State Tax Systems Need to Become More Progressive, Not Less
State tax systems, according to a new report from the Institute for Taxation and Economic Policy, take a far larger share of income from their lowest income residents than they do from the wealthy, exacerbating income inequality within and between states, encouraging the wealthy to move to low tax states, and even worse, threatening the effectiveness of federal and state programs designed to ease the tax burden for the poorest families.
The report, called Who Pays: A Distributional Analysis of the Tax Systems in all 50 States, measures the state and local taxes paid by different income groups in 2013 (measured at 2010 income levels, and accounting for the impact of tax changes enacted through January 2, 2013). After combining all of the state and local income, property, sales and excise taxes state residents pay, researchers found that the average overall effective tax rates by income group nationwide are 11.1 percent for the bottom 20 percent, 9.4 percent for the middle 20 percent and 5.6 percent for the top 1 percent.
Ten states that are particularly egregious offenders. In the "Terrible Ten" as the authors call Washington State, Florida, South Dakota, Illinois, Texas, Tennessee, Arizona, Pennsylvania, Indiana, and Alabama the bottom 20 percent pay up to six times as much of their income in taxes as their wealthy counterparts.
Five of these "Terrible Ten" 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 also do not levy a broad-based personal income tax. The other five have a personal income tax rate that is flat or virtually flat, no matter what the income.
Some Republican governors in states that do have an income tax are pushing to get rid of that tax, which would pile an even greater burden on the poor -- not to mention undermine funding for things like education, hospitals, and roads. It's the poorest residents, says Matthew Gardner, the Executive Director of ITEP in a Citizen's For Tax Justice article, who are forced to make up the difference when the low tax promises become law. Often, income taxes are reduced while sales taxes are increased, which of course overwhelming hurts the poor who are forced to pay more for food, gas, and other basic needs. Gardner calls this trend "the surest way to make an already upside down tax system even more so."
Sometimes credits and deductions like the Earned Income Tax Credit can help. The EITC improves progressivity in 24 states and the District of Columbia, though often the wealthy still have the advantage of low capital gains taxes, and more knowledge of their own eligibility for deductions, or at least access to professionals who can help them.
In order to counter this increasingly inequal pattern, the report recommends that states adopt a progressive personal income tax, and to reduce their reliance on consumption and sales taxes, whose costs often reduce the impacts of credits like the EITC, since families end up spending much of the money they would have samed from lower taxes on food and gas. Without these changes, inequality between, as well as within states will only get worse.
So to repeat: Yes, we need state income taxes and such taxes should be even more progressive than they are. The last thing we want for states to go in the opposite direction.
© 2013 Demos