Income Tax and the Working Poor
Chuck Sheketoff
According to a new report by the Washington, D.C.-based Center on Budget and Policy Priorities (CBPP) (PDF), Oregon remains among a minority of states that tax the income of poor families and our income tax on working poor and near poor families is among the highest in the nation.
In 2009 Oregon income taxes kicked in at $19,800 for a married couple with two children — about $2,150 below the poverty line for a family that size.
Of the 42 states (counting the District of Columbia as a state) with an income tax in 2009, only nine other states imposed income taxes on four-person families with less income.
The vast majority of states — 29 of the 42 with income taxes — do not tax the poor.
A two-parent family of four living at the poverty line with just $21,947 in income had to pay $200 in Oregon income taxes in 2009, the fifth highest amount among states for a family of four at that income level.
A nearly poor family of four — a family with income at 125 percent of poverty, or just $27,434 — paid the fourth highest income tax in the nation, $764.
The bottom line is that Oregon not only sets the level for having to start paying income taxes much lower than most other states, but it also imposes one of the heftier income tax bills on low-income families once they rise above that income level.
Many states either levy no income tax on poor working families or even offer what is essentially a negative income tax, where the families get more money back than they pay in.
The report’s findings confirm the need for a robust improvement to Oregon’s Earned Income Tax Credit (EITC). A boost to the state’s EITC is the most efficient and targeted way for Oregon to raise the income tax threshold and end the practice of taxing the work effort of working poor families.
Links to the CBPP study and a summary for Oregon are located at www.ocpp.org. And if you want to join the effort to increase the EITC, visit Oregonians for Working Families — a coalition of over 95 health and human service organizations, labor groups, businesses and local governments pushing for a significant increase in the state EITC.
Chuck Sheketoff is the executive director of the Oregon Center for Public Policy. You can sign up to receive email notification of OCPP materials at www.ocpp.org.
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3:55 p.m.
Apr 29, '10
I kept trying to make this point in the 66 / 67 context: Sure, we have one of the highest income tax rates on the rich, but we're not picking on the rich - we have the VERY highest income tax rate on the poor!
10:29 a.m.
Apr 30, '10
Which is why if we ever go to a sales tax (which I am not advocating, just speculating on) the trade-off should be reduction in taxes at the bottom, preferably by simply reducing to 0% the tax rate on the first "X"-thousand dollars of earned income ("X" depending on filing status).
Then phase out the zero rate as income for that filing status increases past a certain point (I tend to like the 80th percentile for Oregon income).
10:57 a.m.
Apr 30, '10
Therein lies the rub though about regressive/progressivisty of sales tax rates. In order to adjust a sales tax to not make it regressive, which sales taxes inherently are, you lose the breadth of what is taxed and hence its benefit of alleged "stability". If you structure it to not hit essentials, which is problematic in and of itself, and are only taxing luxury items, then you lose not only the scope of the revenue, but reintroduce the volatility. People tend to pull back on non-essential spending when large economic down-turns occur.
Squaring the circle of a sales tax which substantively generates revenue for public services, while assuring that it isn't heaping a regressive tax on the poor and lower income people is a problem.
1:00 p.m.
Apr 30, '10
Correct, in general.
Which is why progressivity in the system overall would be better achieved by an offset against the low end of the income tax than by limiting the scope of the sales tax (if you go sales tax at all).
That keeps a broad sales tax, and also reduces impact on low-income families.
2:07 p.m.
Apr 30, '10
But any "off-set" would be in some form of tax credit, even a 'negative tax' for those at the very low end. And since the revenue they pay-in is paid back by via said offset, and the money is essentially fungible, you again have removed the claimed 'stability' of a sales tax since you are still on netting tax revenue on non-essentials, you are back to volatility and narrowed scope.
3:23 p.m.
Apr 30, '10
No. Not a credit. Read my post again. A change in income tax rates.
Adjusting the rates in the income tax has absolutely zero impact on the overall stability of the sales tax, except on the margin where total discretionary income is counted.
And at that level, because low-income families tend to spend a higher portion of their income at the retail level, the impact would increase, not decrease the stability of the sales tax.
4:03 p.m.
Apr 29, '10
As many folks have pointed out before when talking about business taxes, if we're talking about equity and fairness we should look at total tax burden on folks of different income, not focusing so much on one type of tax or another.
Not that I'm against increasing the EITC - I'm for it - but as the report notes many states without income taxes have sales taxes, thus are more regressive. And Oregon and Montana, without sales taxes, are more progressive than portrayed just by income tax rankings. Per report: "these two states still have less regressive tax systems overall than the average state."
11:37 p.m.
Apr 29, '10
Evan is right, and wrong.
He's correct that total taxes are important to look at, as well, but when you look at total taxes the lowest income Oregonians pay a larger share of their income in state and local taxes than the wealthiest. See http://www.ocpp.org/cgi-bin/display.cgi?page=is20091012Making and http://www.ocpp.org/cgi-bin/display.cgi?page=cp0911ProgTaxati
Oregon isn't "more progressive" it is "less regressive" than some other states -- as taxes as a share of income still do go down as income goes up.
And looking at the income tax effects on low-income households is important for a number of reasons, as explained in the report. First, it is a significant source of income for the states. It gets at the issue of the degree to which we tax the work effort of those struggling to get by -- this is important given that the loss of public assistance is typically steep for every additional dollar earned. Adjusting the income tax is typically the best way to target assistance to those who need it when compared to changes in sales or property taxes.
12:11 p.m.
Apr 30, '10
I like the "less regressive" vs. "more progressive" distinction. Language can be so important, and I stand corrected.
9:19 a.m.
Apr 30, '10
I apologize for taking what might seem like a knee-jerk conservative view (I try to be neither), but don't you think there is an inherent societal value in everyone paying toward government services? It's the lesson of tithing, right? That's not to say that we should increase taxes of any kind on the poor, but I also don't think it makes policy sense to be looking for ways to move toward zero taxes for anyone.
10:21 a.m.
Apr 30, '10
So... If we accept that we should have programs (food stamps, Oregon Health Plan, school lunches, etc) which help the poor because they are poor, we should then ask them to pay for those programs, thus making them poorer and in need of even more assistance?
I'm not sure that makes sense.
10:54 a.m.
Apr 30, '10
If you mingle macro and micro, you'll always find some contradictions. E.g., why would anyone who carries a credit card balance do anything to try and save money?
Food stamps, Oregon Health Plan, school lunches, etc., come from different pots of money, some federal, some state. And the taxes/fees paid by the poor go for particular purposes. If I am poor but drive a lot, I'm helping pay for the roads I use, through gas taxes. That's not inconsistent with food stamps being given, especially if they're intermittently provided.
And, I think, people are better citizens knowing that they are paying for services, even if the contribution is much less than others.
1:05 p.m.
Apr 30, '10
The specific issue here is state income tax. How does it make someone a "better citizen" to take part of their paycheck and then increase the amount the same government gives them in support?
1:31 p.m.
Apr 30, '10
Taking part in paying for services makes them a better citizen -- they can complain about roads they help pay for, they are more engaged in the system (ideally). I don't think it takes a doctorate in sociology to believe that people feel more a part of a community when they contribute.
The later government support to this hypothetical person comes in a variety of forms, may come sporadically, or may not come at all, depending on their needs.
And by the way, richer people get subsidized too, right? I guess I could argue that energy tax credits should be eliminated, and my income tax should just be reduced.
1:57 p.m.
Apr 30, '10
JR: Taking part in paying for services makes them a better citizen -- they can complain about roads they help pay for, they are more engaged in the system (ideally).
You assert this again, but you do not explain how this is a fact. And people will complain about things whether they paid for them or not.
JR: And by the way, richer people get subsidized too, right?
Yes, but the point is they should not be. And there is a clear and obvious distinction between "subsidizing rich people" and using the tax code to incentivize behavior.
12:26 a.m.
May 1, '10
Jonathan, every income tax system -- the current income tax, every proposed "flat tax" alternative -- has some level of income that is not taxed. It is well established that the poorest should not pay income taxes..the issue raised by this study is where do you draw the line? Below the official (and out of date and low, I would add) poverty level? Most states do not tax people who are poor. Oregon does.
4:18 p.m.
Apr 30, '10
Bob. It's not an empirical thing. If I volunteer and give money to Save Our Elms, I will be more vigilant to watch for any getting Dutch Elm disease. If I contribute money, time and sweat to building a new playground for my kids' school, I will more attentive to litter, graffiti, misuse, etc. It's the notion that the tragedy of the commons is mitigated if members of society get a sense that the common areas are partly theirs.
I'm not saying it's apples to apples, but I think the sociological principle is valid. Most people don't like being freeloaders ... everyone paying as they can is (I think, in my opinion) an important policy reason to not try and reduce anyone's tax/fee burden to zero.
12:33 a.m.
May 1, '10
As noted above, it is well settled that at some low level of income we do not tax. We've already "moved" there. Also, I think its a strawman b.s. argument that paying taxes makes people better citizens. Is Phil Knight, one of the biggest taxpayers in Oregon really a better citizen because of it? Better than who? How would he be lessor if we slashed his taxes?
There are certainly some things that having skin in the game makes a difference (a reason OCPP asks for honoraria when we give talks - we get a better chance that the talk will be promoted and better attended), but taxes don't fit that sociological scheme.
8:45 a.m.
May 4, '10
I think that taxes should fit in the this sociological scheme of having "skin the in the game." as JR mentioned, being involved in an organization you are more likely to be to concerned with its well-being. The problem here is that very few people see paying taxes as being involved in government. This may be our most direct involvement in government (people that don't vote still pay taxes!). Everyone should pay some form of tax and we should spread the idea that because of this we all have a stake in what our government does and for us and to us.