The Tax Burden of the Working Poor

The Tax Burden of the Working Poor (and a way to help)
By Bina Patel
Cascade Policy Institute

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-hundred-dollar 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

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

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) ………….# of children….Max. 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. 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 self-sufficiency.

– 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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  • Britt Storkson

    This underscores our assertion at http://www.theprotectionracket.com that the working poor and middle class pay most of the taxes relative to what they make while the well-to-do pay next to nothing. This is not an accident or oversight but by design.
    The key phrase here is *relative to what they make*. Someone may say “I paid $100,000 in taxes this year”. If they had income of $1 million that’s only a 10% tax rate. Compare that to the 35-40% overall tax rate the average working person pays and it’s no wonder that the rich get richer and the poor get poorer as a result of the tax system alone.
    The best way to get rid of a tax is to enfoce it uniformly. If that were done we either wouldn’t have the tax or the rate would be much less.
    Why do you think that Social Security taxes are capped at about $90,000 of income? If we’re going to have a tax why doesn’t everybody pay the same rate? And no redefining what is income.

  • NME

    What is crazy is that as you move closer to the middle class you seem to get hit by higher tax rates and newer taxes.

  • Jerry

    What is really crazy is that the bozos in Salem now want a sales tax, which will hit the poor even harder! The idiots. The dolts. The fools.

  • Bob Clark

    The Oregon state income tax seems especially burdensome to working college students. I don’t think a single, working college student can qualify for earned income tax credit in most cases. The income threshold for state taxation effectively starts at about $5,000 per year. Many working college students make up towards $20,000. Federal income taxation doesn’t begin effectively until like $10,000 and then too there is more generous federal credits for college expenses. As a result, a part-time working college student out on their own is often paying more in state tax than federal tax. If Oregon really wants to help young Oregonians launch their education, careers, and do it efficiently, it should raise the threshold at which income taxation begins by $5,000 or more to at least $10,000. It would also help folks who are barely squeaking bye on their pension. The threshold should also be raised with inflation.

  • CRAWDUDE

    Yawn! Said it before, will say it again. ” I will vote for a sales tax when the income tax is completely and irrepairably removed, not a second before”! Which is the same stance of the majority of Oregon voters, why do the tax and spenders keep floating this stale ain’t gonna happen idea?

    Lol, there was a hotly defended study that says we all enjoy paying taxes, maybe that’s why the sales tax discussions pop up every so often. Deep down inside we WANT the pols. to soak us for more cash.

    I purpose a new Oregon slogan: ” Oregon: taxing those who work to pay for those who won’t”.

  • SS

    EITC has been successfully used by government to provide positive incentive to the working poor, by rewarding ‘work’ and not fuelling the ‘victim mentality’. It would be difficult though, to universalize it, or to include students and middle class in its scope that easily.

  • Caper

    Sometimes expanding a good thing, can make it worse. Watch out. Thought analysis by the Cascade crew.

  • JAC

    Folks, government policy makers and politicians won’t tell you this; BUT, the fact is Oregon individual income tax rates in effect have not been re-indexed for inflation for more than 30 years. In the 70’s you paid 3% tax at $3000.00, 5% at 5000.00, 7% at $7000.00, and 9% at 9000.00. Enter inflation of the 70’s and 80’s and you now have most tax payers in the 9% state tax bracket and windfall money for Salem bureaucrats to spend. In 93’ with low inflation rates Salem started to re-index for inflation, but the damage was done. If the Oregon tax rates were properly re-indexed for 30 years of inflation you would pay 3% at 30,000.00, 5% at $50,000.00, 7% at 70,000.00, and 9% at 90,000.00. But then Salem would not have 300% more money to spend over the past 12 years alone.

    Cheers,
    JAC – The Tax Gut