Who Pays? 7th Edition – ITEP

Who Pays? 7th Edition

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State-by-State Data and ITEP Tax Inequality Index Map

Executive Summary

Who Pays? is the only distributional analysis of tax systems in all 50 states and the District of Columbia. This comprehensive 7th edition of the report assesses the progressivity and regressivity of state tax systems by measuring effective state and local tax rates paid by all income groups.[1] No two state tax systems are the same; this report provides detailed analyses of the features of every state tax code. It includes state-by-state profiles that provide baseline data to help lawmakers and the public understand how current tax policies affect taxpayers at all income levels.

Key Findings

The vast majority of state and local tax systems are regressive, or upside-down. This requires a much greater share of income from low- and middle-income families than from wealthy families. The absence of a graduated personal income tax in many states and a heavy reliance on consumption taxes contribute to this effect.

The lower one’s income, the higher one’s overall effective state and local tax rate. On average, the lowest-income 20 percent of taxpayers face a state and local tax rate nearly 60 percent higher than the top 1 percent of households. The nationwide average effective state and local tax rate paid by residents to their home states is 11.4 percent for the lowest-income 20 percent of individuals and families, 10.5 percent for the middle 20 percent, and 7.2 percent for the top 1 percent.

In 41 states, high-income families are taxed at lower rates than everyone else. Our analysis sorts taxpayers into seven income groups and finds that in most states the top group, representing the top 1 percent of earners, pays a lower rate than any other group. Similarly, 42 states tax the top 1 percent at a lower rate than the bottom 20 percent, while 46 states tax the top 1 percent less than the middle 60 percent of earners.

In 35 states, low-income families are taxed at higher rates than everyone else despite having the least ability to pay. Six states plus D.C., on the other hand, tax low-income families at lower rates. Nationally, comparatively high tax rates on low-income families remain the norm, despite recent steps to lower taxes for this group by bolstering refundable tax credits. Only six states and the District of Columbia now reserve their lowest overall tax rates for low-income families. Those states are Maine, Minnesota, New Jersey, New Mexico, New York, and Vermont.

Tax structures in 44 states exacerbate inequality. Most state and local tax systems worsen income inequality by making incomes more unequal after collecting state and local taxes.

Tax structures in six states and the District of Columbia reduce inequality. These half dozen states, plus D.C., narrow the gap between lower- and middle-income taxpayers and upper-income taxpayers, making the distribution of income more equal after collecting state and local taxes. Those states are California, Maine, Minnesota, New Jersey, New York, and Vermont.

In the 10 states with the most regressive tax structures, the lowest-income 20 percent pay three times as much of their income in taxes as the wealthiest 1 percent. In Florida, home to the nation’s most regressive tax system, low-income families pay almost five times as much as the wealthy. After Florida, the next most regressive tax codes can be found in Washington, Tennessee, Pennsylvania, Nevada, South Dakota, Texas, Illinois, Arkansas, and Louisiana.

Heavy reliance on sales and excise taxes makes tax systems more regressive. Eight of the 10 most regressive states rely heavily on sales and excise taxes. As a group, these eight states derive more than half of their tax revenue from these taxes, compared to a national average of about one-third. Heavy reliance on these taxes is largely a function of these states’ decision not to levy robust personal income taxes. Six of these states do not levy broad-based personal income taxes while two levy flat-rate taxes. Nationwide, the lowest-income 20 percent of taxpayers pay 7.0 percent of their income toward sales and excise taxes, the middle 20 percent pay 4.8 percent and the top 1 percent pay a comparatively meager 1 percent rate.

A progressive, graduated rate income tax makes overall tax systems less regressive or more progressive. States with the least regressive state and local tax systems derive, on average, more than 39 percent of their tax revenue from income taxes, above the national average of 29 percent. These states promote progressivity through the structure of their income taxes, including graduated rates (higher marginal rates for higher-income taxpayers) and targeted refundable credits.

States described as “low tax” are often high tax for low-income families. States such as Florida, Tennessee, and Texas are often described as “low tax” due to their lack of personal income...