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States taxing the poor most

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Tourists perennially enjoy Waikiki beach.
Hawaii has a particularly low poverty rate of 10 percent, but the state continues to tax families at the poverty line at one of the highest rates in the country.

In an effort to help families work their way out of poverty, most of the United States do not tax the incomes of working-poor families. A handful of states do, however. 24/7 Wall St. examined a new report from the Center on Budget and Policy Priorities to identify the states that tax the poor the most.

The decision of these states to continue taxing the poor is notable because most states have stopped. Over the past two decades, there has been a widespread, bipartisan effort to roll back taxes on working-poor families. Today, only 15 states still tax families with incomes that are at, or below, the federal poverty line -- currently $23,018.

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However, the effort to reduce taxes on the poor has stalled, according to the CBPP. In 2011, no new states exempted working-poor families of four -- the benchmark family unit used in the study -- from income taxes. Worst still, in almost all 15 states, these taxes have increased.

The number of states that continue to tax poor, working families remains too high, Phil Oliff, policy analyst at the CBPP and coauthor of the report told 24/7 Wall St. “That makes it harder for those families to pay for basic necessities like food and clothing; it makes it more difficult for them to afford work related expenses like child care and transportation costs; and it’s bad for the state’s economy.”

While the average median income of the residents of these states varies, a number are particularly poor relative to the rest of the country. States such as West Virginia, Georgia and Alabama have among the highest poverty rates in the country. As a result, a larger percentage of these states’ populations are affected by taxes on poor families. According to Oliff, “States should be helping poor families to work their way into the middle class, not taxing them deeper into poverty.”

24/7 Wall St. identified 10 states that tax two-parent families of four living at the poverty line at the highest rate, based on CBPP’s report, “The Impact of State Income Taxes on Low-Income Families in 2011.” All of these states also tax families with incomes that place them below the poverty line. For each state, we also included the income level below the poverty line where families would not be taxed. In addition to this, we included the poverty rate and median household income for each state, based on data from the U.S. Census Bureau.

These five states tax the poor the most.

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1. Alabama

  •  Income tax on working-poor: $548/yr.
  •  Lowest taxable income: $12,600 (55 percent of poverty line)
  •  Poverty rate: 17.4 percent (7th highest)
  •  Median household income: $40,474 (5th lowest)

Alabama is one of the country’s poorest states, and it taxes its poor residents’ incomes the most. The state has a poverty rate of 17.4 percent, which is among the nation’s highest. It also has the fifth-lowest median household income. A family of four at the poverty line must pay $548 in income taxes. This amount has consistently increased since 1994. Additionally, Alabama has the second-lowest tax threshold in the country. A single-parent family of three making $9,800 -- or 55 percent of the group’s poverty level of $17,922 -- remains subject to income tax.

2. Illinois

  •  Income tax on working-poor: $509/yr.
  •  Lowest taxable income: $13,100 (57 percent of poverty line)
  •  Poverty rate: 13.1 percent (25th lowest)
  •  Median household income: $52,972 (17th highest)

Illinois taxes families of four making 57 percent of the poverty level. This means that a family earning $13,100 a year must pay income tax. Due to state fiscal issues, Illinois raised its flat income tax rate from 3 percent to 5 percent in 2011. This caused income taxes for a family of four at the poverty line to increase by $322. However, the state plans to fully implement tax credits for low-income families by 2013, which “will almost completely offset the impact of the income tax increase for poor families,” according to CBPP.

3. Hawaii

  •  Income tax on working-poor: $331/yr.
  •  Lowest taxable income: $17,800 (77 percent of poverty line)
  •  Poverty rate: 10.0 percent (6th lowest)
  •  Median household income: $63,030 (5th highest)

Hawaii has a particularly low poverty rate of 10 percent. It also has one of the highest median household incomes in the country. The state continues to tax families at the poverty line at one of the highest rates in the country. However, the amount a family of four at the poverty line pays in income tax has decreased since 1994. That year, the amount was $406. Today, it is $331. The state also taxes families making 77 percent of the poverty line or more.

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4. Oregon

  •  Income tax on working-poor: $274/yr.
  •  Lowest taxable income: $20,200 (88 percent of poverty line)
  •  Poverty rate: 14.6 percent (18th highest)
  •  Median household income: $46,560 (22nd lowest)

A family of four in Oregon living at the poverty line pays the fourth-most taxes in the country at $274. For a family that size making 125 percent of the poverty line, the amount of tax owed jumps to $869 -- the third most in the country. State lawmakers have considered extending tax breaks for low-income households in recent years, but significant action has not yet taken place.

5. Georgia

  •  Income tax on working-poor: $273/yr.
  •  Lowest taxable income: $15,900 (69 percent of poverty line)
  •  Poverty rate: 16.5 percent (11th highest)
  •  Median household income: $46,430 (21st lowest)

Georgia has among the highest rates of residents living below the poverty line in the country. It also has the fourth-lowest tax threshold in the county. Families making just 69 percent of the poverty line or more are taxed. For those low-income families, taxes are generally getting worse. The amount that a family of four living on the poverty line must pay in income tax has more than doubled since 1994, from $116 to $273.

Read which other states are taxing the poor.