The tax breaks available to the poor offer a lot more than extra spending money each spring. For some families, it can go a long way toward eventually lifting them out of poverty.
Such tax breaks are pretty standard, and pretty generous, at the federal level — to the point where they typically eliminate federal income tax liabilities for families in poverty. But some poor families still face substantial state income tax bills, depending on where they live, according to a report released by Columbia University this week.
In Alabama, for instance, a family of four living at the poverty level may pay $588 a year in state income tax, while a similar family in Illinois would pay $240, according to the study. “It’s surprising how much variation there is,” says Curtis Skinner, director of family economic security at the National Center for Children and Poverty at Columbia University.
The size of the state tax bill depended mostly on the income level at which states started charging income taxes. It also mattered whether states offered low-income families refundable tax credits such as the earned income tax credit. Researchers estimated what a family of four (with two parents and two kids) would pay in state income taxes with an annual income of $23,624, what was the poverty threshold in 2013. They did the same for a single parent household with two children earning the poverty threshold of $18,769.
Sixteen states charge taxes to families of four living at the poverty level. In six of those states, the tax bill was larger than $200. That may not seem like much for some families, but for a parent with two young children, it could be enough to cover a few months’ worth of diapers, Skinner says.
“To what some people may seem like a small amount of money,” he says, “the research is showing really makes a big difference to low income families.”
The study didn’t look at all the tax bills families might have to pay. Researchers looked only at state income tax and left out the nine states that don’t charge it: Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming. But families in those states may still be weighed down by other tax bills, such as sales taxes, Skinner says.
Eighteen states and the District of Columbia offered fully refundable earned-income tax credits in 2013, which means that families could receive the tax credit as part of their refunds, even if they didn’t owe any taxes. As a result, many states offer poor families tax refunds, similar to what they are likely seeing on their federal tax returns.
Some states are making changes to ease the tax burden faced by low-income families. For instance, more states are making the earned-income tax credit refundable, Skinner says. Some states can help low-income families by making other tax breaks such as the child and dependent care tax credit refundable, which could increase some families’ tax refunds, he says.
Currently, nonrefundable tax breaks are mostly enjoyed by higher income families, which benefit from the reduction in their tax bills, he says. In contrast, lower income families tend to have smaller tax bills and would benefit more from a refundable credit that can be added to their refunds, he says.
In the long run, states that offer these tax breaks could see a return on their investment. “Children who have this support are more likely to do better in school,” he says, “and more likely to be employed and to pay taxes in the future.”