Many States Move Toward Higher Taxes on the Rich; Lower Taxes on Poor People

Several states this year proposed or enacted tax policies that would require high-income households and/or businesses to pay more in taxes. After years of policymaking that slashed taxes for wealthy households and deprived states of revenue to adequately fund public services, this is a necessary and welcome reversal. Check out our new post for a thorough digest of tax policy in state legislatures this fiscal year.

To be clear, states have a long way to go before their tax codes are equitable. ITEP’s Who Pays report reveals that 45 of 50 states tax their lowest-income 20 percent of residents at a higher rate than the top 1 percent. Taxpayers in the lowest-income quintile pay an average tax rate that is 50 percent higher than the rate paid by the top 1 percent (11.4 percent v. 7.4 percent). The recent trend to tax the rich more is essential and will help states raise needed revenue and mitigate economic inequality, but a broader package of tax reforms will be necessary to make upside-down state tax systems progressive. Critically, the trend to tax the rich has coincided with a policy push in some states to boost tax credits for workers and their families.

Illinois has been at the forefront in pursuing higher taxes on the rich. The state’s tax system is currently one of the most regressive due, in part, to its flat income tax. In November 2020, voters in that state will decide whether to move to a graduated income tax (meaning the higher one’s income, the higher one’s tax rate) structure. Lawmakers already have enacted a companion bill which would increase tax rates on incomes over $250,000 and assess a top rate of 7.99 percent on millionaires (compared to the current flat rate of 4.95 percent today) if voters approve the measure. A graduated rate tax in Illinois will be far better suited to offer a progressive counterbalance to regressive sales and excise taxes.

Meanwhile, Massachusetts is advancing a Fair Share Amendment, which would assess a surcharge on incomes above $1 million per year. And New Mexico is looking ahead: If state revenues don’t grow by at least 5 percent, a 5.9 percent tax rate on income over $210,000 for individuals or $315,000 for married couples will take effect. Check out Taxing the Rich Works for a more thorough summary of trends in the states.

While some states sought to tax those who have benefited most from recent economic growth, other states explored how to help put more money in the pockets of working families via tax credits. Six states made a range of improvements to either their Earned Income Tax Credit (EITC), Child Tax Credit or other working family credits. This diverse group includes California, Maine, Minnesota, New Mexico, Ohio, and Oregon. Read Tax Credit Wins and Continued Debates in the States for a complete summary.

The takeaway from states’ tax-related legislative activity is that some lawmakers are listening to their constituents and recognizing the need to take a dramatically different approach to tax and budget policy. The earlier part of this decade gave rise to a Tea Party-driven movement in the states to cut taxes. Most notorious was the Kansas experiment, which dramatically cut taxes for businesses and the rich and resulted in schools struggling to stay open for the full academic year and a worsening credit rating for the state, and which has since been repealed. Other states enacted tax cuts or tax shifts, meaning they cut, for example, income taxes but increased regressive taxes such as sales and excise tax.

The public has made clear it wants policymakers to take a different approach. Last year, teachers across the country staged protests or walkouts to raise awareness of how misplaced priorities have resulted in lack of adequate funding for education. And in November 2018, voters in several states helped swing the party makeup of their state houses, putting in place lawmakers with different priorities.

We know it’s well within states lawmakers’ powers to remedy their inequitable tax codes and ensure that low-and middle-income families aren’t taxed at higher rates than the rich. An enormous amount of work still remains to be done, but 2019 brought some welcome progress on this front.

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