Americans generally voice support for a tax code that's "progressive” – that makes tax rates rise somewhat in proportion to one's income. Yet across America, hidden from easy view, states generally have tax laws that favor the rich over ordinary citizens.
As Americans fill out their tax forms this season, state tax codes contrast sharply with the federal income tax – where the rich pay at higher rates.
State and local taxes – including property and sales taxes – will consume about 9.4 percent of middle-income earnings, compared with 5.4 percent of income for the high-earning 1 percent of families, according to one recent nationwide analysis.
The differences stand out at a time of public concern about income inequality, alongside how to revive jobs and income growth for the middle class.
“The vast majority of states allow their very best-off residents to pay much lower effective tax rates than their middle- and low-income families must pay,” concludes the recent report by the Institute on Taxation and Economic Policy (ITEP), a left-leaning research group.
The organization argues that it’s unfair for wealthy residents of a state to pay lower tax rates, and also that the system is making it harder for states to balance their budgets.
Another research group, the Tax Foundation, offers a different take: It agrees with the basic assessment that state tax codes allow the rich to pay at lower rates, but argues that the appropriate focus for tax policy is on promoting economic growth rather than on income redistribution.
Here’s a look at the how the state tax codes stack up, according to the ITEP report:
• Almost all states take a much greater share of income from low- and middle-income families than from wealthy families. Key reasons, the report says, are the “absence of a graduated personal income tax and overreliance” on sales taxes.
• The most regressive tax codes aren’t confined to any one region. The report’s Top 10 are Washington State (the most regressive), followed by Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas, and Indiana.
• The least regressive states also are geographically diverse. They include California, Delaware, Minnesota, Montana, Oregon, and Vermont.
In analyzing the state and local tax codes, ITEP confined its research to non-elderly families. The group says that, since many states offer special tax breaks to older residents, a fully inclusive analysis would have skewed the picture of tax burdens faced by most families.
The most regressive states, the report finds, tend to rely heavily on sales taxes for revenue. Since moderate-income families spend most of their income, these taxes can hit them harder than they hit the rich.
On income taxes, the 10 most regressive states either have a “flat-rate tax” (all residents are asked to pay the same share of their income), have low top rates, or don’t have a tax credit for low-income residents.
Meanwhile, some states tax investment income from capital gains at a lower rate or offer lots of deductions used by wealthy residents.
Public opinion on tax policy is nuanced. Many Americans are more concerned with promoting economic growth than with using the tax code to shift money from the rich to the poor. But a 2013 Gallup poll found 59 percent of Americans agreeing with the view that “money and wealth in this country should be more evenly distributed among a larger percentage of the people,” while 33 percent called the current distribution “fair.”
The conservative-leaning Tax Foundation, in a rebuttal to the ITEP report, argues that the overall US tax code remains progressive, despite the state-level trend in the other direction. In a key chart, combining the federal income tax with state and local taxes, it shows that the top fifth of households (by income) pay 35.6 percent of their earnings in taxes, compared with 25 percent for the middle fifth of households and 13 percent for the bottom fifth.
Some research suggests that efforts to reduce inequality need not harm economic growth. A report by International Monetary Fund economists last year, for instance, called lower inequality “robustly correlated with faster and more durable growth.” Specific policies matter, of course, but the study said that evidence from various nations does not support the view that there’s inherently a big “trade-off” between redistribution and growth.