In conjunction with the U.S. Census Bureau’s release of new poverty data this week, ITEP has an updated report out today, State Tax Codes as Poverty Fighting Tools, that provides an overview of anti-poverty tax policies, surveys state developments in these policies in 2015, and offers recommendations that every state should consider to help families rise out of poverty.
Based on the Census data, here’s what we know. Poverty remained persistently high as the new data showed no significant change from last year or the previous three years. In 2014, 46.7 million (or 1 in 7) Americans were living in poverty. At 14.8 percent, the federal poverty rate remains 2.3 percentage points higher than it was 2007, just before the throes of the Great Recession indicating that recent economic gains have not yet reached all households and that there is much room for improvement. Most state poverty rates also held steady between 2013 and 2014 though twelve states experienced a decline.
In good news, the Supplemental Poverty Measure (SPM) released alongside the official measure, demonstrates that the tax code can be used as an effective poverty-fighting tool. The federal EITC and refundable portion of the Child Tax Credit alone, for example, decreased the supplemental poverty rate from 18.4 to 15.3 percent for everyone. And, thanks in large part to those credits, the supplemental poverty rate for children is actually lower than their official poverty rate (16.7 compare to 21.5 percent). The SPM was developed in recent years to address concerns that the official measure does not produce an adequate nor accurate picture of those living in poverty. It does a much better job of measuring the true cost of making ends meet as it includes expenses such as child care, out of pocket medical costs, and payroll and income taxes as well as policies like the Earned Income Tax Credit (EITC), the Supplemental Nutritional Assistance Program (SNAP; formerly food stamps), housing assistance and other key anti-poverty policies.
But here’s something that will be ignored this week in virtually all the chatter about poverty and policy: As much as federal tax policy plays a vital role in mitigating poverty, state tax systems actually exacerbate poverty.
While the federal tax system is overall (barely) progressive thanks to progressive income tax rates and tax credits such as the EITC and Child Tax Credit (CTC), virtually every state tax system is regressive, meaning the less you earn, the higher your effective tax rate. 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 on the richest 1 percent of taxpayers. ITEP’s 2015 comprehensive report, Who Pays?, examined the tax systems of all 50 states and the District of Columbia and found the effective state and local tax rate for the poorest 20 percent is 10.9 percent, which is more than double the 5.4 percent average effective rate for the top 1 percent.
Despite the unlevel playing field states create for their poorest residents through existing policies, many state policymakers have gone backward and proposed (and in some cases enacted) tax increases on the poor under the guise of “tax reform.” During the 2015 legislative session, for example, 17 states considered or passed tax cut or tax shift packages that would lower taxes for the very rich and increase them for low- and moderate-income families.
State policymakers should take note. Right now, states are failing those who struggle with poverty and, instead, are using the tax code to favor those who don’t need any more help. Lawmakers who are serious about improving their constituent’s lives should closely examine the Census data on poverty in their states and communities and consider enacting progressive tax policies that will reduce poverty and improve families’ quality of life.
State Tax Codes As Poverty Fighting Tools recommends that states jump-start their anti-poverty efforts by enacting one or more of four proven and effective tax strategies to reduce the share of taxes paid by low- and moderate-income families: state Earned Income Tax Credits, property tax circuit breakers, targeted low-income credits, and child-related tax credits.
A full copy of the report can be found here.