A number of elements in the tax system can create marriage penalties or bonuses. In the federal tax system, for example, the law generally requires married couples to file taxes jointly based on a combined income.(29) Couples with similar incomes tend to face marriage penalties (i.e., the couple pays more than the combined taxes of two individuals) while those with dissimilar incomes often receive bonuses (i.e., the couple pays less than the combined taxes of two individuals). To the extent that state tax structures mirror the federal one, married couples may face similar penalties or bonuses. We focused on the state Earned Income Tax Credit, the state mechanisms for addressing penalties, and tax thresholds. (Table 6 in the detailed matrices provides additional information on state policies.)
State earned income tax credit (EITC). The federal EITC reduces taxes and provides wage supplements for low-income, working families. It has been part of the federal tax system since 1975. Studies suggest it can reduce poverty and encourage work. Others suggest it can promote marriage by increasing family income. The EITC is based on earnings and presence of children.(30) A family with two children can qualify so long as earnings are under $32,121. The EITC create a marriage penalty or bonus, depending on the employment status of the parents. For example, a penalty would result if one earner easily qualified for the credit but the addition of a second earner to the household through marriage made the family ineligible (or eligible for a reduced credit) because earnings would be combined. This couple would gain financially by not marrying. Conversely, a marriage bonus can exist. A single unemployed mother cannot qualify for the credit; nor could a working male with no children. But through marriage, the couple could qualify for the EITC. Federal legislation in 2001 improved benefits for married couples. Specifically, the income level at which the credit phase-down begins will be increased, resulting in greater credits for married couples than unmarried couples with the same income. Additionally, an increase in the top income level at which a married couple can receive benefits will make more such couples eligible for the credit.(31)
States have also enacted EITCs to reduce the burden of state taxes on working families. Fifteen states have a state EITC.(32) In 14 of the states, it is a percentage of the federal credit, ranging from 5 percent to 32 percent.(33) In Wisconsin, the percentage depends on the number of children (4 percent to 43 percent for one to three children). Thus, to the extent a marriage penalty (or bonus) exists in the federal credit, it will also exist in the state EITC. No state has enacted a change to its EITC that directly addresses the marriage issue.
State marriage penalties. A number of components affect the level of taxable income and, thus, taxes.(34) Consider again the federal tax system. Exemptions, standard deductions, and tax brackets all affect the amount of taxes paid. The first component, exemptions, does not differ by marital status. The standard deduction for an individual, however, is more than half that for a married couple ($4,000 versus $6,700). This creates a penalty when two earners marry (each could have claimed $4,000 if single), but it creates a bonus when one spouse does not work, because the non-working spouse could not have claimed a deduction without income. Tax brackets also create penalties and bonuses. Couples with equal incomes will see a higher proportion of their income taxed at higher rates and thus face a penalty. If couples have unequal incomes, the spouse with the higher income would have been taxed at a higher rate as a single filer, thus might receive a marriage bonus.
Marriage penalties also occur in state taxes if standard deductions for married couples are less than twice the size of deductions for single filers, if tax brackets are not significantly larger for married couples, or if married couples do not have the option of filing separately (thus being taxed as two individuals). Fifteen states have no marriage penalty: Of these, nine states have no state income taxes, so the marriage penalty is not an issue,(35) while six states have a flat tax, regardless of income or filing status.(36) Fifteen states have tax schedules that eliminate or reduce penalties. In eight of these, the tax brackets for married couples are twice as wide as those for single filers, so there is no penalty.(37) In the other seven states, the brackets are wider but not doubled, so a penalty is reduced but not eliminated.(38) Nine states also address the marriage penalty by allowing married couples to use one return but pay taxes on separate income as if they were single.(39) In the remaining 12 states, married couples pay a marriage penalty either because the tax is a percent of the federal liability or joint and single return schedules are similar.(40)
The tax threshold for families. In states that have no mechanism in place to address a possible marriage penalty, the tax threshold can be an issue. If states begin taxing single-parent and married-parent families at the same threshold, the combined income of married couples might push the family over the tax threshold. The income at which families begin paying state taxes varies considerably by state and family structure. As indicated above, families in 12 states face a marriage penalty. Two of these states (New Jersey and West Virginia) have uniform thresholds. Thus, a single parent with two children would begin paying taxes at the same income level as married parents with two children. For example, the tax threshold for a married-parent family of four and a one-parent family of three is the same in New Jersey ($20,000). If a single mother earned $18,000 a year, she would pay no taxes. If she married a man who earned more than $2,000 per year, the family would have to pay state taxes. The other ten states have higher tax thresholds for married-parent families than for single-parent families.(41) The differential ranged from 2 percent in Maryland ($25,200 versus $24,600) to 40 percent in Oklahoma ($13,000 versus $9,300).