State and local taxes effectively redistribute national income from the poor to the very rich, according to data released this week by the Institute on Taxation and Economic Policy, a progressive think tank.
Many state and local governments are heavily reliant on sales taxes, rather than income taxes. Lower-income households tend to spend a greater fraction of their earnings on purchases, including necessities like food and transportation, than higher-income households do. As a result, sales taxes take a bigger bite, percentagewise, from the paychecks of low-income households than high-income ones.
“On average,” according to the institute’s analysis, “the poorest 20 percent of taxpayers spend 11.4 percent of their income on state and local taxes, which is 50 percent higher than the 7.4 percent average effective rate for the top 1 percent.” The net result is that the total share of post-tax national income flowing to poorer households shrinks as a result of state and local taxes, while the richest households see a boost in their income share after those taxes are applied.
“Oftentimes the absence of an income tax is interpreted as proof that a state is ‘low tax,’ ” said Carl Davis, research director of ITEP, via email. “But while this is true for families with high incomes, it’s often not the reality for low-income and sometimes even middle-income families.” Read more