April 11, 2024

Fairness Matters: A Chart Book on Who Pays State and Local Taxes



Read in chart book form here

Jump to charts

Policymakers have options when constructing state and local tax codes. Choosing graduated-rate income taxes collects more revenue from higher-income households who can most afford to pay. Avoiding top-heavy exemptions and deductions ensures that the wealthiest actually pay that fairer share. Reducing the share of revenue from sales taxes can increase fairness, as can making sure that sales taxes reflect the modern economy. And having robust, progressive income taxes instead of overly relying on sales taxes often generates much more adequate revenue for the services that make communities and families thrive.

Too often, however, would-be tax reformers propose policies that would worsen one of the most undesirable features of state and local tax systems: their lopsided impact on taxpayers at varying income levels. Nationwide, the bottom 20 percent of earners pay 11.4 percent of their income in state and local taxes each year. Middle-income families pay a slightly lower 10.5 percent average rate. But the top 1 percent of earners pay just 7.2 percent of their income in such taxes. This is the definition of a regressive, upside-down tax system.

State and local tax codes can do a lot to reduce inequality. But they add to the nation’s growing income inequality problem when they capture a greater share of income from low- or moderate-income taxpayers. These regressive tax codes also result in higher tax rates on communities of color, further worsening racial income and wealth divides.

Heavy reliance on sales and excise taxes is a key driver of this regressivity. Middle- and low-income taxpayers typically pay more tax on what they buy (sales and excise taxes) than on what they earn (income taxes), though many families may not notice since sales taxes are spread out over countless purchases made throughout the year.

When states reduce or reject personal income taxes in favor of higher sales and excise taxes, high-income taxpayers benefit at the expense of low- and moderate-income families who often face above-average tax rates to pick up the slack.

State tax systems that ask the most of families with the least are also less able to generate the revenue needed to fund schools, health care, infrastructure, and other public services that are crucial to building thriving communities. This problem is particularly acute over the long run since regressive tax systems depend more heavily on low-income families who face stagnating incomes while asking less of high-income earners, whose wealth and incomes continue to grow.

It does not have to be this way. States vary considerably in the fairness of their tax codes. Lawmakers can reduce inequity by pursuing more progressive tax policies that have proven successful in many states already.

States levying robust personal income taxes with graduated tax rates and targeted refundable credits, for example, tend to have overall tax systems that are more reflective of taxpayers’ ability to pay. By contrast, states with flat-rate personal income taxes or no personal income tax at all have among the most regressive tax systems in the nation.

Given the detrimental impact that regressive tax policies have on economic opportunity, income inequality, racial wealth disparities, and long-run revenue sustainability, tax reform proponents should employ proven progressive tax options.

(Click on each chart to expand)