Bipartisan Effort to Help Low-Income Families Work Toward Middle Class Falters

April 4, 2012 at 12:51 pm

As the income tax filing deadline approaches, working-poor families in too many states continue to owe state income taxes.  Worse, decades of bipartisan progress in easing taxes on such families is in danger of sliding backwards, our latest survey finds.

Taxing the income of working-poor families makes little sense.  Instead of pushing workers deeper into poverty, states should support their efforts to climb into the middle class.  For one thing, raising the income of poor families boosts their children’s chances of academic success and their earning potential in adulthood.  And a stronger middle class is a key ingredient in any state’s long-term efforts to create a highly-skilled workforce and vibrant economy.

Since the early 1990s, many states have cut taxes on the working poor.  The number of states levying income taxes on working poor families has fallen by more than one-third, thanks to a successful, bipartisan effort among policymakers who recognized that such taxation is counterproductive.

Many States Tax Working Poor Families Deeper into Poverty

But progress faltered in 2010 and remained stalled in 2011 thanks in large part to massive state budget shortfalls as well as a crop of newly-elected, extremely conservative policymakers.  No new states exempted working-poor families from income taxes in 2011, and in most of the states where such families still pay income taxes, they saw their income tax bills increase.

This issue is particularly important in today’s economy.  Income inequality is near its highest level since the 1920s; wages for those at the bottom are not growing, even as those at the top have seen their incomes surge.

States’ lack of progress in the 2011 tax year means that last year:

  • Fifteen of the 42 states with an income tax levied that tax on working, two-parent families of four with incomes at or below the poverty line, which is about $23,000 for a family of four.
  • In a number of states, these working-poor families faced steep income tax bills— $548 in Alabama, $509 in Illinois, $331 in Hawaii, $274 in Oregon, and $273 in Georgia.
  • Several states continued to tax families living in severe poverty.  Five states — Alabama, Georgia, Illinois, Montana, and Ohio — taxed the income of two parent families of four earning less than three quarters of the poverty line, or $17,264.

In some states, progress hasn’t just stalled; it has reversed.  Three states — Michigan, New Jersey and Wisconsin — raised taxes on working-poor families and individuals in recent years, even as they have cut taxes for corporations and/or wealthy individuals.

This year, North Carolina and Oklahoma are considering eliminating their state earned income tax credits (EITCs), which reduce the taxes of low-income workers while encouraging work and reducing poverty.

They should reconsider.  Instead of reversing course, states would be better off to preserve the progress they have made and build upon it as their budget outlooks improve.

Hard for States to Follow Texas’ Footsteps

April 3, 2012 at 3:40 pm

The Governor of Oklahoma and policymakers in Kansas, Missouri, and other states have proposed income tax cuts that they say will boost economic growth.  To make their case, they have cited the example of Texas, which has no income tax and where growth has been strong.

But in reality, Texas is not a helpful model for economic growth for the rest of the country.  True, the number of people and jobs in Texas has been expanding.  But, as we discuss in our recent paper, much of Texas’ growth results not from its policies but rather from factors that state officials cannot control and that other states cannot emulate.

  • Texas has unique geographic and demographic characteristics that have helped lift its economy in recent years. Its border location brings trade opportunities and encourages immigration that, together, help fuel population and job growth.
  • A combination of available land and lending regulations have kept housing prices comparatively low and helped Texas avoid the real estate depression that dragged down many other state economies.
  • Though Texas’ economy has diversified in recent decades, the state’s abundant oil and gas resources remain a valuable asset especially when prices for those commodities are high that most other states lack.

Lack of a Housing Bubble in Texas Made Recession Less Severe

And not everything is rosy in Texas.  For instance, Texas has lots of low-wage jobs and lots of poverty.  In 2011, close to one in ten Texas hourly-wage workers were paid at or below the minimum wage well above the U.S. average of six percent.  One-quarter of people in Texas lack health insurance well above the national average of 16.3 percent.  And, in part because wages are low, a large share of Texans are poor.   In 2010, 18.4 percent of Texas families lived in poverty.   Some 1.8 million (26 percent) of Texas children lived in poverty. Note: We originally stated that 15.7 million children (22 percent) of Texas children lived in poverty. Those figures are for the U.S. as a whole. We revised this post to correct the figures.

Even if it were possible for other states to replicate these features, the fact that so many Texans have not benefited from the state’s economic growth makes Texas a dubious model for the nation.

Think Middle-Income Americans Are Overtaxed? Think Again

April 3, 2012 at 3:08 pm

Do you think middle-income Americans are overtaxed?  By at least one standard — the standard of history — the answer is no, as our new paper explains.

In fact, federal taxes on middle-income Americans are near historic lows, and that’s true whether you’re talking about federal income taxes or all federal taxes, according to the latest available data.

Federal Income Tax Burden at Historic Low

When it comes to income taxes, a family of four in the exact middle of the income spectrum will pay 5.6 percent of its 2011 income in federal income taxes, according to new estimates from the Urban Institute-Brookings Institution Tax Policy Center.  Federal income taxes on middle-income families have fallen significantly in recent decades, and they have been lower under Presidents George W. Bush and Obama than at any time since the 1950s.

When it comes to overall federal taxes, households in the middle fifth of the income spectrum paid an average 14.3 percent of their income in taxes in 2007, the last year for which we have data, according to the Congressional Budget Office (CBO).   That’s just a bit above the 13.8 percent of 2003, the lowest level in data that dates back to 1979.   The 14.3 percent figure will likely fall as CBO gathers data for more recent years, due to the effects of the Make Work Pay tax credit in 2009 and 2010, the payroll tax cut in 2011 and 2012, and a weak economy that reduced many families’ incomes.

The United States remains a low-tax country by international standards as well, collecting less in combined federal and state taxes than nearly any other developed country.

The United States Is a Low Tax Country

Tax Foundation’s State “Tax Freedom Days” No More Valid than the Federal Version

April 2, 2012 at 6:18 pm

Today the Tax Foundation released its list of when “Tax Freedom Day” allegedly arrives in each state.  It’s a deeply flawed and misleading exercise for a host of reasons.

Each state’s Tax Freedom Day – just like the federal version — sharply overstates middle-class tax levels.  As my colleagues explained in an earlier post, the Tax Foundation calculates national Tax Freedom Day using an “average” tax rate that is likely higher than what 80 percent of American households actually pay.  That’s because the other 20 percent of upper-income households, many of them quite affluent, pay a big share of federal income taxes and drive up the average.  Because federal tax levels play a large role in the Tax Foundation’s state Tax Freedom Day calculations, the figures for each state also substantially exaggerate the tax bills of middle-class families in that state.

State Tax Freedom Day calculations tells us surprisingly little about state tax policy for two reasons.  First, the estimates reflect state affluence rather than state taxes.  Because we have a progressive federal tax system, states with higher numbers of very affluent households account for more federal taxes than states with fewer affluent households.  But that doesn’t mean that average households in those states are any more heavily taxed.

Second, the Tax Foundation measures a state’s overall tax level in part by the taxes that other states levy on its residents when they travel or import goods and services.  Alaska’s heavy taxes on oil production, for instance, are counted as taxes paid by energy consumers in the other 49 states.  Same for tourism taxes in Hawaii, gaming taxes in Nevada, and so on.

Finally, the estimates of state Tax Freedom Days for 2012 may be simply wrong – and they have been in the past. That’s because, together, many thousands of cities, counties, towns, school districts, and other local governments levy billions of dollars in taxes each year, and the only reliable source of data on all those taxes is several years old.  More up-to-date data on local taxes, however, wouldn’t solve the other problems with the foundation’s analysis.

What’s Wrong with the Tax Foundation’s “Tax Freedom Day” Report?

April 2, 2012 at 5:57 pm

We issued a paper this afternoon that explained the problems inherent in the Tax Foundation’s annual “Tax Freedom Day” report, the latest version of which the foundation issued earlier today.  Here’s the opening:

The Tax Foundation released its annual “Tax Freedom Day” report today that, once again, leaves a strikingly misleading impression of tax burdens — announcing an “average” tax rate across the United States that’s likely higher than the tax rate that 80 percent of U.S. households actually pay.

To project the day when Americans will have “earned enough money to pay this year’s tax obligations at the federal, state, and local levels,” the Tax Foundation calculates the “average” tax rate by measuring tax revenues as a share of the economy (similar to estimates of total revenues as a share of Gross Domestic Product, or GDP).  Its report suggests the “average” household pays this “average” tax rate.

In reality, in a progressive tax system like that of the United States, only upper-income households (the top 20 percent) pay tax at rates that are equal to or above revenues as a share of the economy.  The non-partisan Congressional Budget Office and other authoritative sources show that low- and middle-income (the other 80 percent) pay a smaller share of their income in taxes than the Tax Foundation report implies.

The Tax Foundation acknowledges this issue in a methodology paper accompanying its report, noting that its estimates reflect the “average tax burden for the economy as a whole, rather than for specific subgroups of taxpayers.”   Consequently, those who report on “Tax Freedom Day” as if it represented the day until which the typical American must work to pay his or her taxes are misinterpreting these figures and inadvertently fostering misimpressions about the taxes that most Americans pay.

Click here for the full report.