Individual Income Tax Insights: Fifty States of Rates – State Tax Systems Don’t Play Fair

All state tax systems are inherently unfair, at least that is the verdict issued by the Institute on Taxation and Economic Policy (ITEP). ITEP’s 2015 Who Pays: A Distributional Analysis of the Tax Systems in All Fifty States report analyzed state and local tax systems to assess the fairness with which each system is designed and operated. The basis of this study was the measurement of state and local taxes that will be paid in 2015 by non-elderly taxpayers throughout a range of income groups. 

This report compares all 50 states and the District of Columbia, detailing the effects of each jurisdiction’s tax system on income inequality. The 10 states determined to be the most regressive are Washington, Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas and Indiana. According to this study, “[m]iddle-income families in these states pay a rate up to three times higher as a share of their income as the wealthiest families.” This report deems these states as having the most “unfair” or regressive tax systems. The fairness counterargument, however, often comes down to that although the tax rate may be lower for wealthier taxpayers, they are, in fact, paying significantly more money in taxes. 

Four of the states with the most regressive tax systems, according to the report, - Florida, South Dakota, Texas and Washington - have no personal income tax. Additionally, Pennsylvania, Illinois, and Indiana use a flat rate across all income brackets, also known as a proportional tax.  

It is important to note that using a graduated tax rate structure does not equate to a fair tax system. As this study shows, some graduated-rate income taxes are determined to be less fair than some flat-rate taxes. 

A few of the least regressive tax systems are seen in California, Delaware, the District of Columbia, Oregon and Vermont. The District of Columbia has a “close-to-flat” tax system because of its refundable earned income tax credits and an income tax with higher rates for the wealthy with limited tax breaks. Nonetheless, these states are still considered to have regressive tax systems, as some low- or middle-income groups still contribute more of their income to taxes. 

Of course, personal income tax is not the only type of tax considered when evaluating fairness, as property and consumption (sales and excise) taxes are greatly relied upon for generating revenue, especially in those states with little to no personal income tax. The overreliance on consumption taxes is reported to neutralize the benefits low-income taxpayers receive, thus making “low-tax” states also burdensome on the poor. 

Georgia issued a press release on Sept. 14 detailing the state’s 9.4 percent increase in tax revenue. Georgia’s gross sales tax collections for the month of August was $881.2 million - $86.8 million more than individual income tax collections at $794.4 million. 

ITEP reports that Georgia’s policy not to provide refundable income tax credits to offset sales tax, for example, is a regressive feature making Georgia the 22nd ranked most unfair state and local tax system. 

Overall, there are essentially no “fair” state tax systems according to the study by ITEP, even those with higher tax rates for the rich. Apparently, simply creating higher taxes for the wealthy is not the cut-and-dry, simple solution to tax inequality as many may think. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: In what ways could states implement fairer tax systems?

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