By Gerry Bradley, Research Director
New Mexico Voices for Children
While
Tax Day might make some of us groan about the check we have to write to the IRS,
it's a good time to reflect on how tax policy affects families that live in poverty.
Specifically,
we need to think about raising the personal income tax (PIT) threshold so we do
not add to these families' hardships. TODAY'S BYLINE Bradley is research director
for New Mexico Voices for Children.
The
PIT threshold is the income level at which a worker begins to pay income tax.
The threshold in New Mexico is near the federal poverty level. While it's right
that people at this income level should not be taxed, in reality, the threshold
should be set at twice the federal poverty level. That's because even people earning
twice the federal poverty level suffer significant hardships.
It is widely thought that the federal poverty level (FPL) does not represent an
adequate level of income - one that would permit a family to afford decent housing,
food, child care, transportation and other necessities. The inadequacy of the
FPL has been thoroughly documented over the last decade or so by the National
Academy of Sciences and the US Census Bureau, among others.
Also
over the last 10 years, the Economic Policy Institute has produced estimates of
the income required for a basic family budget. The EPI produces estimates for
both one- and two-parent families with either one, two or three children, and
correlates them with the cost of living in various cities and rural areas.
The
basic family budget for a two-parent, two-child family in New Mexico, for example,
ranges from a high of $43,344 for Santa Fe to a low of $36,576 for rural New Mexico.
In general, the basic family budget for New Mexico families is about twice the
FPL.
Families
living under twice the federal poverty level encounter many hardships. The Survey
of Income and Program Participation (SIPP) and the National Survey of American
Families (NSAF) look at hardship under two headings: critical and serious.
Critical
hardship covers food insecurity - not having enough to eat or missing meals -
as well as insufficient health care, and housing hardships such as disconnected
utilities and doubling up with friends and families.
Serious
hardship includes food insecurity, insufficient health care and housing problems,
as well as inadequate child care. Both critical and serious hardship, as defined
by the U.S. Census Bureau, is prevalent in families at twice the federal poverty
line. This makes a clear case for raising the income tax threshold to 200 percent
of the FPL.
Consider
two examples. Currently, a one-parent one-child family would be at the federal
poverty level on an income of $13,461 (or $27,000 at 200 percent of the FPL).
Using head-of-household income tax filing status, with the standard deduction
of $5,000 and two exemptions of $3,200 each, the family's taxable income would
be $15,200. New Mexico income tax due on that amount would be $397. It may not
sound like a lot of money, but $397 represents almost one month of food expenditures
for this family.
A
two-parent, two-child household would have an income of $19,806 at the FPL (or
$39,6000 at 200 percent of the FPL). Filing their income taxes on a married-filing-jointly
basis, with a standard deduction of $10,000 and four exemptions of $3,200 each,
the family would have New Mexico taxable income of $16,800 and owe $427 in income
tax. This level of taxation would almost pay for a month's rent in Albuquerque.
Families
with incomes at twice the federal poverty level suffer a significant hardship
because the state's income tax threshold is set too low.
New
Mexico should move the income tax threshold to twice the FPL so families at this
income level do not have to pay taxes. This could be done by increasing the exemption
for low income tax filers that was enacted during the 2005 legislative session
and would help to alleviate a significant source of hardship for low income New
Mexicans.
