MADISON—Everyone pays taxes, but Wisconsin has programs to ease the tax burden for low-income families. However, a new report from the Wisconsin Taxpayers Alliance (WISTAX) finds that some of the programs meant to help the poor may actually make it harder for them to succeed as they work their way up the job ladder. Celebrating its 75th anniversary, the nonprofit WISTAX keeps Wisconsin citizens informed through nonpartisan, public-policy research.

The study, "Taxes on Low-Income Families," notes that the main tool for aiding Wisconsin’s poor families is the income tax. The state provides a large standard deduction that declines as income rises, as well as a $700 exemption for the filer, spouse, and dependents. For a single filer with two children, this means that the first $10,560 of income is not taxed. Wisconsin also provides several tax credits targeted to low-income families, such as the Earned Income Tax Credit (EITC) and the homestead credit. Most are refundable, meaning that the taxpayer pays no income tax, but receives money from the state. These credits make the tax a "negative income tax."

When combined with federal credits, such as the federal EITC, these programs provide real benefits to the poor. For example, a single mother who has two children and earns $20,000 per year is eligible for federal and state credits that can bring her income up to $23,489. And, because some of the credits require earned income, they serve as a work incentive.

The new WISTAX study also points out some of the pitfalls associated with these credit programs. Credits targeted to low-income families gradually diminish as income rises. The rate at which they are reduced effectively acts as a hidden tax rate. For a taxpayer with $75,000 of income, rates are obvious: a state income tax rate of 6.5%, a federal rate of 28%, and a 7.65% social security/medicare tax (42.15% total). The new report shows that the hidden tax rates that result from the elimination of low-income credits alone can be 50% or higher. The high rates could act to discourage work or improvement of job skills, WISTAX said.

The report also examines other taxes that low-income families pay and the programs in place to aid these families. Since poor families spend most or all of their income—they have very little savings—the sales tax claims a larger share of their income. Wisconsin, like many states, exempts food and prescription medications to ease the burden on those with low incomes. Despite these exemptions, low-income families still pay more of their incomes in sales taxes than do those with more means. Using figures from the Wisconsin Department of Revenue (DOR), WISTAX noted that, in 2001, the poorest 20% of households paid an average of $372, or 3.9%, of their income in sales taxes. By contrast, the top 10% paid an average of $4,000 in sales tax, or 2.2% of income.

Many low-income families do not directly pay property taxes because they rent. However, WISTAX researchers noted that rental property owners usually pass along property taxes to tenants through higher rents. According to DOR, the poorest 20% of Wisconsin households paid nearly 7% of their income in 2001 property taxes, including estimated taxes for renters. Those with incomes in the top 10% had property taxes ranging from 4.0% to 4.5% of income. Wisconsin provides some relief to low-income residents through the homestead, farmland preservation, and farmland tax relief credits. These credits reduced the burden for low-income households from 7% to a little more than 5% of income, largely eliminating the property tax’s "regressivity."

The new report also examines excise taxes on gas, tobacco, and alcohol. Using expenditure information, WISTAX researchers noted that low-income households spend a greater share of their income on each of these goods. And, since excise taxes have fixed rates, low-income households pay more in these taxes (as a share of income) than do others. WISTAX estimated that households with incomes below $15,000 paid between 1.2% and 2.7% of their income in these excise taxes. By comparison, those with incomes above $70,000 paid less than 0.5%.

Although there is no formal definition of low-income, the new report highlights the characteristics of those with incomes under $20,000. In Wisconsin, approximately 43% of households with incomes under $20,000 are headed by someone over 65. Families with incomes in this range are dominated by two groups: married couples without children (32.3%) and single mothers (36.8%). Single individuals without children made up 11.6% of the total.