Individual Tax Insights: Survey Says, In a Fair State Tax System Higher Income Households Should Pay More

The results are in. Montana, Oregon and South Carolina garnered high marks for the fairness of their state and local tax systems, according to the results of a WalletHub study reported by John S. Kiernan.  Delaware and Idaho rounded out the top five in the overall fairness ranking, a fact noted by Butch Otter, Idaho’s Governor.

In what it believes to be the first ever study matching what Americans think is fair with the structure of state and local tax systems, WalletHub ranked the 50 states for tax fairness after analyzing their income taxes, sales and excise taxes, and property taxes. 

To get a picture of what Americans think would be a fair state and local tax system, WalletHub conducted an original online survey of 1,050 Americans.  The sample was designed to be nationally representative by age and sex, with substantial variation across income levels, racial and ethnic categories and political beliefs, according to Kiernan.

The survey asked respondents to provide a percentage of income households at various income levels should pay in state and local taxes.  The survey presented 10 different income levels ranging from $5,000 to $2.5 million and asked for a percentage between zero and 25.  An average percentage was calculated for each income level.

Answers ranged from a low of 2.5 percent for households making $5,000 a year to a high of 16.36 percent for households making $2.5 million per year.  From the data, Kiernan concludes respondents support a progressive state and local tax structure.  In other words, state and local tax systems are fair when higher income households pay a greater percentage of their income in taxes than lower income households.

WalletHub also sorted the responses by respondents’ income and identification as either economically liberal or economically conservative and found the same pattern.  Regardless of political persuasion, respondents at each income level favored a progressive tax structure.

Using data from the Institute on Taxation and Economic Policy (ITEP), WalletHub then compared what Americans think is fair to the structure of state and local tax systems.  ITEP estimates the total state and local tax burden of households at seven different points in the income distributions of each state (e.g., bottom 20 percent or top 1 percent).  Because each state’s income distribution is unique, corresponding household income at each distribution point varies by state.  For example, the top 1 percent of households in Connecticut earns more than the top 1 percent in Mississippi.

The study showed that the relationship between household income and state and local tax burden is negative.  As income goes up, state and local tax burden goes down, the opposite of what Americans think is fair, according to the report.

Its second place tax fairness ranking is not Oregon’s only favorable attribute.  Some climate scientists predict the coastal areas of the Pacific Northwest will provide a “potential climate refuge” as global warming progresses, according to a story by Jennifer A. Kingson in the Sept. 22 edition of The New York Times.  If you have been wondering where you might find comfortable temperatures and tax fairness, follow the Oregon Trail.

By Mike Dazé

Continue the conversation on Bloomberg BNA’s State Tax Group’s LinkedIn page:  to be fair to taxpayers and raise sufficient revenue, should states rely more on a progressive income tax system than on other types of taxes?

For more information about individual income taxes, check out Bloomberg BNA’s Individual Income Tax Navigator by signing up for a free trial of the Bloomberg BNA Premier State Tax Library today.

Follow BBNA on Twitter at: @BBNATax.