Every State’s State/Local Tax System Taxes the Poor More than the Wealthy–And All Exceed Federal Taxes
by Kenneth Thomas
Every State’s State/Local Tax System Taxes the Poor More than the Wealthy–And All Exceed Federal Taxes
A new report from the Institute on Taxation and Economic Policy (ITEP) shows that in every state in the country, the bottom 20% of households pay more of their income in state and local taxes than does the top 1%. Washington state was the worst, where the bottom 20% pay a whopping 17.3% of their income in state and local taxes. This was followed by Florida at 13.5% and Illinois at 13.0%. Though the report hints at an exception, a reading of their appendix shows that the only one is the District of Columbia.
As the report points out, such high taxation increases the burden of poverty on the people who, by definition, can least afford it. Moreover, this runs counter to the federal tax system, which in its overall effect (see table below) is progressive. On average, the top 1% pay federal taxes equal to 30% of their income, compared to 1.1% for the lowest 20%.
Source: Tax Policy Center
Between these two reports, we can see that the bottom 20% of taxpayers pays a much higher portion of their income in state and local taxes than they do in federal taxes. ITEP therefore recommends four major policies to make state and local taxation less regressive.
1) Enact a refundable earned income tax credit for state income tax;
2) Enact property tax circuit-breaker caps for all low-income taxpayers, including renters;
3) Enact other refundable income tax credits for childless households below the poverty level;
4) Enact or increase child tax credits, and make them refundable.
Of course, it should go without needing to be said, but to make federal tax more progressive (think of Mitt Romney and his tax rate below the average 15.1% paid by those in the third income quintile), we should tax capital gains and carried interest the same as ordinary income.
cross posted with Middle Class Political Economist
I have to admit that I’ astonished.
I read through that report (OK, skimmed it) and couldn’t see them explaining why State taxes are regressive.
For example, we know that sales taxes are regressive. Much State taxation is sales taxes. Therefore it’s not really a great surprise that State taxation is regressive.
As to this:
“we should tax capital gains and carried interest the same as ordinary income.”
Two points: 1) You’d have to abolish corporate income tax. 2) You still need to have an inflation adjustment for capital gains tax.
Tim, it depends on the state. Florida no income tax. In Maryland we have sales tax, state income tax, local income tax (added 50-60% of state), and property taxes (state and local).
Here is Maryland’s tax brackets:
http://individuals.marylandtaxes.com/incometax/ratesbrackets.asp
The rate is progressive, but not by much.
The report is based on a separate report. In that report you can see the details, there are a lot of impacts from “business excise tax,” “real estate taxes” (even though most rent, this is implicitly in the rent) and so forth on the low end. Basically imputed passthroughs of tax on the very low income. Additional the high income get a benefit imputed for deducting state/local on their federal income tax (presumably because the low income have no possibility of having itemized deductions sufficient to cover).
Link to previous report.
http://www.itep.org/whopays3.pdf
I live in Indiana and saw in the report that low income pay 11.9%, middle pay 10.4% and top 1% pay 5.3% of income in state and local taxes. As a middle income person, the 10.4% is bogus. Indiana has a 3.4%income tax, a county tax of 1% and property tax which is equal to about 1.5% of income. The sales tax of 7% is high, but is not on food, medicine or services. I have kept track of my sales tax (gasoline, phone, water, etc) and find that is is about 2% of income. When I look at all taxes combined the total state and local taxes for Indiana is 6.4%, not the 10.4% identified in the cited report.
Indiana has a flat tax on income with basic exemptions to income; dependents. This means the vast majority of income is taxed at 4.4%. The top 1% I would imagine pay a higher proportion of their income in sales tax (cars, homes, vacations, gadgets) than middle and low income taxpayers.
The people who put the report together need to understand math more importantly the use of percent. When one wants to show a large divergence, you use percent. When one wants to show total cost, one uses dollars. The report needs to use the correct measurement when looking at taxes.
It sounds like Indiana’s tax structure is very similar to the current structure in Massachusetts (large exemptions for food clothing, medication, services in the sales tax, 5.3% mostly flat income tax). I don’t know how much property tax is collected in the state (only buying our first house now, so it’s not something I thought about as an independent expenditure aside from “housing”).
The low end does “feel” wrong, but I have to think that they would have tied out their percentages and average incomes in each group to the real collections for 2007. You should be able to do that and figure out whether they are just ridiculously off on the total or not.
William
and you need to understand the difference between “measured over the whole population” and “one man’s experience.”
I have long paid a much higher percent to the State of Oregon than I pay to the United States. Not sure why that’s true, but it has always worked out that way.
As for “percent” as the measure… it is often very misleading. For example, you can increase the percent of income paid to Social Security and yet the absolute amount left to the taxpayer AFTER taxes increases as wages increase… the extra percent going to pay for an expense that grows as a “percent” of his needs… that his, he is going to live longer and not want to work longer, so he will have to pay a larger percent for his retirement. the fact that he is getting richer at the same time eases the “burden” considerably. And even if he weren’t getting richer… the difference between having an extra ten dollars a week when you are working, and being short ten dollars a week when you are not working is huge, much, much bigger than you would ever guess from looking at “percent.”
Tim, state taxes are regressive overall because of the reliance on sales and property taxes, primarily.
As to your two questions, the U.S. has had periods when capital gains were taxed as ordinary income and there was no inflation adjustment (which countries do such an adjustment, BTW?), without abolishing CIT, and its economic performance was just fine, IIRC. Perhaps you want to argue that’s not “fair” (Mitt Romney obviously thinks so), but that is a separate question from what we “have” to do.
Ken
I think that Tim has less faith in “free markets” than I have. Taxes are (could be) like “gravity.” A “dead weight loss” in his estimation, but as any engineer knows an important part of what makes things work.
In any case it is something every business has to take into account… and adjust prices accordingly, and wages will be adjusted accordingly… to the extent that the market for labor is “free” and not a lopsided “take it or starve” proposition.
Thing is, if taxes were “predictable” and not subject to political manipulation, the markets would adjust and “fairness” would take care of itself… through prices and wages… or not.
If not, then we might have to do something different… which of course is where we are now,, but we have gone too far in the direction of manipulating “taxes” and frankly manipulating them in favor of the least productive and most predatory of businesses. Something the free market is too slow to adjust to before great harm is done.
please note, i do not have a religious faith in free markets. just pointing out for the sake of discussion that those free markets could take care of the “fairness” that the very “free marketeers” are always howling about when they want a tax break.
because they,of course, live on the spread… the profits they can make while the markets are adjusting.. that is “between equilibrium” between “fair prices.”