Today the Center on Budget and Policy Priorities released a report on how, in each of the 42 states that have a state income tax, the income tax impacts the very poor – those households with incomes near or below the poverty line. In 2007, the federal poverty line for a family of four was $21,203, and the line for a family of three was $16,530.
Why do we care about income taxes paid by low-income people? CBPP argues (and we would agree) that high taxes on very low-income families are counterproductive to efforts of those families to become self-sufficient and move out of poverty. The report states:
“Taxing the incomes of working-poor families runs counter to the efforts of policymakers across the political spectrum to help families work their way out of poverty. The federal government has exempted such families from the income tax since the mid-1980s, and a majority of states now do so as well. Eliminating state income taxes on working families with poverty-level incomes gives a boost in take-home pay that helps offset higher child care and transportation costs that families incur as they strive to become economically self-sufficient.”
Note: This is not about exempting very poor people from taxation – they still pay plenty of sales taxes, property taxes and other kinds of taxes.
Not surprisingly, states range the spectrum from levying substantial taxes on people with incomes below the poverty line to providing tax refunds. Families in severe poverty – with incomes significantly below the poverty line – must pay an income tax in 10 states, including Alabama, Ohio and Michigan.
Instead of making the hurdles higher for poor families, states can employ the tax system to help families move out of poverty. Fortunately, Minnesota is one of of those states. The report found that we are among 14 states that offers income tax credits to families with incomes at the poverty line as a strategy to help families become self-sufficient.