Taxing the Poor

Federal program cuts, tax breaks for the wealthy and state budget crises are not the only forces squeezing the working poor. According to a study by a progressive think tank, low-income households are getting pinched yet again by state income-tax policies that turn what little they have into even less.

Of the 42 states levying income taxes in 2005, nineteen taxed two-parent families of four living in poverty, and sixteen taxed impoverished single-parent families of three, according to the Center on Budget and Policy Priorities (CBPP), which has tracked state income-tax data since the early 1990s.

Antipoverty groups say such tax policies add a perverse twist to an already tattered social safety net, and are demanding tax relief for the poor through redistributive fiscal policies.

"This is an especially harsh time to be taxing families deeper into poverty," said Kimble Forrister, executive director of the low-income advocacy coalition Alabama Arise, noting that families in his state are still reeling from the impacts of Hurricane Katrina and skyrocketing fuel costs.

According to the CBPP, while some states have recently reformed their tax codes to relieve the lower income brackets, others have simply let their income-tax thresholds stagnate. This has allowed inflation to drive the tax floor below the federal poverty line -- about $16,600 for a family of three in the lower 48 states and the District of Columbia. The study also found that 31 states taxed families with incomes just above the official poverty line, pulling them back toward financial insecurity.

In Alabama, the basic tax exemptions are essentially held over from Depression-era statutes. In 2005, the state culled income taxes from families of four earning as little as $4,600. A single-parent family of three making the minimum wage -- that's under $11,000 per year -- paid nearly $220. The state charged four-person families with two parents living at the poverty line, which hovers just below $20,000, about $540.

Angela, a 30-year-old single mother in Auburn County, sees income taxes are just one more hurdle in her struggle to keep her two children, ages 9 and 12, housed and fed.

"It's just hard from day to day," she said. In her view, the government seems to be discouraging her efforts toward economic self-sufficiency. The more she works -stringing together low-skill, temporary jobs paying as little as $6.10 an hour -- the less she receives in food-stamps assistance, and the closer she moves toward the income threshold at which the government saps her earnings.

"It's just kinda messed up," she said. "If you go out and get a job, you're still hurting yourself, 'cause now, I gotta worry about feeding my family out of my pocket."

Nonetheless, driven to push past the rim of poverty, Angela is starting a new job at a local low-income childcare center, Auburn Daycare. Joining the staff as an entry-level assistant, she said that she had been unable to afford daycare there for her own children.

That irony is not lost on Ethel White, director of Auburn Daycare. Due to state and federal budget shortfalls, she said, childcare subsidies for working-poor families have evaporated, showing that poor people's tax dollars have not circulated back into their communities. And since many parents cannot afford to pay thousands for daycare out of pocket, she added, they are ensnared by another paradox: the lack of affordable, reliable childcare during the workday is often what stands between parents and long-term employment.

The layering of heavy taxes over poverty, White said, "certainly contributes to joblessness in our community. It certainly contributes to hunger. It contributes to an unfair burden on those families…. So we're taxing people who are least able to afford a tax system of this nature."

Presenting the CBPP's findings at a news conference, analyst Nicholas Johnson remarked that state taxes, including sales and property taxes, generally tend to hit poor consumers harder than they hit the well off. As Washington foists its fiscal problems onto state budgets, he projected, "that also shifts the burden of paying for government services from higher-income families to lower-income families."

This pattern of making the poor pay more for less is felt acutely in Arkansas, where two-parent families of four at the poverty line paid about $410 in state income taxes last year.

Rich Huddleston, executive director of the public-interest group Arkansas Advocates for Children and Families, said that the state's main release valve for fiscal pressures is regressive taxation. He predicted that to deal with federal Medicaid cuts, the state could hurt the poor either by scaling back healthcare programs, or by raising inequitable taxes to cover the costs.

"From our view," said Huddleston, "it doesn't make much sense to raise money… to try and help families and then at the same time, punish them economically through the tax system."

Though states' tax codes vary widely, a state-by-state analysis of 2002 non-elderly household tax data by the Institute on Taxation and Economic Policy, a progressive think tank, revealed that overall, combined state and local tax systems heavily favor the wealthy.

In Alabama, for example, the richest one percent of the tax base paid only 3.8 percent of their income in sales tax, property tax and state-income tax, compared to 10.6 percent for the poorest fifth.

Nationwide, the state and local tax burdens of the poorest 20 percent and the richest one percent are similarly divided. Those in the poorest fifth pay 11.4 percent of their income while the wealthiest percentile coughs up just 5.2 percent.

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Fair rate or fair share?

Progressive analysts warn of more tax distortions in the future. Since 2000, averaged across states, the threshold that triggers the state income tax has dropped, sweeping in poorer families.

Pushing back against what they see as growing inequality, some lawmakers and advocacy groups are campaigning for baby-step tax reforms to alleviate some of the burden. Some proposals involve raising the income threshold that triggers the tax. Others would implement a state "earned-income tax credit" (EITC), modeled after the federal program, which, in 2003, brought an estimated 4.4 million low-income people above the federally recognized poverty line.

Lawmakers in Hawaii, where a single-parent family of three making just $9,800 is subject to the income tax, are now considering legislation to provide credits and special deductions that would pull poor families out of the income-tax pool.

Arkansas Advocates has proposed a state EITC plan that would boost the incomes of about 234,000 families across the state.

Two states over, Alabama Arise is pressing for legislation to reconfigure the tax burden without undermining the state's revenue. A tax discount of $230 million for lower four-fifths of taxpayers would be offset by a hike of $230 million for the top fifth, according to the group's plan. This would effectively raise the tax threshold for a two-parent family of four from $4,600 to nearly $23,000 per year.

Forrister pointed out that for a typical working-class family, saving several hundred dollars in taxes "means shoes and eyeglasses and paying the heating bill."

But some conservative groups prefer different changes to the tax system.

Gary Palmer, president of the conservative Alabama Policy Institute, told TNS, "We've been a longtime advocate for making our state taxes fairer and less burdensome to the poor, but doing it in a way that's fair to everybody." Like other fiscally conservative think tanks, the API argues for minimizing all taxation across the income spectrum.

"I don't understand people that think that I ought to take what you make and give it to somebody else that didn't make it," Palmer commented.

Alabama's tax structure already taxes all brackets at a relatively flat rate, and the Institute has backed a proposal by Governor Bob Riley to offer a blanket tax cut of $55 for wealthy and low-income households alike, and to use a recent budget surplus to exempt the poorest families of the rest of their tax burden.

Angela, just starting her new job at Auburn Daycare, doesn't like the idea of being taxed, either. On the other hand, she said, if people like her have to hand over the money they earn to the government, it could at least be better spent.

"It should go to education programs," she said. "It should go back into the community… I mean, [to] help out -- not just look out for yourself, but it's other people, too."