Oregon taxes and low-income families: good and bad news

We’re talking taxes today on Policy for the People, specifically from the vantage point of the Oregonians with the fewest resources, those who are struggling the most to make ends meet. 

In our first segment, we hear about a brand new tax credit in Oregon designed to shore up the lowest-income families with young children in our state. Tyler Mac Innis of the Oregon Center for Public Policy explains who qualifies for the Oregon Kids’ Credit and why the creation of this new tax credit is a very good thing.

But despite the positive development that the Oregon Kids’ Credit represents, Oregon’s tax system as a whole is one that continues to weigh more heavily on the lowest income families than anyone else. Miles Trinidad of the Institute on Taxation and Economic Policy discusses the recently released report Who Pays? 

Transcript

Tax season is underway. Oregonians and people all across the country will be filing their income tax returns over the next few months. In the spirit of tax season, we’re talking taxes today on Policy for the People, specifically from the vantage point of the Oregonians with the fewest resources, those who are struggling the most to make ends meet. 

In our first segment, we will hear about a brand new tax credit in Oregon designed to shore up the lowest income families with young children in our state. My colleague Tyler Mac Innis, Policy Analyst with the Oregon Center for Public Policy, explains who qualifies for the Oregon Kids' Credits and why.

The creation of this new tax credit is a very good thing. But despite the positive development that the Oregon Kids' Credit represents, Oregon's tax system as a whole is one that continues to weigh more heavily on the lowest income families — more than on the rich, as we explore in our second segment. 

Miles Trinidad, a State Policy Analyst with the Institute on Taxation and Economic Policy, discusses the institute's recently released report titled Who Pays? He explains that the vast majority of tax systems across the country, Oregon included, are upside-down, asking proportionately more of the poor than of the rich. 

Stay tuned. 

Juan Carlos Ordóñez (host): So, Tyler, tax filing season just got underway and there's a new tax credit that's now available to some Oregon families. Can you explain to the listeners what the Oregon Kids' Credit is and who qualifies for this brand new tax credit?

Tyler Mac Innis: Sure. So the Oregon Kids' Credit is a new tax credit designed to help the lowest income families with young children in our state, those families who are struggling the most in terms of making ends meet. And specifically, the families who are eligible for the tax credit are those making less than $30,000 per year and who have a child who's younger than six years old.

The tax credit can be worth up to $1,000 per qualifying child, up to a maximum of five kids. So in other words, a family that makes less than $30,000 a year, and say, has a one and four year-old at home, they could get a tax credit worth $1,000 for each one of those kids. So that’s $2,000 more that goes towards helping them cover rent, keeping food on the table, or just keeping up with the rising costs of raising kids in general.

So the Oregon Kids' Credit can go a long way in terms of helping those families. 

Juan Carlos: How did this credit come about? Can you give us some background into how it came to be Oregon Law? 

Tyler: Sure. So the Oregon Kids’ Credit was created by the Oregon legislature last year. And lawmakers made it applicable for tax year 2023, which is the year that people are currently filing taxes for now.

And what's really remarkable is that the legislature established the kids’ credit with near unanimous approval. It passed 51 to 1 in the House and 24 to 1 in the Senate. So, like I said, nearly unanimous in terms of support. And this happened during what was a fairly contentious legislative session that saw a weeks-long walkout by Senate Republicans. And I think that just goes to show that there was broad recognition for how badly needed this kind of policy was and just how effective a child tax credit can be.

It's clear that many families earning low wages are really struggling when it comes to raising their kids and keeping up with the costs of doing that, the cost of childcare, housing, you name it. And all of those things have been made worse by high inflation rates in recent years, even though we've started to see that ease up a bit.

And I also think it's important to mention that the enhanced federal Child Tax Credit, which was in effect for one year in 2021, really showed what a powerful policy a child tax credit can be in its brief existence. That enhanced child tax credit at the federal level massively cut child poverty across our country. But unfortunately, that policy expired at the beginning of 2022.

And so Oregon lawmakers took that lesson to heart. And they they started to work on crafting the Oregon credit.

Juan Carlos: Tyler, the enhanced federal Child Tax Credit that you mentioned: it went away. But there is a good bit of evidence as to what that federal Child Tax Credit accomplished. I wonder if you can share a little bit about that information about the benefits of tax credits, generally — giving cash to families in need?

Tyler: Sure. So this is something that's been widely studied, to your point, the benefits of getting extra resources in cash to families with low incomes. And, you know, those studies have found that getting additional money to families with low incomes can have a wide range of positive impacts on the families and on their children. Those impacts include things like improved health outcomes for children in their parents and increased earnings, even of those child beneficiaries when they reach adulthood.

And we know a little bit from the expanded Child Tax Credit experience in 2021 exactly what Oregon families who were receiving the expanded credit were spending those dollars on. In Oregon, about nine in ten low income Oregon families were spending those expanded CTC dollars really on their basic needs, things like keeping food on the table, paying their rent or their mortgage, buying clothes for their kids who are growing, getting big, or just, you know, keeping the utilities that utilities up to date.

So the lights stay on. Really, when we talk about getting these kinds of resources to families who are qualifying for these kinds of tax credits, we’re really talking about them helping meet their basic needs and ensuring that they have that foundation of economic security that enables their kids to thrive later in life. 

And if I could just add one more point. You know, as we're recording this, we just saw at the federal level, the House of Representatives pass by a pretty wide bipartisan margin, a re-expansion of sorts of the federal Child Tax Credit. And while it's not the full enhanced version that was so successful and impactful in 2021, this new expansion of the federal Child Tax Credit would still do a world of good for Oregon children and for children across the country.

And so as we're recording this, Juan Carlos, the House is sending that bill over to the Senate side. And so we're waiting to see what happens there. But we're really encouraged to see this fight continue at the federal level. 

Juan Carlos: Going back to the new Oregon Kids' Credit, do we know how many children in Oregon stand to benefit from it?

Tyler: Yes, we've estimated that about 55,000 children in Oregon are eligible to be claimed for the Oregon Kids' Credit. So, in other words, there are about 55,000 kids ages 0 to 5, who live in families across the state who are making less than $30,000 a year. So that's quite a large number of children across our state who really need these resources.

Juan Carlos: So for a family that meets all the criteria for the credit, they meet the income eligibility criteria and their kids 0 to 5 years old, what do they need to do to get the tax credit? 
 
Tyler: Well, if you qualify for the credit, all you need to do in order to receive it is to file a tax return. You need to file an Oregon tax return. And that in turn requires filing a federal tax return, because the Oregon tax return piggybacks on that federal one. 

And I should say that while filing a tax return is no one's idea of fun, the payoff can go well beyond the benefits of in this newly created Oregon Kids' Credit. Families who are eligible for the kid's credit may also qualify for the federal Child Tax Credit, the federal Earned Income Tax Credit. Oregon has its own Earned Income Tax Credit and the Oregon Working Family Household and Dependent Care Credit. All of those tax credits together can add up to a pretty hefty chunk of change that can make a real big difference in the lives of families who are living at the margins. 

But I also think it's important to say that there are volunteer services that provide free tax assistance across the state. And so there are folks available to help prepare and file your tax return if you need it. One way to find out about free tax assistance is to call 211 info, and you can do that simply by dialing 2-1-1. And you can also text your zip code to 898211 or email help@211info.org. Any of those ways you can get in touch with 211 and they can direct you to someone who can help you file your taxes.

Juan Carlos: Tyler any final thoughts you want to share with us regarding the Oregon Kids' Credit? 

Tyler: Well, I think fundamentally all Oregon kids deserve to grow up healthy and enjoy an opportunity to thrive. But unfortunately, in our current economy, where low wage work is pervasive, childcare costs are sky high and families are just struggling to get by. It's really difficult for many parents to provide their kids what they need.

So the Oregon Kids' Credit honors the dignity of all parents and responds to the needs of our state's most vulnerable children. So for the listeners who have young kids at home and make less than $30,000 a year, I would really encourage you to file your tax return and claim the Oregon Kids' Credit that you're entitled to. And even if you're not eligible yourself, please help us spread the word about this new tax credit, because you could be making a really important difference in the lives of Oregon kids.

Juan Carlos: That was Tyler McInnis of the Oregon Center for Public Policy, discussing the Oregon Kids' Credit, a tax credit that is now available for the lowest income families with young children. While the Oregon Kids' Credit will help some of the families struggling the most. Our state's lowest income families do not fare well with our current tax system.

When you look beyond the income tax and factor in all state and local taxes, it turns out that Oregon's tax system weighs most heavily on those who earn the least, explains Miles Trinidad, a State Policy Analyst with the Institute on Taxation and Economic Policy. But even though Oregon's tax system is regressive, upside-down, low income people have it even worse in most other states. 

Miles, welcome to Policy for the People. 

Miles Trinidad: Yeah, thank you. I'm excited to be here. 

Juan Carlos: You work at the Institute on Taxation and Economic Policy, a think tank based in Washington, D.C.. But I understand that you have a connection to Oregon. 

Miles: Yes, I do. So I grew up in Oregon. I grew up in Hillsboro, Oregon, just outside of Portland. I attended the University of Oregon. And even when I eventually left Oregon to move to D.C., I I still had an Oregon tie. My first job out of college was working for Congressman DeFazio for the great 4th District of Oregon. 

Juan Carlos: So you and your colleagues at the Institute on Taxation and Economic Policy recently published the report Who Pays? And as your organization points out, this is the only distributional analysis of tax systems across the country. Can you explain what question the Who Pays report tries to answer? 

Miles: Yeah. So the main question, the researchers answer is: in all 50 states and D.C., who pays a higher share of income in taxes? This is important because different taxes impact families differently across the income scale. But also, as you know, state local taxes — they cover and fund all the things we benefit and enjoy together as a society. So things like education, transportation and public safety. And also within that question, we also ask, are these taxes progressive? So are they higher for those who earn the most? Are they paying a higher share of their income in taxes, which most people can kind of associate with tax fairness?

Or is it a regressive tax system? So do those who earn the least actually end up paying a higher share of their income than those who earn more? So those are the two main questions that our report aims to answer. 

Juan Carlos: So what were the main findings of the report? What were the answers you got from those questions?

Miles: So the main findings of the report is that a vast majority of states and local tax systems are regressive or considered upside down. And this was the case in 41 states. So in these states, high income families are actually taxed — have lower rates or at a lower effective tax rates — than others across the income scale. So the lower your income, the higher one's overall effective state and local tax rate is.

And that's problematic because these upside-down tax structures exacerbate inequality and it makes incomes more unequal after collecting taxes. And another finding is that states that we often kind of associate or describe as low tax states are often the high tax states for low income families. And this is more of a broader national pattern.

We find states with lower taxes for the highest income earners tend to have higher taxes for their lowest residents. And this is just completely absurd, upside-down from, what I would say, the public's understanding of tax fairness is. If you asked someone they would not support a regressive tax system like this. 

Juan Carlos: I wonder if you can explain to the listeners why this concept of progressivity or its opposite, regressivity, are so important when we evaluate the kind of tax system that we have? Why is it that folks really need to pay attention to whether the tax system in their state is progressive or regressive? 

Miles: So tax policy decisions deeply affect households’ ability to pay. An example of this: if someone is earning $25,000 per year and another person is earning $250,000 a year and they both have an identical effective tax rate of 10% across all tax types — so this is like personal income tax, sales tax, property tax — the first person's ability to pay is significantly lower despite paying the effective effectively the same rate. So it makes it harder for them to pay the bills, put food on the table, because their after tax income doesn't go as far as a person earning $250,000.

And that inhibits their ability to advance and have any kind of meaningful economic mobility compared to someone who has a lot more money left over, who earns more. And kind of touching on that as well, as I think a lot of people know, income and wealth have become increasingly concentrated among the most affluent households in this country, with even more immense disparities across racial diversity as well.

Research has shown that these kinds of regressive tax systems exacerbate and perpetuate this inequality. For example, when income rise among the wealthy, state revenues grow more slowly because these people are taxed effectively at much lower rates. And so then states end up kind of offsetting these lower tax revenues by relying more heavily on taxes that fall on lower and middle income households, such as sales taxes. Also heavy tax cuts for the top deprive states of revenue to invest in public services — public goods like education and health care and college programs — that we associate with building opportunity and improving well-being for families and communities.

But yet we keep seeing lawmakers doubling down on these permanent regressive tax cuts or with just limited benefits for the lower and middle class. 

Juan Carlos: Let's step back a bit and talk about how ITEP went about its analysis. Can you describe the kind of work that you did to figure out whether a state's tax system is progressive or regressive?

Miles: Yeah, So let me provide some background here. So we've been doing this report since the mid-90s, and some of our analysts have built up incredible amount of expertise on both state and local tax systems. And we think this is probably one of our best studies yet. So our seventh edition contains nearly all the major taxes levied by state and local governments.

So this is, as I mentioned earlier, personal income taxes, corporate taxes, property taxes, but it also includes smaller taxes like insurance premium taxes, transfer taxes, estate and inheritance taxes. So overall, the study captures over 99% of all state and local tax revenue nationwide. So we think this report is incredibly thorough, making sure we cover all of our bases when it comes to looking at the tax policy in each state.

Juan Carlos: So you mentioned a little bit about the states that don't do so well in the report, but I wonder if you can say more about the states that have the most regressive tax systems and about why that is? What features of their tax code makes them more regressive?

Miles:  Yes. So some of the states that are the worst in our analysis — so this is starting from the most regressive state — are states Florida, Washington, Tennessee, Pennsylvania, Nevada, South Dakota, Texas, Illinois, Arkansas, and Louisiana.  Florida fell to the most aggressive state in this version of the study, largely because Washington state actually took steps to improve their taxes. I think Washington state was the worst state in our previous edition. And Washington State, they recently implemented a tax on high income earners’ investments. And they also passed the Working Families Tax Credit, similar to an Earned Income Tax Credit.

And again, the states which you often hear heralded as low tax states —you often get these stories of people fleeing high tax states to move to these low tax states — but these states are actually high tax states for those making the least. On average, these families, low income families in these states, pay about five times more as a share of their income than the wealthy. And even middle income families that pay more than three times more than the wealthiest families in these states.

And this goes back to a lack of a broad based personal income tax, which makes it almost impossible to balance the more regressive taxes that these states rely on, like consumption and property taxes. So out of these ten states, six of them do not have a personal income tax. And two states had a flat personal income tax.

And sometimes you hear these debates in other states as try to mimic these states. They try to eliminate their own personal income taxes or they try to move towards a flat tax, pointing at these states as examples. However, these states should be examples of what not to do, if you don't want to have a regressive tax system.

And another common feature is a heavy reliance on sales and excise taxes. Eight of these ten states rely on consumption taxes and about 52% of their tax revenue comes from consumption taxes, compared to the national average of about 34%. Consumption taxes ask more of the lower and middle class families because they spend more of their income, as opposed to higher income families who are more able to save, which is what makes this tax law inherently regressive.

And then one more point is that most of these states lack refundable tax credits. So these help make the systems more progressive by offsetting the regressive taxes like consumption and property taxes. 

Juan Carlos: A lot of these states that fare badly in the report, that have the most regressive tax systems, they lack an income tax. Why is it that the income tax is such a key component of a good tax system — that allows the tax system to be more progressive? 

Miles: Yes. So with an income tax, particularly a graduated income tax, as you earn more, the tax rate goes up. You know, it's something we associate with the federal taxes system, the marginal tax rates. It works to counterbalance the regressive taxes like consumption and property taxes. Consumption taxes, like, for example, if a state has a flat, let's say, about 6% tax, that person earning $500,000 is still paying that 6% tax that someone who's earning $15,000 is paying. So even though it's a flat tax, it takes more out of the paychecks of people from the lower incomes. So, a graduated personal income tax can counterbalance this, just because people from higher income groups tend to not pay as much of their income towards those other kinds of taxes.

So a personal income tax is a lot more, I would say, flexible, kind of counterbalancing those other taxes. 

Juan Carlos: We've been talking about the states that fared poorly in the report, but let's look at the other side, those states that fare the best. Which ones are they and why is it? Presumably, they do have an income tax, but can you talk about which ones they are and why they do well?

Miles: Yes. So seven of the ten states that fared the best in our study actually received positive values on our tax inequality index. So that means that their tax systems don't worsen income inequality and actually lessen it across groups. So this includes D.C., Minnesota, Vermont, New York, New Jersey, Maine and California.  And then the remaining three states in the top ten are Massachusetts, New Mexico and Oregon, however, all of which have a slightly regressive tax system. But it is important to note that even though these are states that are the best, none of these states are actually entirely robustly progressive. 

So some of the common features that make these states a bit less reggressive and more progressive is a higher reliance on a graduated income tax and a lower reliance on a regressive sales tax. And then also, a lot of these states use targeted refundable low income tax credits like an Earned Income Tax Credit or a child tax credit, both of which Oregon has.

Juan Carlos: And as you mentioned, Oregon is in the top ten, well, actually number ten on the list in this report — 10th best. So we don't have an actual progressive tax system here in Oregon. But nevertheless, compared to the rest of the country, we fare quite well. I wonder, what features of Oregon's tax system makes us come out better than most?

Miles: Yes. So Oregon has made great progress on refundable tax credits. So recently the state passed a refundable tax credit of about $1,000 for children under six, and it's targeted towards low income households. But it also had a very modest increase to its Earned Income Tax Credit as well. Also, Oregon is one of a handful of states with no statewide sales tax, and as I mentioned earlier, some of these more regressive states have a very high reliance on the sales and excise tax.  And Oregon also has a graduated personal income tax. So those are the kind of the two features that are driving Oregon's progressivity. 

Juan Carlos: So what steps could Oregon take to make the tax system more progressive, a fairer tax system, in other words?

Miles: Yeah, that's a great question. So as we discussed earlier, Oregon did improve its Earned Income Tax Credit. However, compared to states that are higher on the list in being a little more progressive, its credit is actually a little bit lower than those states. So in Oregon, the credit is either nine or 12%, depending on the age of the child in a household.

However, the least regressive states have an Earned Income Tax Credit that's at least 25% of the federal credit. And, you know, there are key steps the states have been taking to make the credits even more generous than the federal credit. So some states have or are looking to expand the age eligibility because currently it's limited to those over age 25, unless you have a dependent, or increasing a credit for childless workers, because they have a much lower credit than those with children.

Another thing is that Oregon has a lower personal income tax rate for pass-through business income. So this is the kind of income that tends to be concentrated in higher earning households. So taxing that income at a lower rate than ordinary income increases the regressivity in the state. And also the state lacks a property tax circuit breaker for low income homeowners or non senior renters.

And we think this is important to address, particularly for racial equity, the vast differences of intergenerational wealth and a long history of racist housing policy that puts some folks at a disadvantage when it comes to property taxes or rents paid. And one other thing is that Oregon allows a partial income tax deduction for federal income taxes paid.

And this is an incredibly rare carve out. Oregon's one of only three states that provides some kind of income tax deduction for federal income taxes paid. And these deductions are detrimental to income tax systems, as they tend to offer large benefits to high income earners. And they also undermine the stability of state income taxes because it makes it harder to get more progressive revenue sources by giving these deductions out.

Juan Carlos: Miles, are there any final thoughts you want to share with us regarding the progressivity or progressivity of tax systems across the country and any other insights that your report produced? 

Miles: So I think the main thing is that we know that policy levers can help move the needle and help improve people's lives. These are, you know, policy choices. We actively choose whether or not we allow regressive or progressive tax systems in our states or in our local communities. Being a regressive tax or a regressive state isn't inevitable. Oregon and every state has the tools needed to ensure that their tax systems are more fair and more equitable.

Juan Carlos: That was Miles Trinidad of the Institute on Taxation and Economic Policy discussing the new report, Who Pays? 

Before we leave, I just want to remind you of a point made earlier in the show, and that is to claim the Oregon Kids' Credit. If your family is eligible, be sure to file a tax return. And if you're not eligible, you can help our state's most vulnerable children by spreading the word about this new tax credit. Thanks for listening. And we will see you next time.