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The Tax Burden of the Working Poor (and a way to help)

Bina PatelCascade Commentary

Summary

Protecting the earned income of low-income families is a proven method of concretely reducing poverty and increasing economic equity. The Earned Income Tax Credit, first enacted in 1975, encourages individuals to remain employed rather than depend on unearned income such as welfare programs. Within the asset building field, it is essential to advance the concept of “making work pay” via public policies and community programs.

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Oregon is among the states which levy a high tax on their lowest-income working families, creating financial hardships for families with few resources. According to the Center for Budget and Policy Priorities, “Taxing the incomes of working-poor families runs counter to the efforts of policymakers across the political spectrum to help families work their way out of poverty.” For those living with incomes placing them just over the poverty line, meeting basic needs like housing and food costs is extremely difficult. A few-hundreddollar tax bill (loss of earned income) can be a deciding factor in their economic stability.

The following table from the recent report of the Center on Budget and Policy Priorities on taxes and low-income families shows the tax burden by family income:

Oregon’s 2006 income tax levied on working-poor and near-poor families
Family Income Tax State Rank
(1 = highest tax)
For families of three with incomes at the poverty line ($16,079) $120 8
For families of four with incomes at the poverty line ($20,615) $319 5
For families of three with minimum-wage earnings ($15,599) $80 4
For families of three with incomes at 125% of poverty line ($20,099) $511 3
For families of four with incomes at 125% of poverty line ($25,769) $832 3
“According to the Center for Budget and Policy Priorities, ‘Taxing the incomes of working-poor families runs counter to the efforts of policymakers across the political spectrum to help families work their way out of poverty.’”

Taxing these dollars pushes many families who are close to poverty into the category of the “working poor,” those who maintain employment at least 27 weeks out of the year but who fall below the poverty line. Unfortunately, working does not necessarily result in economic security; and in trying to make ends meet, many of the working poor need public assistance. The working poor are most at-risk of a financial crisis that could take years to overcome, should an emergency occur. With little take-home pay, few families are able to save enough to mitigate a crisis, much less accumulate assets in the long-term to help alleviate instability.

One way government eases the tax burden on low-income workers is through the Earned Income Tax Credit (EITC). Congress enacted the EITC in 1975 to help alleviate the burden of social security taxes and create incentives to remain employed. According to the Annie E. Casey Foundation, the EITC pulls 5 million families out of poverty every year across the U.S. Below is a summary of EITC filing criteria and refunds. Nationally, over 21 million families received the tax credit, including over 211,000 filers in Oregon. The average federal return is $1625.

Maximum 2006 Earned Income
(married joint filing)
Number of Qualifying Children Maximum 2006 Credit
$38,348 2 or more $4,536
$34,001 1 $2,747
$14,120 0 $412
“Why is the EITC such an important issue? It speaks directly to an area of poverty alleviation that needs as much attention as possible. Earned income is instrumental to upward mobility and security for families.”

Why is the EITC such an important issue? It speaks directly to an area of poverty alleviation that needs as much attention as possible. Earned income is instrumental to upward mobility and security for families. There are many kinds of income, including loans from family, welfare, food stamps and unemployment insurance. These forms of income do not provide the same incentives and stability that earned income can. While unearned income plays a role in short-term subsistence for many families, earned income has a significantly different impact on family health. Further, protecting earned income through the EITC is an immediate and extremely effective response to poverty, especially for those most vulnerable to negative economic shocks. The EITC is a singular example of how government can remove barriers to success for working families.

  • The EITC keeps families out of the welfare trap (whose economic disincentives discourage work and self-sufficiency, thereby encouraging the choice to remain on public assistance). Earned income is an opportunity to break the cycle of dependence on unearned income like welfare and to continue moving towards economic selfsufficiency.
  • Unlike some welfare programs, the EITC sends the message that employment is more valuable than income transfers. As noted earlier, the EITC was created 32 years ago to encourage individuals to remain employed. Within the asset building field, it is essential to advance the concept of “making work pay” via public policies and community programs.
  • Earned income can be leveraged for asset building activities that further build wealth, thereby moving families away from the poverty line (an important indicator in the ability to remain self-sufficient over time). These sorts of asset building activities also increase inclusion into more mainstream, competitive and affordable financial services.
  • The EITC brought over $360 million dollars back into the Oregon economy.
  • Returning earned income to workers is in essence a wage increase – by close to 30% for some, according to the U.S. Department of the Treasury.

While government and community organizations have developed many ways to support low-income families both in making ends meet and in getting financially ahead, the EITC is among the most effective, with definitively better outcomes than an expansion of welfare would offer. In Oregon, federal eligibility for the EITC means a state return equal to 5% of the federal credit. The state legislature is currently considering HB 2398 and HB 3023, which would increase the EITC refund to 12%. A legislative effort to remove barriers like high taxation on low-income families is a proven method of concretely reducing poverty and increasing economic equity.

Bina Patel is Director of the Oregon Asset Policy Initiative at Cascade Policy Institute, a think tank based in Portland, Oregon. To read other publications of the Oregon Asset Policy Initiative, visit www.cascadepolicy.org.

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Cascade Policy Institute is a tax-exempt educational organization as defined under IRS code 501(c)(3). Nothing appearing in this Cascade Commentary is to be construed as necessarily representing the views of Cascade or its donors, or as an attempt to aid or hinder the passage of any bill before any legislative body. The views expressed herein are the author’s own.

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