Many in state poor, pay no income tax
Posted on Sunday, May 20, 2007
Two of every 10 Arkansas state individual income tax returns have no tax liability.
And three of every 10 individual federal returns filed by Arkansans have none.
In other words, a lot of Arkansans don’t pay income tax.
That’s generally because the filers have incomes so low the tax doesn’t apply to them.
Those figures don’t include returns by individuals who had a tax liability but obtained a refund of at least some of what was withheld from their paychecks, federal and state officials said.
Arkansas is fifth-highest among the states in the percentage of federal returns with no liability, said Nona French, research and fiscal policy director for Arkansas Advocates for Children and Families.
Only Mississippi, Louisiana, New Mexico and Alabama ranked higher, she said, citing the most recently compiled Internal Revenue Service figures, for 2004.
According to David Stell, an IRS spokesman, those 2004 figures showed 1, 136, 031 federal income tax returns filed by Arkansans, 787, 139 (or 69. 3 percent ) had a liability and 348, 892 (30. 7 percent ) didn’t.
The national average was 26 percent.
There were 869, 339 returns filed by Arkansans with adjusted gross income of less than $ 50, 000, and 523, 079 of them had a liability, the IRS said, while 346, 260 didn’t.
On the state income tax side of things, David Foster, Arkansas’ state income tax administrator, said 894, 333 (79. 2 percent ) of the 1, 128, 791 state income tax returns filed in tax year 2004 had a liability, leaving 234, 458 (20. 8 percent ) with none. Exemptions aren’t new. Since the mid-1980 s, the federal government has exempted families trying to work their way out of poverty.
A majority of states now do so as well, according to a recent report from the Center on Budget and Policy Priorities, a Washington, D. C.-based group that studies how public policy affects low- and moderate-income families.
What the federal government considers a poverty-level income has changed over time. The 2006 poverty guidelines are $ 9, 800 for a single individual; $ 13, 200 for a married couple with no children; $ 16, 600 for a married couple with one child; $ 20, 000 for a married couple with two children; and $ 23, 400 for a married couple with three children.
Policy analysts differ over whether exemptions are always good.
Some see the growing body of exempt poor people as progress, a reasonable compassionate stand by the government.
Others ask whether too many are exempt, encouraging a growing body of citizens to unrealistically expect the fruits of government without paying the price necessary to provide them.
Chris Edwards, director of tax policy for the Cato Institute, a Washington, D. C.-based research group that favors limited government, said it’s reasonable for “some modest group at the bottom,” such as those below the poverty line, not to pay income tax.
Every major federal tax law since 1986 has taken more people off the bottom of the tax rolls.
But it’s gone too far, he said.
Along the way, Congress also has expanded the Earned Income Tax Credit, the child-care credit, and the 10 percent income tax bracket, Edwards said.
“Taxes are the cost of government,” he said. “If the public is voting for big government, they should certainly feel the pain of big government as directly and transparently as possible. Politicians try to hide the cost of government through deficits and other techniques.”
But Bob McIntyre, executive director of the Citizens for Tax Justice in Washington, D. C., said everyone pays some taxes (sales, payroll, property, others ), including those at the federal, state and local levels, in significant amounts.
The Citizens for Tax Justice says it favors fair taxes for low- and middle-income families, requiring the wealthy to pay their fair share of taxes, and closing corporate tax “loopholes.”
Of the major taxes, the federal income tax is the least onerous for most people, especially those struggling to make ends meet, because the burden is lighter on low incomes and greater on higher incomes, and that’s a good thing, McIntyre said.
“Calling for more pain on middle and low-income families so that taxes can be lower on the rich, as right wingers tend to do, isn’t likely to be popular,” he said. “That’s why those who promote regressive ideas such as flat taxes and national sales taxes falsely pretend that’s not what they really want.”
Edwards countered that flat taxes are proportional because they levy the same percentage tax on all income levels. He said such a tax is not regressive but progressive if they have an exemption for a certain threshold of income. For example, one flat-tax proposal would levy a 20 percent tax on income and exempt the first $ 20, 000, he said.
“I want less pain on everyone with smaller government overall,” he said.
Not all of the poor are free of the income tax. Arkansas is one of four states (the others are Alabama, Hawaii and West Virginia ) in which some families with incomes below the poverty level faced state income tax bills exceeding $ 400 this year, according to the Center on Budget and Policy Priorities.
That statistic will change because this year the Arkansas General Assembly enacted legislation to exempt people whose income is below the poverty level from paying state income tax, starting tax year 2007.
Such a tax at such an income level can cause significant difficulties for families struggling to escape poverty, particularly when these families pay such taxes as sales, payroll and excise taxes, the center said in a report released in late March.
Arkansas is not alone in enacting changes that will reduce taxes on low-income families over the next several years, the center said. It’s also been done in Alabama, Oklahoma and New Mexico.
State Rep. Keven Anderson, R-Rogers, chairman of the House tax committee, said it’s hard to argue that Arkansas has too many people not paying state income because the state’s tax system as a whole is “somewhat regressive.” People not paying income taxes are paying, among other things, a lot of sales tax, he said.
Anderson said it’s hard to argue that a person whose income is at or below the poverty level should pay income tax.
He met little resistance this year in handling the legislation exempting Arkansans who make below the federal poverty level.
The law, Act 195, is expected to exempt about 62, 000 Arkansans, according to the state Department of Finance and Administration.
Arkansans earning more than the federal poverty level but less than 33 percent above it will receive tax credits intended to lessen the burden. The department estimates 89, 000 taxpayers will be eligible for those credits.
Under the law, the filing eligibility requirements will be indexed each year using the Consumer Price Index to make sure taxpayers below the poverty level continue to not have to pay state income tax, the department said.
The measure is projected to reduce state tax revenue by $ 14. 7 million next fiscal year and $ 16. 8 million in the following year, the department said. This law is one of several new laws. Another will halve the state’s 6 percent sales tax on groceries, starting July 1. The Legislature enacted tax cuts totaling about $ 200 million a year.
Single Arkansans started paying state income tax when they make $ 8, 001 a year in adjusted gross income and that increases to $ 10, 201 for tax year 2007, Foster said.
A single Arkansan making the poverty level of $ 9, 800 a year paid $ 65 in income tax for tax year 2006, he said.
Married Arkansans with either no or one child started paying income taxes at an adjusted gross income level of $ 15, 501 a year and that increases to $ 17, 201 for tax year 2007, Foster said.
A married couple with no children making the poverty level of $ 13, 200 paid no state income tax, he said, and a married couple with one child making the poverty level of $ 16, 600 paid $ 269 in state income tax.
Married couples with either two or three children started paying state income tax with an adjusted gross income level of $ 16, 001 a year and that increases to $ 20, 701 for tax year 2007, he said.
A married couple with two children making the poverty level of $ 20, 000 paid $ 400 in state income tax, Foster said. A married couple with three children making the poverty level of $ 23, 400 paid $ 553 in state income tax, Foster said.
Greg Kaza, executive director of the Arkansas Policy Foundation, said the state is better off with more people off the income tax rolls because it’s their money to spend, invest, save and even squander.
He praised Gov. Mike Beebe for expanding the tax cut debate beyond proposals to create a state Earned Income Tax Credit or other proposals to benefit lowerincome individuals by pushing lawmakers to enact a law to halve the state’s 6 percent sales tax on groceries.
That law will benefit both lowincome and middle-class families, he said. The wealthy also will benefit from the sales-tax break.
Last week, Beebe said he has no plans for broad-based state income tax cuts anytime soon.
His remarks came in response to a question from John Tyson, chairman of Tyson Foods Inc., who said he thinks that Arkansas could be at an economic disadvantage competing with states such as Florida and Texas that don’t have a state income tax.
Arkansas has a maximum income tax rate of 7 percent, which kicks in at taxable income levels of $ 30, 100 and higher.
The income tax is one of two state general revenue taxes on which Arkansas most relies to finance state government operations. The other is the sales tax. Each produces about half of the state’s $ 4 billion-plus general revenue annually.
The state Department of Finance and Administration reports that according to U. S. Census figures, Arkansas ranks 21 st in terms of taxes paid as a percentage of personal income: 2. 5 percent.
In terms of the amount paid per capita, the state ranks 32 nd, with $ 625 in income taxes paid per person.
The same rankings list Arkansas at 47 th in total state and local taxes paid per person (counting property and sales taxes ), at $ 2, 607.
In terms of total state and local taxes as a percent of personal income, the state ranks 25 th at 10. 4 percent of personal income. The figures are from 2004.
The rankings change, however, depending on who’s compiling them. If state taxes only are counted — not combined with local taxes — Arkansas’ ranking is higher.
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