Crossing the Threshold: Families in poverty no longer paying state income tax

An interesting new report from our friends at the Center on Budget and Policy Priorities looks at whether families with income below the federal poverty level (FPL) in each state are subject to state income taxes. It finds that for Oklahoma, the threshold at which a two-parent family with two children owes state income tax made it above the federal poverty line for the first time in 2008. The income tax threshold for a two-parent family of four was $23,500 in 2008, which is 107 percent of the FPL of $22,017. The report shows that back in 2000, the state’s income tax threshold for a family of four was several thousand dollars below the poverty line.

Oklahoma’s laudable progress in this regard is primarily the result of two tax changes adopted over the past decade that have made Oklahoma’s tax system more progressive and lowered tax liabilities on low- and moderate-income families. In 2000, Oklahoma adopted a state Earned Income Tax Credit, set at 5 percent of the federal credit, which can provide up to $200 for families at or about the federal poverty level. Then in 2005 and 2006, the Legislature adopted a major multi-year increase in the standard deduction, which is claimed by most taxpayers earning under $50,000 per year. The standard deduction rose from $2,000 for a family in 2005 to $6,500 in 2008 (the year examined in the report). By next year, the state’s standard deduction will be fully indexed to the federal standard deduction, which is expected to be $11,400. The Center also calculates in a new state child tax credit that can be claimed by families earning less than $100,000 per year.

Yet despite this progress, Oklahoma’s tax system overall remains regressive, which means that low- and moderate-income households pay a greater share of their income in state and local taxes than do wealthy households. As we emphasized in the discussion of tax fairness in our new Online Budget Guide, the “income tax… is progressive, but not progressive enough to make up for the burden that sales and property taxes put on lower income taxpayers.” As shown in this factsheet, the recent cuts in the state’s top income tax rate which accompanied the increase in the standard deduction primarily benefited higher-income earners. Next week, the Institute for Taxation and Economic Policy will be releasing an updated version of its invaluable Who Pays? report that will provide detailed information on the distribution of taxes across income categories.

We contend that a more progressive tax system would reduce the tax impacts on struggling Oklahoma families by providing them more resources to meet current needs and invest in the future. Our Online Guide discusses several options, including increasing the state EITC,  strengthening the sales tax credit that offsets the sales tax on groceries, increasing the personal exemption, and stretching out our tax brackets to allow more initial income to be taxed at lower rates. It is unlikely that any of these proposals will even be on the table while the state struggles with declining tax collections and budget shortfalls. Still, it is essential that  future discussions of changes in the tax system consider options that would build on the gains seen this decade and make the system fairer for low- and moderate-income families.