Virginia Taxes Punish the Working Poor

Virginia ranks among the worst states in the nation in the income tax burden it imposes on working families just above the poverty line, according to a national study prepared by the Center on Budget and Policy Priorities.

The Virginia Organizing Project released the report, State Income Tax Burdens on Low-Income Families in 2000: Assessing the Burden and Opportunities for Relief, jointly with the Center on Budget and Policy Priorities in Virginia on March 1.

“This national study confirms the findings of Virginia’s own Commission on State and Local Tax Structure, which issued its report to the State Legislature in December,” said Danielle Poux, Virginia Organizing Project chairperson. “A new Virginia tax credit for individuals living below the poverty line took effect in 2000 and provides significant help for the very poor, but does nothing to ease the tax burden on working families struggling to stay just above the poverty line.”

The income tax burden on a two-parent family of four earning $22,001 a year (125 percent of poverty) actually increased last year, from $525 in 1999 to $561 in 2000, according to the Center on Budget and Policy Priorities report.

“Increasing the income tax burden of the working poor is simply wrong,” Poux said.

Sue Capers, director of the Virginia Coalition for the Homeless, said her group has worked for the last 12 years to establish an earned-income tax credit for low-income workers in Virginia. “While we welcome the reduction in the income tax burden on most people living below poverty passed by the State Legislature in 1999, we continue to seek an earned-income tax credit. It would be consistent with stated goals of Virginia government to encourage economic self-sufficiency and the transition from welfare to work for low-income families,” Capers said.

Virginia’s current tax program creates an income tax “cliff” for the working poor. If a family’s adjusted gross income exceeds the federal poverty level by a single dollar, the family is subject to the full taxation.

“A simple solution is available, according to both the Virginia Tax Commission report and the Center on Budget and Policy Priorities study,” Poux said. “Adoption of an earned income tax credit provision modeled on the federal earned income tax credit would eliminate the cliff.”

Under the federal program, tax credits are not terminated abruptly at a specified income level, but are gradually reduced as income grows, with the credit currently ending for families with one child when family income reaches $27,413. Fifteen states, including Maryland, have adopted earned income tax provisions modeled on the federal program.

“This issue is of great consequence to more than 400,000 Virginia families who qualify for the federal earned income tax credit,” Poux said. “Working poor families have little incentive to increase their modest incomes when the state income tax burden actually pushes them back below poverty. It leaves them with less spendable income for necessities like rent, food, clothing and school supplies for their children.”

By all accepted measures of tax burden, Virginia is a low tax state. Nationally, Virginia has the fourth lowest tax burden overall (9.2 percent), yet ranks fourth highest in the tax burden it places on single-parent families of three earning $17,171, or 125 percent of the federal poverty line. The Tax Commission report asserts that state and local taxes in Virginia took away 9.2 percent of the income of families in the second lowest fifth of family income ($15,000-$26,000). Meanwhile, taxpayers in the second highest fifth ($43,000-71,000) pay 8.6 percent, and the top one percent ($295,000 or more) pay only 6.9 percent.

“Virginia is the tenth wealthiest state in the nation in terms of median income,” Poux said. “That we fail to adequately address basic public needs like transportation and education while placing an inequitable tax burden on those least able to afford it is a disgrace. It’s time for the State Legislature to implement an earned income tax credit for low-income working families in Virginia.”

NOTE: Graphics for the Center on Budget and Policy Priorities report, State Income Tax Burdens on Low-Income Families in 2000: Assessing the Burden and Opportunities for Relief, are available at www.cbpp.org.