The New Federalism and State Tax Policies Toward the Working Poor

This paper discusses how state income taxes and sales taxes affect the working poor. While some states impose substantial burdens through income taxes with low thresholds and/or sales taxes that do not exempt necessities, others provide generous subsidies through refundable earned income tax credits similar to the federal earned income tax credit. A few states go beyond the federal model and also provide refundable child care credits. In evaluating the role of tax policy to assist low-income people, policymakers need to study the incentives and disincentives associated with various features of the tax system.