States and Localities Undermine Tax Progressiveness
by Rodger Doyle
Scientific American, July 2004
For most, the federal income tax probably does not rank as a great achievement of the 20th century. But it is efficient and mostly fair, thanks to its progressive rates. Few realize, however, that state and local taxes are so strongly regressive that they cancel out much of the progressivity of the federal tax. This conclusion comes from the Institute for Taxation and Economic Policy, a Washington, D.C.–based research group. It conducted a state-by-state analysis of the tax burden on families headed by those younger than 65 years of age—namely, their total tax as a percentage of their income. (Elderly families were excluded because state tax systems often treat them differently.) It found that those in the lowest 20 percent income bracket paid at a rate 2.2 times that of the top 1 percent, whereas the middle 20 percent paid at a rate 1.8 greater.
As illustrated on the map, the tax burden for the bottom 20 percent varies widely by state. At one extreme is the state of Washington, where this group pays at a rate 5.7 times that of the top 1 percent. At the other extreme is Delaware, where the tax burden is virtually the same for all income groups. A map for the middle 20 percent income group would display a fairly similar pattern. The type of tax levied explains the differences among the states. Washington, for example, relies primarily on sales and excise taxes, whereas Delaware relies mostly on a progressive income tax. Sales taxes, which are levied on a percentage basis, and excise taxes, which are levied as ?xed fees, take a larger share of income from low- and middle-income families than from the rich and nullify the progressive effect of income taxes.
Most state and local tax systems are archaic and not merely because of regressivity. Property taxes, the dominant source of local income, have traditionally financed schools, a custom that results in inadequate funding in lower-income districts. Most states still rely heavily on local property taxes for schools, but a few, such as New Hampshire and Vermont, have implemented statewide property taxes to raise the equity of school funding.
Most sales taxes were enacted in the 1930s and did not apply to services, which were a relatively small part of consumer spending then. Today services account for 60 percent of spending. Only New Hampshire, Hawaii and South Dakota tax services comprehensively. A broader tax, particularly one that exempted necessities such as utilities, would be less regressive because services are consumed disproportionately by the wealthy. State and local governments are shifting away from progressivity. Their revenues from income taxes fell 10 percent from 2000 to 2003; during the same period, sales taxes rose 6 percent and property taxes, 20 percent.