According to a recently published study, nearly every U.S. state and local tax system is fueling the nation’s inequality crisis by forcing middle- and working-class families to contribute a larger percentage of their incomes than their wealthy counterparts.
The Institute on Taxation and Economic Policy (ITEP) study, titled Who Pays?, analyzes in detail the tax system of every U.S. state, including rates paid by different income segments.
Richest paying lowest taxes
In 41 out of 50 states, ITEP found the wealthiest one percent is taxed at a lower rate than every other income group. Forty-six states tax the top one percent at a lower rate than middle-income households.
State lawmaker not delivering for the public
“When you ask people what they think a fair tax code looks like, almost nobody says we should have the richest pay the least,” said Carl Davis, ITEP’s research director. “And yet when we look around the country, the vast majority of states have tax systems that do just that. There’s an alarming gap here between what the public wants and what state lawmakers have delivered.”
Tax-cutting measures for the wealthy
Over the past few years, dozens of U.S. states have launched what the Center on Budget and Policy Priorities recently described as a “tax-cutting spree,” permanently reducing tax rates for corporations and the richest members of society during the COVID-19 pandemic that saw billionaire wealth and company profits skyrocket.
Vast reserve of untaxed assets
A recent report by Americans for Tax Fairness showed ultra-wealthy Americans are currently sitting on $8.5 trillion in untaxed assets.
Small number of progressive states
ITEP’s new study reveals that tax systems in only six states—California, Maine, Minnesota, New Jersey, New York, and Vermont—and the District of Columbia are progressive, helping reduce the gap between rich taxpayers and less well-off residents.
Bay State millionaire tax
Massachusetts, a state with one of the U.S.’s more equitable tax systems, collected $1.5 billion in revenue last year after enacting its millionaires tax. The measure improved the state’s ten spot ranking in ITEP’s Tax Inequality Index. Minnesota has also increased its taxes on the rich over the past few years while expanding benefits for families on lower incomes, ITEP’s study observes.
Tax laws widening gap
But the broader picture of the state and local systems is less equitable. In 44 states, ITEP found that tax laws “worsen income inequality by making incomes more unequal after collecting state and local taxes.”
Florida has the nation’s most regressive tax code, with the richest one percent paying a 2.7 percent tax rate while the poorest twenty percent pay 13.2 percent.
Favors the rich
Florida is one of several U.S. states that lack personal income taxes, forcing them to rely on consumption and property taxes that are “nearly always regressive,” according to ITEP’s analysis.
Higher than average
“Eight of the 10 most regressive tax systems—Florida, Washington, Tennessee, Nevada, South Dakota, Texas, Arkansas, and Louisiana—rely heavily on regressive sales and excise taxes,” the study says. “As a group, these eight states derive 52% of their tax revenue from these taxes, compared to the national average of 34%.”
It’s getting worse
ITEP state policy director Aidan Davis said, “We’ve seen a lot of states shift their tax systems to become even more regressive in recent years by enacting deep tax cuts for the wealthiest.”
Kentucky helping out corporations
The report points out Kentucky adopting a flat tax and repeatedly cutting corporate tax, which “delivered the largest windfall to families in the upper part of the income scale and have been paid for in part through new or higher sales and excise taxes on a long list of items such as car repairs, parking, moving services, bowling, gym memberships, tobacco, vaping, pet care, and ride-share rides.”
How to fix it
Davis argued that “we know it doesn’t have to be like this,” saying there is a “clear path forward for flipping upside-down tax systems and we’ve seen a handful of states come pretty close to pulling it off. The regressive state tax laws we see today are a policy choice and it’s clear there are better choices available to lawmakers.”