Use state tax policies to help poor families escape poverty

Tax systems across the country are making many families poorer because almost every state imposes higher tax rates on low-income families than on those in the upper-income brackets, according to a recent report by the Institute on Taxation and Economic Policy (ITEP).

In Colorado, for example, low- and middle-income taxpayers earn $11,400 and $48,500 per year, respectively, and pay almost 10 percent of their income in state and local taxes. Meanwhile, the top 1 percent of earners, with average pay of $1,975,800, pays only 4.2 percent of total earnings in state and local taxes.

The slow recovery in the economy has led to major budget cuts, particularly in programs that benefit the poor. Nationally, many state policymakers have recently proposed tax increases on the poor as a way to either close budget gaps or finance tax cuts for the wealthiest residents. According to the ITEP report, these increases may push individuals and families further into poverty.

The ITEP report documents several anti-poverty tax policies, describes what individual states are doing in 2012 and recommends policies that states should consider to help families rise out of poverty.

One such recommended policy is state supplements to the federal Earned Income Tax Credit (EITC), which provides targeted tax reductions to low-income workers and is also an important way of rewarding work and increasing incomes. Colorado's state EITC is funded through TABOR surpluses and was last disbursed to workers in 2001. According to the Census Bureau, the federal EITC helped lift about 5 million families, including 3 million children, out of poverty in 2010.

Complementary to the EITC is the refundable low-income credit that is offered in 10 states to ensure that families below a certain income level aren't subject to the personal income tax. For example, Ohio offers a non-refundable credit that ensures families with incomes less than $10,000 aren't subject to state income tax.

Fixed-income families hit hardest by the recession and housing crisis have access to property tax credits that are also known as property tax "circuit breakers." The credit gives homeowners and renters a credit equal to the amount by which their property tax bill exceeds a certain percentage of their income. In Colorado, this credit is limited to those over 65 years old and disabled veterans, and it includes renters as well as homeowners.

Another important policy is the Child Tax Credit, a federal income tax law that allows taxpayers to claim a $1,000 income tax credit for each dependent child under 17 years of age. These per-child credits are an important anti-poverty strategy, especially if they are refundable and limited to low-income families.

The federal child and dependent care credits for low- and middle-income working parents who frequently spend a significant portion of their income on child care allow a non-refundable income tax credit to help offset child-care expenses.

We support policies that improve the lives of American families living in poverty. State lawmakers have a responsibility to ensure that state tax structures do not make it difficult for poor families to climb out of poverty. ITEP's recommendations are some of the most cost-effective strategies available to lawmakers to address economic security issues in America.

– George Awuor