Basic Conclusions on How State Tax Systems are Inherently Regressive

I am quoting extensively from this report:from ITEP:

Economists have widely discredited trickle-down economic theories espoused for more than three de­cades, but that hasn’t stopped new generations of supply-side theorists from repackaging those philoso­phies and pushing for lower state tax rates for wealthy individuals, businesses and corporations. In fact, recent years have brought tax proposals and changes in multiple states that would overwhelmingly benefit the highest income households under the guise of stimulating economic growth. This report doesn’t seek to rebut ideological claims; rather it is an in-depth analysis of all taxes that all people pay at the state and local level.

This study assesses the fairness of each state’s tax system by measuring state and local taxes paid by non-elderly taxpayers in different income groups in 2015 as shares of income for every state and the District of Columbia. The report provides valuable comparisons among the states, showing which states have done the best — and the worst — job of providing a modicum of fairness in their overall tax systems. The Tax Inequality Index (Appendix B) measures the effects of each state’s tax system on income inequality and is used to rank the states from the most regressive to the least regressive.

The bottom line is that every state fails the basic test of tax fairness. The District of Columbia is the only tax system that requires its best-off citizens to pay as much of their incomes in state and local taxes as the very poorest taxpayers, but middle-income taxpayers in DC pay far more than the top one percent. In other words, every single state and local tax system is regressive and even the states that do better than others have much room for improvement.

Overall, effective state and local tax rates by income group nationwide are 10.9 percent for the bottom 20 percent, 9.4 percent for the middle 20 percent and 5.4 percent for the top 1 percent (see chart below). This means the poorest Americans are paying two times more of their income in taxes than the top 1 percent.

Virtually every state tax system is fundamentally unfair, taking a much greater share of income from low- and middle-income families than from wealthy families. The absence of a graduated personal income tax and overreliance on consumption taxes exacerbate this problem.

The lower one’s income, the higher one’s overall effective state and local tax rate. Combining all state and local income, property, sales and excise taxes that Americans pay, the nationwide average effective state and local tax rates by income group are 10.9 percent for the poorest 20 percent of individuals and families, 9.4 percent for the middle 20 percent and 5.4 percent for the top 1 percent.

• In the 10 states with the most regressive tax structures (the Terrible 10) the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy counterparts. Washington State is the most regressive, followed by Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Ari­zona, Kansas, and Indiana.

Heavy reliance on sales and excise taxes are characteristics of the most regressive state tax systems. Six of the 10 most regressive states derive roughly half to two-thirds of their tax revenue from sales and excise taxes, compared to a national average of roughly one-third . Five of these states do not levy a broad-based personal income tax (four do not have any taxes on personal income and one state only applies its personal income tax to interest and dividends) while four have a personal income tax rate structure that is flat or virtually flat.

State personal income taxes are typically more progressive than the other taxes that states levy (e.g property, consumption). Sales and excise taxes are the most regressive, with poor families paying almost eight times more of their income in these taxes than wealthy families, and middle income families pay­ing five times more. Property taxes are typically regressive as well, but less so than sales and excise taxes.

Personal income taxes vary in fairness due to differences in rates, deductions, and exemptions across states. For example, the Earned Income Tax Credit improves progressivity in 25 states and the District of Columbia, while nine states undermine progressivity by allowing taxpayers to pay a reduced rate on capital gains income, which primarily benefits higher-income households.

State consumption tax structures are highly regressive with an average 7 percent rate on sales and excise taxes for the poor, a 4.7 percent rate for middle-income people, and a 0.8 percent rate for the wealthiest taxpayers. Because food is one of the largest expenses for low-income families, taxing food is particularly regressive; five of the ten most regressive states tax food at the state or local level.

Taxes on personal and business property are a significant revenue source for both states and locali­ties and are generally regressive in their overall effect, particularly for middle-income households. A homestead exemption (exempting a flat dollar or percentage amount of property value from a property tax) lessens regressivity. A property tax circuit breaker that caps the amount a property owner pays in property taxes based on their personal income can also reduce regressivity; none of the 10 most regres­sive states offer this tax break to low-income families of all ages.

States commended as “low tax” are often high tax states for low- and middle-income families. The 10 states with the highest taxes on the poor are Arizona, Arkansas, Florida, Hawaii, Illinois, Indiana, Pennsylvania, Rhode Island, Texas, and Washington. Seven of these are also among the “terrible ten” because they are not only high tax for the poorest, but low tax for the wealthiest.

I  found out about this from EJDionne, via a facebook post by my friend David Aylward.

Published in: on January 15, 2015 at 9:24 pm  Leave a Comment  

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