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The Impact of State Income Taxes on Low-Income Families in 2006

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Publication Date: March 2008

Publisher(s): Center on Budget and Policy Priorities (Washington, D.C.)

Author(s): Jason Levitis

Special Collection: John D. and Catherine T. MacArthur Foundation

Topic: Banking and finance (Taxation and tax policy)
Government (State or regional government)

Keywords: Economic projections; State budgets; Tax code; Income diversity

Type: Report

Abstract:

Poor families in many states face substantial state income tax liability for the 2006 tax year. In 19 of the 42 states that levy income taxes, two-parent families of four with incomes below the federal poverty line are liable for income tax. In 15 of the 42 states, poor single-parent families of three pay income tax. And 29 of these states collect taxes from families of four with incomes just above the poverty line. States seeking to reduce or eliminate income taxes on low-income families can choose from an array of mechanisms to do so. These mechanisms include state Earned Income Tax Credits (EITCs) and other low-income tax credits, no-tax floors, and personal exemptions and standard deductions that are adequate to shield poverty-level income from taxation. Some states go beyond exempting poor families from income tax by making their EITCs or other low-income credits refundable. These policies provide a substantial income supplement to families struggling to escape poverty, but they are relatively inexpensive to states, since these families have little income to tax.