How State Tax Policies Can Help Mitigate Poverty, Alleviate Growing Income Inequality

The U.S. Census Bureau is slated to release its annual national data on poverty this Tuesday and on Thursday will release state-specific data on poverty. While Census doesn’t leak data ahead of time, many economists are predicting that median income increased between 2014 and 2015 and the poverty rate will see a slight decline. While a downward trend in poverty and upward trend in real income would undoubtedly be good news, it is important to note that the poverty rate will more than likely remain substantially higher than its 2000 level and income gains likely will not be substantial enough to recoup the erosion that happened throughout the early aughts.  

The analysts at the Institute on Taxation and Economic Policy (ITEP) have produced multiple recent briefs and reports that provide important context and offer tax policy suggestions that would both make state tax codes more progressive but also help mitigate poverty and widening income inequality.

ITEP’s signature report, Who Pays?, is a distributional analysis of average effective tax rates in each of the 50 states. This in-depth analysis explains how state and local tax systems exacerbate poverty by overly relying on regressive taxes to raise revenue. In fact, when all the taxes levied by state and local governments are taken into account, every state imposes higher effective tax rates on their poorest families than the richest 1 percent of taxpayers. Across the country, the effective tax rate for the poorest 20 percent of taxpayers is 10.9 percent, more than double the 5.4 percent average effective tax rate for the top 1 percent.

State Tax Codes as Poverty Fighting Tools is a 2015 report that examines four specific tax policies in each of the 50 states and Washington, DC. ITEP will release an update to this report by 11 a.m. on Thursday, Sept. 15 and will also include 2016 legislative updates. The new ITEP report suggests states should enact or improve refundable Earned Income Tax Credits (EITC), offer refundable property tax credits for low-income homeowners and renters, create refundable, targeted low-income credits to help offset regressive sales and excise taxes, and increase the value of existing child-related tax credits. In addition to the report, ITEP will release four updated briefs on each of these key anti-poverty tax policies: Rewarding Work Through State Earned Income Tax Credits, Reducing the Cost of Child Care Through State Tax Codes, Property Tax Circuit Breakers, and Options for A Less Regressive Sales Tax.

In Indexing Income Taxes for Inflation, Why It Matters, ITEP analysts note that low- and moderate-income families may be subject to higher state taxes over time due to “bracket creep.” This simply means since state tax brackets aren’t adjusted for inflation, a hypothetical family whose household income was at the poverty level in 2007 but whose income increased only at the rate of inflation (meaning they are still living in poverty) may be subject to a higher tax rate in states whose tax codes don’t adjust for inflation.

The bottom line is that no matter what the 2015 Census data on poverty and income find, the nation can do more to address and alleviate poverty. Ensuring state tax policies are progressive is one effective, proven tool in a very diverse arsenal.