September 15, 2010

Credit Where Credit is (Over) Due: Four State Tax Policies Could Lessen the Effect that State Tax Systems Have in Exacerbating Poverty


The ongoing recession has had an unrelenting impact on families and communities in every state across the country. Millions of Americans are without work and in many cases those with jobs are experiencing reduced work hours and wages. New poverty figures from the US Census suggest that the road to economic security will be a long one for the low-income families hit hardest by the recession. In 2009, the share of Americans living in poverty was the highest it has been since 1994. The national poverty rate increased from 13.2 percent to 14.3 percent which represents roughly 1 in 7 people. Thirty-one states also experienced an increase in the share and number of residents living in poverty.

Low-income families face a dual challenge as they work to make ends meet during challenging economic times. As the new poverty figures indicate, more people are struggling to provide for their families and are unable to find work that pays a decent wage. At the same time, state and local tax systems exacerbate the situation by imposing a greater responsibility on low-income families than on wealthy ones, making it even harder for low-wage workers to move above the poverty line and achieve economic security. ITEP’s recent study, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States found that nationwide, the poorest twenty percent of Americans paid on average 10.9 percent of their incomes in state and local taxes in 2007. By contrast, middle-income taxpayers paid on average 9.4 percent of their incomes toward those taxes, and the wealthiest one percent of taxpayers paid just 5.2 percent of their incomes, on average, in state and local taxes.

State tax systems have the potential to play an important role in curbing the impact of poverty and ensuring economic security for all residents. Unfortunately, state tax policy as it is currently structured usually works directly contrary to these goals, and creates an uneven playing field for low-income workers. In most states, truly remedying this unfairness would require fundamental tax reform. Short of this, however, lawmakers can utilize their states’ tax systems as a means of providing affordable and targeted assistance to the growing number of people and families living in poverty. Virtually every state could jump-start their anti-poverty efforts with relatively little effort by enacting one or more of these four proven and effective tax reforms: Refundable state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits.

Read the Full Report (PDF)