Citizens for Tax Justice

For release on June 26, 1996




State & Local Taxes Hit Poor & Middle Class Far Harder than the Wealthy


By an overwhelming margin, most states take a far greater share of income in taxes from middle- and low-income families than from the wealthy, according to a new study by Citizens for Tax Justice and the Institute on Taxation & Economic Policy.

"State and local governments are being called upon to take on more and more responsibilities," said Michael P. Ettlinger, CTJ's tax policy director and lead author of the study. "Unfortunately, when it comes to paying for services, most states currently have extremely unfair tax systems."

Sad National Norm: Soak the Poor and Middle Class to Spare the Rich

Nationwide, the study--Who Pays?--found that middle- and low-income families pay much higher shares of their income in state and local taxes than do the very well-off:

The study also shows major differences among states, with a handful of states close to flat or even slightly progressive, but with others taxing their poorest residents at up to four times the effective rates paid by the wealthy, and their middle-income families at upwards of 2 times the rates paid by the rich.



The "Terrible Ten" Most Regressive Tax States

The study found that ten states--Washington, Florida, Texas, South Dakota, Tennessee, Pennsylvania, Louisiana, Illinois, Alabama and Michigan--are particularly regressive. These "Terrible Ten" states ask poor families--those in the bottom 20% of the income scale--to pay two to four times as great a share of their earnings in taxes as do the wealthy. Middle-income families in the "Terrible Ten" states pay one-and-a-half to almost three times as high a share of their income as the wealthiest families.

The study calculates that if these 10 states replaced their very regressive tax systems with even moderately progressive ones, then taxes could be reduced for middle- and low-income families by an average of $1,100 a year.

The Ten Most Regressive State Tax Systems
Taxes as shares of income by family income group
  Taxes as a % of Income on: Ratio of taxes paid by
Income group Poorest 20% Middle 60% Top 1% Poor/ Top 1% Middle/ Top 1%
Washington 17.1% 10.5% 3.9% 435% 267%
Florida 14.0% 7.7% 3.6% 390% 216%
Texas 13.8% 8.5% 4.4% 314% 194%
South Dakota 11.7% 7.7% 2.9% 408% 269%
Tennessee 12.3% 7.5% 3.6% 340% 208%
Louisiana 13.4% 9.9% 6.0% 224% 167%
Pennsylvania 13.3% 10.2% 6.1% 220% 168%
Illinois 13.6% 9.8% 6.1% 223% 160%
Alabama 11.6% 9.0% 4.8% 242% 187%
Michigan 13.3% 10.6% 6.9% 193% 154%



Highest Taxes on the Poor

The study notes that many analyses of tax burdens in the states simply rank states according to some computation of average tax burdens--sometimes looking only at selected taxes. But these averages often mask disparities among the taxes faced by families at different income levels.

"Are no-income-tax states like Washington, Texas and Florida "low-tax" states for poor families?" said Ettlinger, "No. In fact, these states' heavy reliance on sales and excise taxes make their tax burdens on the poor very high."


For example, the state of Washington, which does not have an income tax, is the highest-tax state in the entire country for poor people. When all state and local sales, excise and property taxes are tallied up, poor families in the State of Washington pay 17.1 percent of their total income in taxes. In neighboring Idaho and Oregon, which have much less regressive tax systems, the poor pay 9.2 percent and 10.9 percent, respectively, of their incomes in state and local taxes--far less than in Washington.

Florida and Texas, other no-income-tax states, tax their poor families at rates of 14 percent and 13.8 percent, respectively (fifth and sixth highest in the country). These rates on the poor aremuch higher than the rates on the poor in several states that some might brand as "big taxers."

Many so-called "low-tax" states are, in fact, high-tax states for the poor. Most of them do not offer a good deal to middle-income families either. The wealthy in such states, however, pay relatively little.

What Makes a State's Tax System Regressive?

The study highlights the common characteristics of states with particularly regressive tax systems. In the 10 most regressive tax states, several items particularly stand out:

  • Five of the ten states lack a broad-based personal income tax.

  • Of the five very regressive tax states that do have broad-based personal income taxes, three have flat rate taxes and two (Alabama and Louisiana) allow a deduction for federal taxes paid.

  • Seven of the ten states--Washington, Florida, Texas, South Dakota, Tennessee, Louisiana and Alabama--rely very heavily on sales and excise taxes. In these seven states, about half to three-quarters of the total state and local taxes imposed on the families in our study come from these consumption taxes (compared to the national median of 35% for all states).

The Least Regressive States

The study also examined the tax characteristics of the four least regressive states (those few that by some measures have progressive tax systems). All four have progressive personal income taxes and do not rely heavily on consumption taxes. Of the four, Delaware and Montana have no general sales tax, California has the most progressive income tax in the country and Vermont has the fourth most progressive income tax in the country and relatively low reliance on sales and excise taxes.

The Kind of Tax Matters

As the above discussion indicates, the study found that the kind of taxes that a state imposes on its citizens makes a huge difference.


The relative regressivity of a state's overall tax system depends both on how each tax affects families at different income levels and on how large a role each tax plays in a state's overall revenue mix.

Thus, California's level of reliance on each of its major taxes is fairly typical. But, by having a very progressive personal income tax, it ends up with one of the most progressive tax systems in the country.

Delaware, on the other hand, is one of the most progressive tax states not because any one of its taxes is exceptionally progressive, but because it relies so heavily on its modestly progressive income tax and relies very little on regressive sales and excise taxes.


Federal Itemized Deduction Offset

State and local personal income and property taxes, unlike sales and excise taxes, are allowed as itemized deductions in computing federal income taxes. This has a significant impact. On average, a fifth of all state personal income and individually-paid property taxes are "exported" to the federal government (and to taxpayers nationwide) as a result of these deductions. For the best-off state and local taxpayers, close to 40 percent of their state and local income and property tax bills are effectively paid by the federal government. The state-by-state tables in the study shows the benefits of federal itemized deduction offsets by income group. States that rely heavily on sales and excise taxes get much less benefit from these federal offsets than do states that relymore on income taxes.


Conclusion

"As new responsibilities devolve to the states, important decisions will have to be made on how to pay for fulfilling them," Ettlinger noted. "States may choose to pay for new services in the same way that they have in the past--regressively. Or they may decide instead to ask wealthier families to pay tax rates more commensurate with their incomes. In either case, the path that states choose will have a major impact on the well-being of their citizens--and will be a major part of the 'devolution' story."

U.S. Average State and Local Taxes in 1995
Income Group Lowest
20%
Second
20%
Middle
20%
Fourth
20%
Top 20%
Next 15% Next 4% TOP 1%
Income Range Less than
$25,700
$25,700 -
$40,500
$40,500 -
$54,600
$54,600 -
$74,900
$74,900 -
$131,000
$131,000 -
$351,000
$351,000
or more
Average Income in Group $15,600 $33,200 $47,400 $63,700 $93,300 $191,000 $801,000
Sales & Excise Taxes 6.7% 5.2% 4.2% 3.5% 2.6% 1.8% 1.1%
General Sales—Individuals 3.5% 2.9% 2.4% 2.0% 1.5% 1.1% 0.7%
Other Sales & Excise—Ind. 1.5% 1.0% 0.8% 0.6% 0.4% 0.3% 0.1%
Sales & Excise on Business 1.7% 1.3% 1.0% 0.9% 0.6% 0.4% 0.3%
Property Taxes 4.5% 2.9% 2.8% 2.8% 2.8% 2.6% 1.9%
Property Taxes on Families 4.1% 2.7% 2.6% 2.5% 2.5% 2.0% 0.9%
Other Property Taxes 0.4% 0.3% 0.2% 0.3% 0.3% 0.5% 1.0%
Income Taxes 1.3% 2.3% 2.8% 3.2% 3.6% 4.1% 5.0%
Personal Income Tax 1.2% 2.2% 2.8% 3.1% 3.5% 3.9% 4.6%
Corporate Income Tax 0.1% 0.1% 0.0% 0.1% 0.1% 0.1% 0.3%
TOTAL TAXES 12.5% 10.5% 9.8% 9.5% 9.0% 8.4% 7.9%
Federal Deduction Offset –0.1% –0.2% –0.4% –0.9% –1.4% –1.9% –2.1%
TOTAL AFTER OFFSET 12.4% 10.3% 9.4% 8.6% 7.7% 6.5% 5.8%



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