or almost half of the federal poverty line, is still subject to income tax.
> Income tax on working-poor: $251/yr.
> Lowest taxable income: $19,300 (84% of poverty line)
> Poverty rate: 11.9% (14th lowest)
> Median household income: $47,961 (24th lowest)
Iowa is one of five states in which the tax on poverty-level incomes has increased faster than inflation since 1994, and one of only two in which that tax has increased from $0 that year. Iowa’s increase was also the largest in dollar amounts. The state senate in February approved a tax break for working families in Iowa earning $45,000 a year or less. If approved by Governor Terry Branstad, this tax break will aid many low-income residents.
> Income tax on working-poor: $273/yr.
> Lowest taxable income: $15,900 (69% of poverty line)
> Poverty rate: 16.5% (11th highest)
> Median household income: $46,430 (21st lowest)
Georgia has among the highest rates of residents living below the poverty line in the country. It also has the fourth-lowest tax threshold in the county. Families making just 69% of the poverty line or more are taxed. For those low-income families, taxes are generally getting worse. The amount that a family of four living on the poverty line must pay in income tax has more than doubled since 1994, from $116 to $273.
> Income tax on working-poor: $274/yr.
> Lowest taxable income: $20,200 (88% of poverty line)
> Poverty rate: 14.6% (18th highest)
> Median household income: $46,560 (22nd lowest)
A family of four in Oregon living at the poverty line pays the fourth-most taxes in the country at $274. For a family that size making 125% of the poverty line, the amount of tax owed jumps to $869 — the third most in the country. State lawmakers have considered extending tax breaks for low-income households in recent years, but significant action has not yet taken place.
> Income tax on working-poor: $331/yr.
> Lowest taxable income: $17,800 (77% of poverty line)
> Poverty rate: 10.0% (6th lowest)
> Median household income: $63,030 (5th highest)
Hawaii has a particularly low poverty rate of 10%. It also has one of the highest median household incomes in the country. The state continues to tax families at the poverty line at one of the highest rates in the country. However, the amount a family of four at the poverty line pays in income tax has decreased since 1994. That year, the amount was $406. Today, it is $331. The state also taxes families making 77% of the poverty line or more.
> Income tax on working-poor: $509/yr.
> Lowest taxable income: $13,100 (57% of poverty line)
> Poverty rate: 13.1% (25th lowest)
> Median household income: $52,972 (17th highest)
Illinois taxes families of four making 57% of the poverty level. This means that a family earning $13,100 a year must pay income tax. Due to state fiscal issues, Illinois raised its flat income tax rate from 3% to 5% in 2011. This caused income taxes for a family of four at the poverty line to increase by $322. However, the state plans to fully implement tax credits for low-income families by 2013, which “will almost completely offset the impact of the income tax increase for poor families,” according to CBPP.
> Income tax on working-poor: $548/yr.
> Lowest taxable income: $12,600 (55% of poverty line)
> Poverty rate: 17.4% (7th highest)
> Median household income: $40,474 (5th lowest)
Alabama is one of the country’s poorest states, and it taxes its poor residents’ incomes the most. The state has a poverty rate of 17.4%, which is among the nation’s highest. It also has the fifth-lowest median household income. A family of four at the poverty line must pay $548 in income taxes. This amount has consistently increased since 1994. Additionally, Alabama has the second-lowest tax threshold in the country. A single-parent family of three making $9,800 — or 55% of the group’s poverty level of $17,922 — remains subject to income tax.
Charles B. Stockdale