Which State Taxes the Poor the Most?

September 26, 2013 — Leave a comment

It is the state that recently passed voter-referendums legalizing same-sex marriage and marijuana consumption. President Obama easily cruised to victory in this state during this past presidential election. However, the overwhelming liberal layout of the state of Washington has not led it to have a favorable tax environment for the poor.

According to a new report from the nonprofit Institute on Taxation and Economic Policy (ITEP), poor families in Washington state pay 16.9 percent of their total income to state and local taxes.

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Released last Thursday, new census data reveals that poverty rates have not changed in forty-three of the states. ITEP regards New Hampshire, Alaska, and Maryland as some of the best-performing states yet they point that a tenth of the population still lives in poverty in these states. Mississippi led all states with 24 percent of its population living in poverty.

“Any time when one in six Americans are living in poverty it’s important to ask what our public policies can do to make that better,” says ITEP Executive Director Matt Gardner. “It’s important to remember that state tax codes can play a role in mitigating poverty as well.”

In the report, ITEP points out some tax policy changes, which can benefit poor families. It notes that states can enact the Earned Income Tax Credit (EITC).  The Earned Income Tax Credit is a refundable tax credit dependent on the number of children you have. When the credit exceeds the amount of taxes owed, it results in a tax refund to those who claim the credit. Currently, only twenty-six states have enacted this tax credit.

Similarly, the non-profit proposes states have true “property tax circuit breakers.” These property tax circuit breakers are “refunds provided by the state government to those whose property tax payments are deemed too great.” Some eighteen states deliver roughly $3 billion per year in circuit breaker programs.

Lastly, they recommend that states should create low-income credits and child-related credits to reduce the tax burden on the poor.

Though ITEP criticizes states for the high taxes on the poor, the report applauded three states for their active efforts in reducing the tax burden for poor families.

It praises Vermont, for it is has one of the least regressive tax systems in the nation. ITEP finds that Delaware’s “system isn’t very progressive, but its reliance on income taxes and low use of consumption taxes created a system that’s ‘only slightly regressive overall’.” Finally, ITEP applauds New York and the District of Columbia and their “close-to-flat” tax systems.

Remember that a regressive tax system is one in which taxes tend to reduce the taxes for people with a higher ability to pay, and they shift these taxes disproportionately to those with a lower ability to pay.

The opposite of the regressive tax system is the progressive tax system: one that the ITEP advocates for in this report. In progressive tax systems, the average tax rate increases as the amount subject to taxation increases.

In between these two tax systems falls the flat or proportional tax. The flat tax system is where the tax rate is fixed as the amount subject to taxation increases.

JDKatz: Attorney's At Law

JDKatz, P.C. is a full-service law firm focused on tax lawbusiness and transactional lawestate planning and elder law. We are dedicated to minimizing your existing liability and risks while providing valuable tax planning to streamline your tax issues in the future. Please call us at 301-913-2948 to schedule an appointment to meet with one of our trusted attorneys, or visit http://www.jdkatz.com.

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