New Report: States Without Income Taxes Hike Residents' Federal Tax Bills by Billions a Year

For Immediate Release

Contact: 

Mazher Ali
617.423.2148 x101
mali@faireconomy.org

New Report: States Without Income Taxes Hike Residents' Federal Tax Bills by Billions a Year

BOSTON - States that rely heavily on sales taxes instead of levying a personal
income tax are imposing billions of dollars in extra federal income
taxes annually on their residents, according to a new report from the
Institute on Taxation and Economic Policy (ITEP) and United for a Fair
Economy's Tax Fairness Organizing Collaborative (TFOC).

The new report, Leaving Money on the Table, calls attention to
the important, but often overlooked, linkage between state and federal
tax systems. In particular, the report examines the federal deduction
taxpayers may take for state and local taxes they paid, and analyzes the
impact of this deduction on the combined federal taxes paid by all
state residents.

The report shows that in the seven states that do not levy an income tax
but do rely substantially on state sales taxes (Florida, Nevada, South
Dakota, Tennessee, Texas, Washington and Wyoming), state residents pay
considerably more federal income taxes as a result:

  • If these seven states enacted even a minimal, flat-rate
    income tax and used the revenues to reduce sales taxes dollar for
    dollar, the federal taxes paid by residents of these seven states would
    drop by a combined $1.7 billion a year.
  • If these states enacted a progressive personal income tax similar to
    what many other states now levy, federal taxes paid by residents of
    these states would drop by up to a combined $5.5 billion a year.

"How states choose to raise money has a big impact on the amount of
federal tax dollars that can be returned to their residents each year,"
said Karen Kraut, Director of the TFOC. "Substituting an income tax for a
sales tax would keep the total revenue raised by the states the same,
but would substantially reduce the federal tax bills of the residents of
these states. That's because the sales tax deduction offers a small
benefit and the low- and middle-income people for whom sales taxes are
most burdensome generally do not itemize their federal tax returns,
while the income tax deduction offers a much larger tax benefit and the
beneficiaries - mostly upper-income taxpayers - are very likely to
itemize."

"The federal tax system provides a clear incentive for states to
adequately fund public services," noted ITEP Executive Director Matthew
Gardner. "It also provides a clear incentive for states to rely on
progressive personal income taxes to fund those services. And the few
states that have not yet taken advantage of this incentive are basically
leaving federal money on the table."

The report also shows that such a tax swap would substantially reduce
state taxes on low- and middle-income families, resulting in significant
improvements in the tax fairness climate of each state.

The added benefits to the economy of such a progressive tax swap are
highlighted in a recent TFOC report, Solutions that Work for Main Street: Progressive
Guidelines for Closing Recessionary State Budget Gaps
. As
the report explains, switching to a more progressive tax structure puts
money in the hands of low- and middle-income people who tend to
immediately spend it in the local economy. Such increased economic
activity leads to job retention and creation, and enhances economic
recovery during a recession.

Leaving Money on the Table is available for download at faireconomy.org/news/Leaving_Money.

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United for a Fair Economy is a non-partisan organization that helps people of all races, ethnicities and classes work to reduce economic inequality.

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