In 10 States, the Poor Are Paying More of Their Income to State Taxes than the Rich

New Report Shows Tax Inequality

In 10 States, the Poor Are Paying More of Their Income to State Taxes than the Rich
October 9, 2015

One great way to start a fight is to initiate a debate about what constitutes a fair share of taxes. Should they be progressive, regressive, or neutral? An even better way to phrase the question is: Should taxes be based on a proportionate share of income, consumption, or some other property?

Those are the basic questions underlying tax inequality. The Institute for Taxation and Economic Policy (ITEP) released their findings on the issue. In a report titled: "Who Pays?" the institute highlights the differences at a state level.

ITEP asserts that, "virtually every state tax system is fundamentally unfair" because of a regressive nature. Regressive taxes end up taking a proportionately larger share of income from poor residents than from wealthier ones; progressive taxes take a greater percentage from the wealthy than the poor (excluding the effect of deductions and loopholes).

Ten states stand out as the "Terrible 10" for particularly regressive tax behavior. They are Washington, Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas, and Indiana. The ratio of taxes paid as a percentage of income between the poorest 20% and the top 1% ranges from 231% in Indiana to a staggering 686% in Washington, where the poorest 20% pay 16.8% of their income in taxes and the top 1% pay only 2.4%.

What do these states have in common? Either no state income taxes or a relatively flat structure, and a reliance on consumption taxes (sales taxes and excise taxes). You can make an income tax system as progressive as you like, but you cannot generally charge people more for an item based on their income. (Imagine being asked at the grocery counter how much you make and having your sales tax calculation based on your answer.) That makes sales taxes inherently regressive — by definition, it costs a respectively larger share of poorer residents' income to buy anything.

It is possible to blunt the regressive nature of sales and excise taxes through the use of tax credits aimed at lower income residents. Tax credits for the poor, combined with more progressive income tax structures and lower ratios of income taxes to consumption taxes, create state tax systems that are considerably less regressive. Some combination of these properties makes these seven states the fairest in the eyes of ITEP: California, Delaware, District of Columbia, Minnesota, Montana, Oregon, and Vermont.

Property taxes are the third variety of tax that states generally rely on for most of their income, and they are somewhat regressive. However, the effects of income tax and consumption taxes can swamp the property tax effect.

The underlying ITEP premise is that tax equality would be represented by a fully proportional tax structure, where everyone pays the same percentage of his or her income regardless of whether that income is high or low.

A true flat tax without deductions or loopholes would achieve that on the income tax front, and some politicians have advocated that approach — but since regressive sales taxes and property taxes are independent of income and based on consumption and asset value respectively, the only way to make an entire state tax system fair by the ITEP definition is to have a very progressive income tax system and combine that with tax credits. Perhaps someday, politicians really will figure out how to charge consumption taxes based on income and add another tool to the tax discussion (let's hope not).

More detailed information on the breakdown of tax inequity by state is available in the full ITEP report. As you read this, keep in mind that some conservatives would argue that tax fairness is defined as keeping the same percentage of your earned income whether you are wealthy or poor. That's how fights start over the definition of "fair share."

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Elaine | 10.09.15 @ 03:14
Yeah I'm not one to "start a fight" over taxes so I'm just going to keep my mouth shut.
Erin | 10.09.15 @ 16:02
I don't really have anything positive to add to this.
Steffanie | 10.09.15 @ 16:02
Shocker that I live in one of those states. Would be nice if something could be done about that.
Nancy | 10.09.15 @ 16:03
I'm glad that California is considered fair in something. Unfortunately, they overtax us in other ways. Have you seen our gas prices?
Bobbie | 10.09.15 @ 16:04
Tax system overall is broken, but as for how to fix it, who knows.
Meredith L | 10.09.15 @ 16:04
You know, maybe I've got this wrong but a tax on consumption is probably the most ridiculous thing I've ever heard of. Wouldn't it be like a group goes out to dinner and everybody splits the bill equally except you only had salad and a glass of water while the person next to you ate filet mignon with wine. My opinion is, give a straight percentage tax across the board and get rid of the loopholes.
trish | 10.09.15 @ 16:05
I live in one of the fairest states. But this article still enrages me.
Sara | 10.09.15 @ 16:06
You know that this really does not surprise me. However, you would think by now we would have a solution to taxes that helps everybody.
Kamie | 10.09.15 @ 16:11
Yup, and I live in one of those states, and another one the list is my home state..
STOKES | 10.09.15 @ 16:15
The entire income tax system is broken beyond repair.
Angie | 10.09.15 @ 16:16
I'm with Meredith - why can't we just have a flat percentage tax?
Chelsey | 10.09.15 @ 16:16
The whole tax system needs to be fixed. There is so much wrong with it.
Chrisitna | 10.09.15 @ 16:17
There are issues with taxes no matter where you live. We moved from Ohio to Texas specifically because there is no state or local tax (whereas in Ohio you are taxed by the city , the state and the federal government). The sales tax where we lived in Ohio was 7.25%. Where we live in Texas it is 8.25%. Not much of a difference for things that we buy, compared to the benefit of not being taxed by two additional entities as far as I'm concerned. And we are in no way in the top 1% ;)
Beverly | 10.09.15 @ 16:18
This is why we need a flat tax with no loopholes.
Britt | 10.09.15 @ 16:19
Great article with lots of useful information.
Zanna | 10.09.15 @ 16:19
The budget is broken and the tax code needs revising, but the ones who benefit the most from unfair laws are often the ones writing the laws. It's not going to change.
Sarah | 10.09.15 @ 16:21
Of course I live in one... other than that..... that's all I got to say.
Andrea | 10.09.15 @ 16:24
Not even going there. Arizona is in the list.... :(
Daniel | 10.09.15 @ 16:26
You would hope at some point things like this would change or be brought under control
Kathryn | 10.09.15 @ 16:27
I have never thought about taxes to be honest, I have done them of course but I never thought how each state did their own.
gracie | 10.09.15 @ 16:31
The tax structure has been broken for a long while now. I don't have much hope that they will ever actually even it out so that it is more fair.
Amanda | 10.09.15 @ 16:36
Crazy! but not surprising sad to say. Tax the poor so the rich can be richer
Kelley | 10.09.15 @ 16:42
I used to live in Indiana and I agree, I always felt like I was getting reamed with my taxes...
Wanda Langley | 10.09.15 @ 16:47
This is mind boggling that the States are all so different. You would think that these elected government officials would get their heads together and fix this so that it is fair for everyone.
Carla | 10.09.15 @ 16:48
The tax system as a whole needs to be revamped. It is out of control.
Alec | 10.09.15 @ 16:48
I can confirm this is true. My fiancé and I live in Florida and his old job was taking almost $50 per paycheck from us. He only made up to $240 a week before taxes on a good week. Hopefully going forward something can be done to even out the taxes paid by everyone.
Christina | 10.09.15 @ 16:50
I live in one of these states. The more we work the more they take. Can't win for losing.
steven | 10.09.15 @ 17:02
You would think by now they would have figured out a way to fix this.
$commenter.renderDisplayableName() | 12.04.20 @ 08:07