Those who earn the least pay the most in nearly every state across America. Or rather, the poorest citizens pay the highest proportion of their incomes to local and state governments—twice as much in fact, as the top one percent. And this regressive system, this inversion of the idea that taxes should be linked in part to a citizen’s ability to pay, tells us a lot about how we talk about fairness today.
Often when people say “taxes”, they mean the federal income tax. When Mitt Romney said that “47 percent” of people would vote for President Obama “no matter what,” he was referring to the 47 percent of Americans who paid no federal income taxes in 2011. Some of those people were retired, and most of the others paid payroll taxes for Medicare and Social Security. But the federal income tax system is quite progressive, scaling from a 10 percent rate at the bottom to a nearly 40 percent rate in the top income bracket. Tax breaks like the Earned-Income Tax Credit and the Child Tax Credit mean that lower-income Americans sometimes have a negative federal income tax bill—the IRS sends them a check. These progressive provisions in the federal tax code are crucial tools for cutting poverty and inequality.
But according to a new report from The Institute on Taxation and Economic Policy, the impact of those federal tax breaks is largely offset by the burden of state and local taxes. Here’s how state and local taxes break down as a percentage of income: The richest Americans pay the least.
The tax mix changes from state to state. In Washington State, the top one percent pay just one-seventh as much of their income as the poorest twenty percent, largely because the state does not levy a personal income tax. In Kansas, where Governor Sam Brownback’s tax cuts have left the state facing a budget shortfall, the top tax bracket starts at just $30,000 for married couples—so a CEO making six figures pays the same rate as a construction worker making five. Alabama taxes groceries, which absorbs a larger proportion of the household budgets of lower-income families than their richer neighbors. At the other end of the spectrum, Vermont charges low sales and excise taxes and offers a sizable earned-income tax credit for working families. Nevertheless, in every single state “at least some low- or middle-income groups pay more of their income in state and local taxes than wealthy families.” Some states like Texas and Florida have a reputation for being “low-tax.” That may be true for people like NBA player Trevor Ariza, who reportedly left the Washington Wizards for the Houston Rockets this summer in part to save millions on his income tax bill. Someone selling hamburgers at the Wizards’ arena, however, would end up paying a higher proportion of their income in taxes by moving to Texas. These numbers don’t even include the fines and fees that fund nearly half of some municipalities’ budgets—and come disproportionately out of poor peoples’ pockets.
Some of the most regressive aspects of the tax code are designed to advance broadly popular goals. The gas tax, for example, falls hardest on middle-class families, but it may promote environmentally friendly modes of transportation. Tobacco taxes discourage tobacco consumption. Many economists contend that lower rates for capital gains increases business investment, and that hiking the more progressive income taxes could make working less attractive. And in absolute terms, of course, the wealthy pay significantly more in taxes and receive less in direct government benefits than do the poor.
Yet combining America’s regressive state and local taxes with the progressive federal code reveals a system that barely asks more of its most comfortable citizens than of the middle-class. This is what overall effective tax rates looked like in 2014.
Addressing income inequality, long a priority of Democrats, is increasingly becoming a Republican talking point. What does this distribution mean for closing the “income gap”?
Well, most developed countries use their tax systems to diminish inequality, and the United States does too. Just less than most: Before taxes and transfers, the United States is the 10th most unequal of the 31 wealthy OECD countries; afterwards, it is fourth, behind just Chile, Mexico, and Turkey. Policymakers have discussed long-term solutions, like increasing educational attainment to counter the challenges posed by globalization and new technologies, and new regulations like a higher minimum wage. What the regressive state and local numbers show is that there is more room for the progressive federal system to compensate—perhaps by increasing the Earned-Income Tax Credit for low-income workers, and cutting the “carried-interest loophole” that benefits the better-off.
Federal taxes in America are progressive. State and local taxes are not. While the two systems are designed and administered separately, the same taxpayers pay both sets of bills, and their combined effect is only marginally progressive. Presidential hopefuls formulating policy fixes for inequality need to begin by recognizing that reality.