Taxing the Poor by Katherine S. Newman & Rourke L. O’Brien

Author:Katherine S. Newman & Rourke L. O’Brien
Language: eng
Format: epub
ISBN: 9780520948938
Publisher: University of California Press
Published: 2012-01-23T00:00:00+00:00

WHAT DO THE POOR PAY IN TAX?

Estimating the tax burden on the poor is a complicated endeavor. In a 2005 report, economists Hassett and Moore attempted to estimate the tax burden on several hypothetical family types to demonstrate that, in the aggregate, the tax burden on the poor has decreased in recent decades, mainly because of increases in the federal Earned Income Tax Credit (EITC), as shown in chapter 5. Although their interest was primarily in national trends, Hassett and Moore made a concerted effort to estimate state and local tax liability to calculate accurately the full tax burden on the poor. We rely on their original work but focus attention on how a poor family—we’ll call them the Joneses—fares in different states.1

We began by asking what kind of tax liabilities households at the poverty line face in each state. Income tax presents relatively few problems; we know how each state assesses the income of its tax-filing families. The National Bureau of Economic Research maintains a TAXSIM database and a microsimulation model that makes use of both household tax data and administrative information on tax rules by state.2 Using TAXSIM, we determined the tax rates that applied to a hypothetical family of three—one adult and two dependent children—whose income was exactly at the federal poverty line for every year for which we have data on the outcomes we care about (roughly 1982–2008). We note that changing the structure of the hypothetical family used in the tax simulations does not affect the substantive conclusions about variations across states. The estimated total state and local tax burden on a family of three with one working adult and a family of four with two working adults is correlated at 0.95.

It is important to factor in the credits that different states provide as well, so the total state income tax burden for the Jones family consists of the state income tax rate offset by whatever credits each state provides, refundable or not. Thus we have included in our calculations any state earned income tax credits, renter’s credits, child care credits, and sales and excise tax rebates (e.g., rebates on the sales tax on food in Idaho).3 Map 20 displays the range of state income tax liabilities for a family of three at the federal poverty line.

The southern states all rest above the zero tax liability line—as do a number of non-southern states. This means they collect income taxes from single-parent households earning at or below the federal poverty line. There are no southern states below the zero tax liability line. Several non-southern states provide credits such that their poor families not only do not pay any state tax but actually end up ahead of the game: they receive a check because the state provides a refundable credit.

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