Why are State Taxes Less Progressive?

Oregon is planning to raise its tax on beer by 1,900%, which seems like both an irresistible tax-day story and a good chance to write about the differences between state and federal taxes.

In general taxes on consumption goods with negative externalities -- like cigarettes and gasoline and, arguably, alcohol -- are desirable. But taxes on non-luxury consumption goods also tend to be regressive: Bill Gates might be worth a million times as much as the average American, but he does not, alas, consume a million times as much beer. Probably not even half that.



States taxes lean towards sales and consumption more than federal taxes, which is why, when you consider the overall tax distribution by income, instead of simply the federal tax burden by income, the tax code looks less progressive than it otherwise would (H/T Ezra Klein and Catherine Rampell):

The organization that put together this nice chart, Citizens For Tax Justice, uses it to make the point that effective tax rates are "not significantly higher" for the rich than for the middle class, and that the tax system as a whole is "not as progressive as you think." I'd say that's a matter of interpretation. The tax code is obviously still progressive. Coming to a conclusion -- "too progressive," "not progressive enough," etc -- isn't something you can do with a chart.

The other thing that's worth noting about this chart is slight dip in effective rates for the top 4% and top 1%. As I understand it, this has nothing to do with state taxes and everything to do with the fact that the wealthiest Americans get a huge portion of their income from dividends and capital gains, which are taxed at a lower rate. That's the classic Warren Buffett complaint about the tax code.