Just Taxes Blog by ITEP

State Tax Codes Can Help Mitigate Poverty and Impact of Federal Tax Cuts on Low- and Middle-Income Families

State Tax Codes Can Help Mitigate Poverty and Impact of Federal Tax Cuts on Low- and Middle-Income Families

September 20, 2018

Misha Hill
Misha Hill
Policy Analyst

The national poverty rate declined by 0.4 percentage points to 12.3 percent in 2017. According to the U.S. Census, this was not a statistically significant change from the previous year. 39.7 million Americans, including 12.8 million children, lived in poverty in 2017. Median household income also increased for the third consecutive year, but this was due to an increase in employment rather than an increase in wages—real median earnings for full-time workers declined from 2016 to 2017. Income gains have been largely concentrated among the wealthiest. While median income has finally recovered to 2007 levels, prior to the Great Recession, the incomes of the richest 10 percent increased between 2007 and 2017 while those of the poorest 10 percent declined.  Health insurance rates did not increase for the first time in seven years, likely due to the Trump administration’s attempts to dismantle the Affordable Care Act. At the state level, poverty rates decreased a statistically significant amount in 19 states, held steady in one state—Vermont—and increased a statistically significant amount in two—West Virginia and Florida.

The Supplemental Poverty Measure (SPM), which accounts for many government programs that assist low-income Americans and is usually slightly higher than the official poverty measure, was 13.9 percent in 2017. The SPM shows the effectiveness of anti-poverty programs and underscores the importance of protecting these programs. The federal Earned Income Tax Credit (EITC) and refundable portion of the Child Tax Credit, for instance, kept 8.3 million people, including 4.5 million children, out of poverty.

Federal efforts to dismantle the safety net while lavishing tax cuts on the wealthy make state poverty fighting measures even more essential. Despite the current administration’s attempts to shorten already tight time limits and limit the ability of eligible documented and undocumented immigrants from receiving benefits, state policy makers still have several tools at their disposal, particularly through their tax codes, to help alleviate some of the financial pressures of living at or near poverty.

Despite the current regressivity of most states’ tax codes, state tax systems can also be an effective tool to mitigate poverty. In an updated report, State Tax Codes as Poverty Fighting Tools, ITEP incorporates updated Census data and outlines how states can use their tax system to help alleviate poverty and, conversely, to prevent their tax code from taxing workers and their families into poverty. The report and accompanying briefs capture what states have done recently to address poverty through Earned Income Tax Credits (EITC), child and dependent care credits, targeted credits for low-income taxpayers and property tax credits; the report also provides an overview of these anti-poverty policies and offers recommendations that every state should consider to help families rise out of poverty.

State lawmakers and advocates should be encouraged by the progress made in this year’s legislative session to strengthen tax credits for workers and their families. In 2018, several states took steps to expand or enact tax credits for workers and their families. California and Maryland expanded their EITCs to additional workers by removing age restrictions for workers without children. Louisiana, Massachusetts, New Jersey and Vermont all increased the size of their EITCs. And lawmakers in Delaware approved a bill that would make the state’s nonrefundable EITC refundable. Several states also created or expanded credits targeted to families with children. Colorado expanded its existing child and dependent care credit while New Jersey established one for low- and middle-income families. Idaho increased the amount of its nonrefundable child credit, and Wisconsin enacted a one-time per child rebate.

For more details on progress and missed opportunities to alleviate poverty through state tax codes read ITEP’s newly updated report: “State Tax Codes as Poverty Fighting Tools in 2018.”

Because of the overrepresentation of people of color and women in low-wage jobs, state tax credits targeted to low-income workers and families are particularly effective at reclaiming some of the income people of color and women have lost due to institutionalized racism and patriarchy. Well-structured anti-poverty tax policies can provide struggling families with additional income—putting money back in their pockets to help pay for food, housing, transportation and other necessities. ITEP recommends that states enact, or strengthen, one or more of these four proven and effective tax strategies to reduce the share of taxes paid by low- and middle-income families and, at the same time, increase working families’ resources to make ends meet. Further, continued efforts at the state level can help to offset some of the damaging impacts of federal policies on low- and middle- income families.