ITEP
State and local taxes hit the poor and middle class harder because they have to shell out a bigger chunk of their incomes in taxes, finds a new study released today.
The timing of the study comes just as lawmakers across the country consider how to balance gaping budget holes.
"(This) makes it vital to understand who is hit hardest by state and local taxes right now," said Matthew Gardner, lead author of the study by the Institute on Taxation and Economic Policy. "The harsh reality is that most states require their poor and middle income taxpayers to pay the most taxes as share of income."
The study compared the tax systems in all 50 states and found that across the board, state taxes take a harsher toll on lower and middle income groups.
The tax rate for poor and middle class families is twice that of the wealthiest 1 percent of families. The wealthiest pay just 5.2 percent of their income in taxes, while middle income families pay 9.4 percent of their income in taxes. What's more, the poorest families pay the most -- fully 10.9 percent of their incomes go toward state and local taxes, the study shows.
"Fairness is in the eye of the beholder," Gardner said, "but virtually anyone would agree that this upside down approach to state and local taxes is astonishingly inequitable."
The worst offenders -- states with the most regressive tax structures - are Washington, Florida, Tennessee, South Dakota, Texas, Illinois, Michigan, Pennsylvania, Nevada and Alabama. The poorest families in these states pay almost six times more of their earnings in taxes than do the wealthy. The middle income families pay up the 3.5 times more than the wealthiest.
"Every state has a regressive tax system Gardner said. "but these ten states stand out for the extraordinary degree to which they have shifted the cost of funding public investments to their very poorest residents."
Most of the "Terrible Ten" identified by the study have these factors in common: they either have no state income tax, or levy at a flat rate. They rely mostly on regressive sales and excise taxes. They don't allow tax credits for poorer earners like the Earned Income Tax Credit.
The study authors suggest that states can ease the burden on the middle class and poor by shifting away from sales and excise taxes toward a more progressive (rates tied to income levels) personal income tax. "States that choose to balance their budgets by further increasing the general sales tax of cigarette taxes will make their tax system even more unbalanced and unfair," said Gardener.
The states with the least regressive systems were Delaware, the District of Columbia, New York and Vermont. But even in these states, which rely on a progressive income tax, showed some tax inequity on the lowest groups.
The study also noted some trends. Rhode Island, Utah, Arizona and Ohio, have reduced income tax rates on the wealthy or overall causing their taxes to become more regressive. Arkansas, New Mexico, South Carolina Tennessee and Utah lowered or eliminated the sales tax on groceries, causing the overall tax impact to become more balanced.
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For more info: Read the whole study: http://www.itepnet.org/whopays.htm
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