Tax-Related Barriers

Two women pouring over tax receipts

Breaking Down Tax-Related Barriers for ALICE Households

The term ALICE, which stands for Asset Limited, Income Constrained, Employed, describes a sizeable American demographic that is often overlooked in discussions about financial stability. While these households earn above the federal poverty level, they still face difficulties in affording basic necessities like housing, food, and healthcare. One of the little-known challenges that ALICE households face is navigating the complex landscape of taxation. Here are some tax-related binds that exacerbate the financial struggles of ALICE households.

couple looking stressed while filing taxes

General Taxation Inequality

If you’ve ever heard the expression, “the rich get richer and the poor get poorer,” it’s important to understand that unjust taxation plays a major role in this somber truth. In general, tax structures in 45 US States exacerbate income inequality by exacting a greater share of income from low- and middle-income households than wealthy ones. In fact, the lower a household income is, the higher the overall state and local tax burden it shoulders, a fact that keeps struggling families from finding relief or upward economic mobility. 

Some prime examples of unjust tax burdens include property and sales tax structuring. Let’s take a look at each.

Property Taxes and Housing Insecurity

Low-income families often struggle with housing costs, and property taxes can disproportionately burden ALICE households, particularly in states with property tax assessment limits

  • For renters: landlords often pass on the cost of property taxes to tenants in the form of higher rent. Whereas these costs are limited by state and local laws for homeowners, landlord-controlled rents are far more subjective and may include hidden fees that exceed each tenant’s share of property taxes. Further, in some states, homeowners who have the time and know-how can also appeal their property tax assessment if they feel it is unjust, which is not an option for renters.
  • For homeowners: In places with property tax assessment limits, these limits create taxation disparities between new and longtime homeowners. New homeowners, whose properties are assessed closer to the market value, may be taxed significantly more than those who have owned their homes for the average duration within their city or state. For ALICE households who experience greater struggles in purchasing homes and paying mortgage bills, unjust property tax rates can punish rather than reward their efforts.

The Regressive Nature of Sales Tax

Sales tax is often considered a regressive tax because it places a disproportionate tax burden on low-income individuals. For ALICE households, a larger percentage of their income goes toward essential goods and services, which are subject to sales tax. This means that they end up paying a higher proportion of their income in sales tax compared to higher-income households.

elder man looking stressed while filing taxes

The Complexity of Tax Credits

Besides inequitable tax burdens, many ALICE families have difficulty taking advantage of the very tax credits that are designed to help them simply because of their complexity. Examples of these include the Earned Income Tax Credit (EITC) and Child Tax Credit. Filing for these credits involves understanding intricate aspects of tax law, filling out multiple forms, and sometimes even paying for professional tax preparation services. Households who aren’t equipped to do this risk leaving their benefits unclaimed.

The "Benefits Cliff" Dilemma

Then there’s the "benefits cliff," which refers to the sudden loss of public assistance when a person's income exceeds a certain threshold, however minimal. For ALICE households, a small increase in income can result in losing valuable tax credits or other forms of public assistance that effectively outweigh the value of the additional income. This creates a disincentive for career advancement and keeps them trapped in a cycle of financial instability.

By understanding and addressing these tax-related barriers, we can take significant steps toward improving the financial stability of ALICE households. It's not just a matter of fairness; it's a matter of creating a society where everyone has the opportunity to succeed.

two women trying to file their taxes

Get FREE Tax Filing Services With United Way of York County

United Way of York County in Pennsylvania assists working households in our community to achieve financial stability by collaboratively and equitably reducing barriers to prosperity. We offer access to free health and human services like assistance with tax preparation, child care, affordable prescription medications,  transportation support, and more to fight for the financial stability for all members of our community. 

Need help with your taxes? We offer essential tax resources like MyFreeTaxes® and our Volunteer Income Tax Assistance (VITA). Contact us to get the services you need for a financially successful future. Alternatively, consider supporting us by making a donation today!