Taxing the Poor
Apr 27, 2011
Facing state budget deficits, governors in several states, including North Carolina, Michigan and Kansas, are considering eliminating or reducing state earned income tax credits (EITCs) for low-income workers.
State EITCs are typically small. They are calculated as a percentage of the federal EITC and are refundable so that filers with little or no income tax liability can receive them. With no highly vocal constituency or moneyed lobby to protect them, state EITCs are easy targets for cuts. If these proposals pass, they would contribute to states' already regressive tax structures, not to mention reduce the economic wellbeing of hardworking, low-wage earners and their families.
States get a significant part of their revenue from sales and property taxes, and lower-income people pay a higher percent of their income in such taxes than those at the top. In Alabama, for example, sales taxes are imposed on food purchased at grocery stores at rates up to 12 percent. Low-income people spend a greater share of their monthly income on food. When all federal, state and local taxes are taken into account, the bottom 40 percent of the income distribution pays between 16 and 20 percent of their incomes in taxes. The EITC provides needed income to low-wage people and makes our tax code more progressive.
Tax credits for low-income working families have become low hanging fruit for governors and legislatures in part because it is so difficult, both practically and politically, to raise state income and corporate taxes. Procedural rules require ballot initiatives or legislative supermajorities to raise income taxes, so states have increasingly focused on regressive forms of taxation. When faced with budget shortfalls, states frequently raise revenue by reducing state EITCs, increasing sales taxes on food and other necessities, and levying fees on services. In addition to being unfair, regressive taxes are associated with increases in obesity and infant mortality rates, high school dropout rates, teen pregnancy and crime rates, according to a recent book, Taxing the Poor by Katherine Newman and Rourke O'Brien.
Our tax structures should encourage our nation's workers to work. They should raise revenue to improve our roads and our schools and allow the government to take action when the economy experiences a downturn. When the market fails, our tax structure should help workers support their families. State officials who purport concern over our nation's future should look again at the important contributions of our working families, and the detrimental impact of raising their taxes. Workers are the drivers of our economy. Statute requires states to balance their budgets, but we should not ask low-wage families to bear a disproportionate share of the burden of doing so.
For additional information, see: Center on Budget and Policy Priorities' "Policy Basics: State Earned Income Tax Credits," NPR's "In Some States, Working Poor Could Pay More Taxes," and Citizens for Tax Justice's "America's Tax System Is Not as Progressive as You Think."