02-22-06 Press Release: New Jersey should reduce income tax burden on low-income working families

New Jersey should increase the amount of money a family can earn without having to pay state income tax-making it high enough so that no income below the federal poverty line is taxed AND the state should increase that tax threshold each year that the poverty line threatens to overtake it.

These recommendations from New Jersey Policy Perspective and the Association for Children of New Jersey coincide with release of a national report showing that New Jersey is on the verge of forcing a substantial number of households making less than the federal poverty line to pay state income tax-a burden that would be highly unfair to those at the lowest rung of the economic ladder.

The current point at which a family in New Jersey is required to pay state income taxes is $20,000.

According to a report released today by the Washington-based Center on Budget and Policy Priorities, New Jersey's state income tax threshold will almost certainly fall below the federal poverty line for a two-parent family of four next year, unless state law is changed.

The 2006 federal poverty guidelines released last month list $20,000 as the poverty line for a family of four. The figure increases with family size. For example, the poverty line for a family of five is $23,400, meaning that such a family already is paying New Jersey income tax on some of its earnings.

New Jersey raised its state tax threshold to $20,000 in 1999, from $7,500. At the time, it meant that income below the poverty line wouldn't be taxed. But the state's failure to raise the threshold since then has meant more households are paying state income tax on sub-poverty line income.

The Center on Budget and Policy Priorities report, "The Impact of State Income Taxes on Low-Income Families in 2005," says, "Taxing the incomes of working-poor families runs counter to the efforts of policymakers across the political spectrum to help families work their way out of poverty... Eliminating state income taxes on working families with poverty-level incomes gives a boost in take-home pay that helps offset higher child care and transportation costs that families incur as they strive to become economically self-sufficient. In other words, relieving state income taxes on poor families can make a meaningful contribution toward 'making work pay.'" The full report is available at http://www.cbpp.org/2-22-06sfp.htm.

"New Jersey already has one of the highest tax burdens in the country on poor people," said Jon Shure, president of New Jersey Policy Perspective, which released the CBPP report today with the Association for Children of New Jersey. "To tax even one penny of income that falls below the poverty line is more than an inconvenience. It is an insult and a barrier to people who are trying to work their way up."

"We must also keep in mind that the federal poverty guidelines do not adjust for New Jersey's cost of living, which is much higher than the national average," said Cecelia Zalkind, executive director of ACNJ. " And, considering that New Jersey's median family income is one of the highest in the nation, it's shameful that working families pay state taxes on incomes just above the federal poverty level."

In 1999, when the Legislature was considering a measure that would have raised the state's tax threshold to $13,500, a report by NJPP was instrumental raising it to $20,000 in order not to tax income that is under the poverty line. "These problems don't stay fixed if they are ignored," Shure said. "We need to reduce the tax burden on low-income working families."

Fourteen states have a less restrictive state income tax threshold than New Jersey's, ranging from Arizona and South Carolina at $20,100 to California, where no income tax is paid on a family's first $40,500 of income. By comparison, New York's threshold for a family of four is $28,200 and Pennsylvania's is $32,000.

Two examples illustrate the New Jersey situation:

A family of four that in 2005 made $19,961-which was the federal poverty line that year-would have owed no tax in New Jersey and received $957 under the state's Earned Income Tax Credit program.
But a family of four making $24,951-just 25% above the poverty line-paid $280 in New Jersey income tax. That's a swing of $1,137 tax on just $4,990 in additional income-an incredible tax of 22.8%.