Most States Have Tax Codes That Are Rigged To Benefit The Wealthy: Report
A sweeping new analysis of taxes across the country reveals that in four out of every five states,the top 1% are paying a lower tax rate than their middle-class and low-income neighbors.
Instead of taxing wealthy residents an equal share, the vast majority of states are filling their budget gaps with taxes that disproportionately burden lower-income families, according to a report by the nonpartisan Institute on Taxation and Economic Policy, titled “Who Pays?”
“When we look at how states are taxing their residents, it’s clear they’re falling very far short of what most people consider to be a fair tax code,” said Carl Davis, ITEP’s research director.
In the top 10 states with the most regressive systems — Florida, Washington, Tennessee, Pennsylvania, Nevada, South Dakota, Texas, Illinois, Arkansas and Louisiana — the middle 60% of families pay an average of twice as much of their income in taxes as the top 1%, and the poorest 20% of residents pay an average of three times as much as the very wealthiest.
Thirty-four states tax low-income households at a higher rate than every other group.
“The core problem is not that complicated,” Davis said. “The problem is that state and local governments are raising most of their tax revenue from regressive taxes on what people buy, or the homes that they own or rent, and those expenses swallow up a larger share of income for low- and middle-income people.”
The report is the most comprehensive picture available of the overall share of income that families pay in state and local taxes across all 50 states and the District of Columbia. It examined not only income taxes but also taxes on goods, services, sales, fuel, property — even obscure levies such as South Dakota’s snowmobile excise tax — along with savings through rebates, exemptions and deductions.
Being regressive is not accidental. It’s policy changes over time.Sadaf Knight, CEO of the nonpartisan Florida Policy Institute
States are growing more dependent on these regressive taxes because most have weakened or eliminated their personal income taxes.
In 44 states, the tax code actually worsens income inequality because the top 1% are left with a much larger share of their income after taxes than everyone else.
“Being regressive is not accidental. It’s policy changes over time,” said Sadaf Knight, CEO of the nonpartisan Florida Policy Institute.
Florida has the most regressive tax structures in the country because the legislature has repeatedly gutted corporate income taxes and hiked sales taxes to compensate, she said.
In 2022, a court in Arizona killed a voter-approved tax on the state’s top 1% of income earners that would have raised almost $1 billion annually to fund education. If the tax had remained on the books, Arizona would have joined the middle of the pack. Instead, it ranks 13th in overall inequality.
Other states permit taxpayers to deduct their federal income and capital gains taxes. Because the federal income tax is progressive and wealthy taxpayers are more likely to owe taxes on capital gains from their investments, these tax breaks disproportionately benefit the ultra-rich — and pervert a progressive income tax into a regressive one.
Though no state has a genuinely progressive tax structure, some are more equitable. The least regressive are Minnesota, Vermont, New York, New Jersey, California, Maine, Massachusetts, New Mexico, Oregon and the District of Columbia.
In those nine states and D.C., the top 1% paid a similar or slightly higher marginal tax rate than middle-income or low-income families. They also have either a graduated income tax, limits on deductions for wealthy taxpayers, a state inheritance or estate tax or a mix of those. All 10 offer special tax refunds for low- and middle income families.
Massachusetts leapt in the equality rankings after voters approved the Fair Share Amendment in 2022 and imposed a 4% tax on income over $1 million. The state has projected that it will raise $1.5 billion by June 2024.
“It is just really gratifying to see the results,” said Phineas Baxandall, the interim president at the Massachusetts Budget and Policy Center. “The tax money being generated from the millionaire’s tax is the reason why free school meals haven’t gone away — the reason why we’re not having to do cutbacks on early education.”
