An Alabama Earned Income Tax Credit
An Arise Citizens’ Policy Project fact sheet, made possible by the Ford Foundation
September 3,1999
by Rob Collins
Arise Policy Analyst
Alabama has a reputation as a “low-tax” state. But for thousands of full-time workers earning poverty wages, the state’s income-tax burden is one of the heaviest in the country. Worse yet, the state depends heavily on sales and excise taxes, which hit poor households hardest. These taxes are called “regressive” taxes because they absorb a much larger proportion of a poor family’s income.
In Alabama, the poorer you are, the greater the proportion of income you lose to state and local taxes: In 1995, non-elderly married couples earning over $250,000 paid less than 3½ cents on the dollar in state and local taxes. But couples earning less than $20,000 paid 11½ cents per dollar.
The state income tax may well be the most unfair in the United States:
• In Alabama a family of four earning only $4,600 a year – barely one-fourth of the official poverty line – must pay income tax to the state. No other state taxes income at such a low level.
• Alabama taxes poor families at the second highest rate of any state with income tax. For example, a mother of two with a minimum-wage job had to pay $218 in state income tax in 1998.
• In the 1990s, 40 of the 41 states with income taxes have changed their tax codes to eliminate or reduce the tax burden on families with poverty-level incomes. The sole exception is Alabama.
The result: Poor families who work their way toward self-sufficiency are likely to find themselves taxed back into poverty.
This is particularly problematic at a time when state welfare policy strives to encourage low- income families to work their way off welfare and out of poverty. That's why the state has an interest in “making work pay.” Their paychecks should help families escape poverty, not subject them to excessive taxation.
Two solutions
An April 1999 study by the Center on Budget and Policy Priorities compares two ways of reducing the income-tax burden for Alabamians:
• increasing the dependent deduction, from $300 to $1,500
• establishing an Alabama Earned Income Tax Credit (EITC), at 10 percent of the federal EITC.
The study evaluates the two tax-cut proposals by comparing the benefits to taxpayers, the cost to the state, and the advantages to low-income families in particular.
• If the dependent deduction were increased, a mother of two children earning minimum wage would get a tax cut from $218 to $101.
• If a state EITC were set at 10% of the federal EITC, the same family would get a tax credit of $382, enough to pay the family’s taxes and provide a “refund” of $164.
Both measures would reduce the income-tax burden on most poor families, but the EITC would direct the benefits to families earning less than $31,000. While the dependent deduction would save families up to $60 per child, the EITC would lower taxes by as much as $380 for the state's lowest-paid full-time workers.
While the dependent deduction would save families up to $60 per child, the EITC would lower taxes by as much as $380 for the state's lowest-paid full-time workers. |
Both proposals would result in a loss of state revenue, but would have the desirable effect of reducing the tax burden on low-income families who are struggling to work their way out of poverty. The Alabama EITC would cost an estimated $71 million in fiscal year 2000. The increased dependent deduction would cost an estimated $76 million.
Proposed Alabama Earned Income Tax Credit
Married Couple with Two Children
Family Income - Tax now +EITC = Result
$8,328 (half poverty line) - $102 + $333 = $231 back
$10,700 (minimum wage) - 178 + 384 = $206 back
$16,655 (poverty line) - 408 + 297 = pay $111
$20,819 (125% of poverty) - 581 + 209 = pay $372
Center on Budget and Policy Priorities. Poverty line is 1998 federal poverty threshold.
Advantages of an Alabama EITC
The EITC has several advantages over the increased dependent deduction:
• Benefits would be targeted to low-income working families; by contrast, an increased dependent deduction would be distributed to households at all income levels.
• By providing a tax credit that rewards work, the EITC would provide a greater incentive for low-income families to stay in the workforce.
• For the poorest households, the EITC would exceed their income-tax liability and would provide a refund. This would make Alabama’s tax system substantially fairer by returning money to the state’s most heavily taxed citizens.
The least-expensive method of delivering more money to the working poor lies in the Earned Income Tax Credit. Such tax forgiveness allows families below a certain level to pay lower taxes, allowing them to keep more of their earnings. . . . It's made a huge difference in lifting poor people above the poverty line.
– Katherine Newman,
John F. Kennedy School of Government
Salon magazine interview, 4/30/99
For a copy of the study on which this fact sheet was based, contact Arise or check our website:
Arise Citizens’ Policy Project
P.O. Box 612
Montgomery, AL 36101
(334) 832-9060
This paper may be reproduced in whole or in part, as long as Arise is credited.