Many States Still Taxing the Incomes of Working-Poor Families

November 15, 2011 at 2:36 pm

The successful bipartisan effort over the past two decades to reduce the state income taxes of working-poor families came to a standstill in 2010, our latest survey finds.

Since 1990, the number of states levying income taxes on poor, two-parent families of four has dropped by well over a third.  But no new states exempted working-poor families from income taxes in 2010, and in most of the states where such families still pay income taxes, they saw their income taxes increase.

States’ lack of progress in 2010 means that last year:

  • Fifteen of the 42 states with an income tax levied the tax on working, two-parent families of four with incomes at or below the poverty line, which is about $22,300 for a family of that size (see table).
  • In a number of states, these working-poor families faced income tax bills of several hundred dollars — $498 in Alabama, $292 in Hawaii, $238 in Georgia, and $234 in Oregon.  That’s a lot of money for a family struggling to make ends meet.
  • Several states continued to tax families living in severe poverty.  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 about $16,700.
  • In nine states, a family of three where the employed person works full-time at the minimum wage owed income tax in 2010:  Alabama, Georgia, Hawaii, Illinois, Mississippi, Missouri, Montana, Ohio, and Oregon.

Since the recession hit, the severe drop in revenues has limited states’ ability to reduce the taxes of poor families.  Nonetheless, doing so should remain a priority.

It can help to make work pay for these families, offsetting work-related costs like transportation and child care expenses.  And research suggests that increasing the after-tax incomes of poor families can boost their children’s chances of success in the classroom and ultimately in the workforce.

Unfortunately, a few states enacted measures over the last two years that raise taxes on low-income families.  As we’ll explain tomorrow, these measures hurt not only low-income families, but also the broader economy.

Non-Defense Discretionary Cuts Could Be Larger With a Budget Deal Than Without One

November 15, 2011 at 2:02 pm

If the congressional “supercommittee” doesn’t agree on new deficit-reduction measures, non-defense discretionary spending — the part of the budget that includes education and training, research and development, transportation, public health, veterans’ health care, and the administration of justice, among other things — will face about $300 billion in automatic, across-the-board cuts over the 2013-2021 period.  That’s in addition to the large cuts that the Budget Control Act already put in place.

But proposals that the committee is considering — such as the Democratic offer of early last week — could cut non-defense discretionary spending by even greater amounts.

Some argue that it is important for the supercommittee to reach an agreement in order to avoid automatic cuts in non-defense discretionary spending.  For example, 130 university presidents have signed a letter to supercommittee members urging them to cut entitlement spending and increase revenues in order to avoid further cuts in scientific research.  But a deal could prove worse for nondefense discretionary spending than simply allowing the automatic cuts to go into effect.

The Democratic offer would cut discretionary spending as a whole — defense and non-defense combined — by $400 billion over ten years.  The offer states that these cuts would be divided equally between defense and non-defense programs, but it doesn’t explicitly include the critical mechanism needed to guarantee that this would happen:  separate caps for defense and non-defense spending for each year from 2014 through 2021.  (Under current law, separate caps will exist in those years only if the committee fails to achieve $1.2 trillion in deficit reduction.)

Read more…

“Flatter” Taxes Aren’t Simpler, Only More Regressive

November 14, 2011 at 4:11 pm

The timely op-ed in today’s Wall Street Journal from Princeton economics professor (and former Federal Reserve vice chairman) Alan Blinder debunks a current myth in Washington that when it comes to taxes, flat equals simple.

“Many useful steps could be taken to simplify the personal income tax.  But, contrary to much misleading rhetoric, flattening the rate structure isn’t one of them,” Blinder notes.

That’s because “100% of the complexity” in the tax code derives from its many special preferences, Blinder says, not from the fact that it contains multiple brackets (i.e., that it taxes different incomes at different rates).

Think about filling out your own taxes the old-fashioned way.  The last step is to consult a table in the instructions and find out how much tax you owe.  You don’t have to break out your calculator and multiply different portions of your income against the applicable tax rate for each.  The table gives you a single figure, just as if there were a single rate.

“[F]lattening the rate structure won’t make the tax code any simpler.  It would, however, make the tax system far less progressive,” Blinder warns, by lowering the rates for high-income taxpayers.

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Jared Bernstein and James Horney Discuss the Perils of a Constitutional Balanced Budget Amendment

November 14, 2011 at 11:30 am

A constitutional balanced budget amendment “is a really bad idea,” Jim Horney says in this video.  “[I]n the long run, under current policies, we’re facing deficits that are way too large.  We should get them down. . . .  But we don’t have to balance [the budget].  What we have to do is bring deficits down to a level, somewhere below 3 percent of GDP, that would keep our debt from rising constantly as a share of the economy.  That’s the danger.”

He and Jared Bernstein explain that policymakers can reduce deficits without enacting a balanced budget amendment, which could seriously harm the economy — by, for instance, making recessions longer and deeper.

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In Case You Missed It…

November 11, 2011 at 4:42 pm

This week on Off the Charts, we focused on the federal budget, federal taxes, state budgets, the economy, and poverty.

  • On the federal budget, we explained why a recent proposal by several Republican members of the deficit-reduction “supercommittee” is not a step toward balanced deficit reduction.  Robert Greenstein rebutted the claim that the supercommittee could get $600 billion in Medicare savings without harming low-income beneficiaries, and Paul Van de Water pointed out that a bad deal in the supercommittee would be worse than no deal at all.  Also, Richard Kogan highlighted an analysis explaining why a balanced budget amendment would harm the economy.
  • On federal taxes, Chuck Marr warned that adopting a territorial system of international taxation would create a powerful incentive for companies to shift jobs and investments overseas.  He also pointed to recent Congressional Budget Office data correcting the myth that many low- and middle-income households don’t pay taxes.

    Read more…