The Hill: State tax systems regressive
media mentionBy Bernie Becker – 01/30/13 07:02 AM ET
Practically every state charges a higher share of taxes from lower- and middle-class families than the highest earners, a new study from a liberal-leaning group found.
The Institute on Taxation and Economic Policy found that the bottom 20 percent of earners paid an effective tax rate of 11.1 percent to state and local governments, while the top earning quintile paid about half as much – 5.6 percent. The middle 20 percent pays a rate of 9.4 percent.
ITEP said that the methods states and localities use for raising revenues – which include income, property and sales taxes – can make their tax systems more regressive.
“Fairness is, of course, in the eye of the beholder,” the report found. “Yet almost anyone would agree that the best-off families should pay at a tax rate at least equal to what low- and middle-income families pay.”
The federal income tax system is currently highly progressive, with a top rate of 39.6 percent for family income above $450,000 a year. The 15 percent marginal tax bracket for married couples ends at $72,500.
President Obama campaigned last year on raising income tax rates at the highest income levels, a goal which Republicans opposed for much of 2012. The fiscal cliff deal signed early this year raised the top rate from 35 percent.
But ITEP says that sales taxes employed by states can be highly regressive. Some state income taxes, the liberal group found, are also not terribly progressive, and that property taxes are also regressive.
A separate study, from the more right-leaning Tax Foundation, found that property taxes made up 35 percent of state and local revenues in 2010, while sales taxes took up another 34 percent. Income taxes accounted for a fifth of state and local revenues.
ITEP’s study found 10 states – Washington, Florida, South Dakota, Illinois, Texas, Tennessee, Arizona, Pennsylvania, Indiana and Alabama – had particularly regressive tax systems.
Those states, the study found, either have no state income tax or a relatively flat tax, and often rely heavily on sales taxes.
“States commended as ‘low tax’ are often high tax states for low- and middle-income families,” the study said.
Delaware, New York, Oregon, Vermont and Washington, D.C. are more progressive, ITEP found. Delaware’s income tax is not very progressive, but the state does not rely heavily on sales taxes.
The other four generally have progressive income tax systems and generous Earned Income Tax Credit systems modeled after the federal EITC system. Oregon, Vermont and Washington, D.C., also don’t rely as heavily on sales taxes.
The study is based on 2013 tax policies, using income data from 2010.