Even for Local Taxes, the Rich Pay Far less Than the Poor
While much attention has been paid to Republican-backed tax cuts for the wealthiest, a new report reveals that even local levies take a greater share of income from the poor than the rich
TAYA GRAHAM: As part of the Real News series examining how our nation’s tax system heightened the historic rise of income inequality, we came across an interesting report.
Instead of looking at the federal tax system, it examines an aspect of this problem often overlooked, state and local taxes. The report is titled, Who Pays: A Distributional Analysis of the Tax System in All 50 States. It makes the argument that the burden of local taxes falls disproportionately on the shoulders of the people who can least afford it. This detailed analysis drills down into the tax code of all 50 states and it provides evidence that local levies like sales tax are so regressive that the lowest earners pay 50 percent more of their income than the wealthiest. The bottom line is that local taxation plays a big role in aggravating income inequality, an intriguing conclusion for an issue that often focuses on the recent Republican tax bill and its generosity to the richest one percent.
So to help me break down the findings and understand how much local taxes are adding to income inequality, I’m joined by one of the people who worked on it, Dylan Grundman. Dylan is a Senior Policy Analyst at the Institute on Taxation and Economic Policy, a nonpartisan think tank which scrutinizes the nation’s tax structure. Dylan, thank you so much for joining.
DYLAN GRUNDMAN: Absolutely, thank you for having me.
TAYA GRAHAM: So let’s start with the broad strokes about your report. What are the big picture findings about the role of state taxes in heightening income inequality?
DYLAN GRUNDMAN: I think the key finding here really is what you just said, the fact that our state and local tax systems are exacerbating income inequality. This is true at a time of federal retrenchment in the area of reducing economic inequalities and it is really surprising to a lot of people, who I think very few of would argue that the role of government should be to make the rich richer and the poor poorer. But what this report finds is that, in fact, that’s essentially what’s happening in nearly every state. Forty-five states tax low income people at a higher tax rate than the top one percent, which leaves incomes more unequal after taxes than before. And of course, this is in an era of growing pre-tax inequality as well.
TAYA GRAHAM: Now, you have an interesting graph in your report, if I understand it correctly, and it shows that the bottom twenty percent pay eleven percent of their income to state taxes, as opposed to seven percent for the richest one percent. Could you talk about that?
DYLAN GRUNDMAN: That’s a national average across all states and the District of Columbia, and that includes both state and local taxes. So that includes three general broad categories of taxes. There are income taxes on personal income and on business income, there are property taxes on our homes, businesses and also our cars and estates, and then sales and excise taxes, known as consumption taxes, so that’s our general sales taxes at the state and local level, and other excise taxes which are alcohol and cigarette taxes, for example. And each of those general categories of taxes tends to influence the distribution of income in a different way. The income taxes are the one truly progressive tax in the mix, which for reasons we’re all familiar with, means as your income goes up, your marginal tax rate goes up. But even that can vary a great deal from state to state.
And sales taxes, on the other hand, are sharply regressive in that the lowest-income families are paying much higher tax rates than the higher income families as a share of their income. And so, you cited the national average, about the lowest twenty percent of households are paying about eleven percent of their income in state and local taxes, which is fifty percent higher than the top one percent, who are paying about seven percent of their incomes. But that also- that can vary a great deal across states. The more regressive states tend to rely more heavily on those sales and excise taxes and often have no personal income tax or a very flat income tax, whereas the few states that don’t really exacerbate economic inequality, they have more robust income tax systems and a little lighter on the sales tax side.
TAYA GRAHAM: Now, before I ask the next question, I would appreciate it if you could define or clarify what we mean by a “regressive tax” just so people understand, what do we mean when we call a tax regressive?
DYLAN GRUNDMAN: Absolutely. Regressive means that the less you make, the more you pay. The more you make, the less you pay. The overall tax rate on wealthier families is lower than that on the lower and middle class.
TAYA GRAHAM: So a big part of what makes state taxes regressive is the sales tax. Could you clarify how that works?
DYLAN GRUNDMAN: Certainly. Our study measures the final incidence of taxes, which essentially means every dollar of revenue that comes into a state or local budget comes out of somebody’s pocket somewhere, but they can travel various routes to get there. So in the sales tax, you’re paying the flat rate immediately on the purchase, but then also to some extent, businesses are paying sales taxes and passing those taxes onto their customers. So some of that impact is embedded in the sales price. And our study shows that total impact, combined between what you’re seeing on your receipt and what’s sort of embedded in the price.
So sales taxes are sharply regressive, because lower and middle income people are spending most of their income and they’re spending most of it on taxable goods and services. Higher income people do more things with their income, such as invest it or find shelters for it, and are also to some extent more able to buy services which are often untaxed at the state and local level.
TAYA GRAHAM: Now, you conclude in the report that the tax structure for 45 states actually exacerbates income inequality. How did you come to this conclusion?
DYLAN GRUNDMAN: We have what’s called a micro-simulation tax model, which is based on 2015 data and 2018 tax laws. So we’re based in actual data from 2015 and we apply those data to a representative sample of tax returns and we essentially- I describe it sometimes as Turbo Tax on steroids, we can run the tax system on this representative sample of taxpayers and then add all those numbers up and see how it’s affecting people at different income groups. And we do a similar calculation for sales taxes and property taxes and so on. So using the results of this model, which is continually updated and carefully calibrated to keep up with changes in demographics in the economy, we can sort out how much taxes are being paid by the lowest income groups, the middle income and the highest income.
TAYA GRAHAM: That’s actually sounds pretty complicated. You also have a Terrible 10, states that have a reputation for taxing the poorest the most and the richest the least. How does that work, and can you give us a few states as an example of the Terrible 10?
DYLAN GRUNDMAN: How it works is that most of these 10 states rely heavily on those regressive sales and excise taxes. I believe it’s 7 of the 10 have no personal income tax, so they just have very little way of offsetting those regressive effects of the sales and excise taxes. And as an example, Washington State is the number one most regressive state in our study. They have no personal income tax and very, very high reliance on those regressive tax sources. And the few that do, out of those Terrible 10, if you do have an income tax, have a very flat income tax. So the wealthier families and the lower income families are paying the top marginal tax rate, the same top marginal tax rates. So that income tax isn’t stepping in to offset the regressivity of those other taxes.
TAYA GRAHAM: Now conversely, you give some states credit for having more progressive tax systems. What are the aspects of those states’ tax structures that make it more fair and equitable?
DYLAN GRUNDMAN: The first difference is just the reverse of what I just said about the regressive states. There are 5 states and the District of Columbia that we consider not exacerbating income inequality. They are California, Delaware, Minnesota, New Jersey, Vermont and DC. And what these states do, generally, is rely more on an income tax. They also have an income tax structure that is more reflective of today’s inequality. So they have a top tax rate that is significantly higher than the middle and lower tax rates and kicks in at a much higher income. So in some of these states, you have to have a million dollars in annual income to pay that top rate.
And then conversely, on the lower income side, many of these states have refundable tax credits for low income families, such as the Earned Income Tax Credit is the most common example. And those credits can actually result in a tax refund on the income tax, which helps offset those regressive taxes that I mentioned, the sales, excise and property taxes. So those are the two main ways that these states are keeping their tax systems from making economic inequality worse. But even each of those states has issues with the distributional impact of their tax code. Some of them tax the lower income families at a higher rate than the middle, some tax the middle at a higher rate than the top, so there is room for improvement all around the nation.
TAYA GRAHAM: I had no idea that the tax structures differed so completely from state to state. As a reporter, I cover the State Capitol and I have never heard this subject come up about the tax code and the regressive aspects of the sales tax. So why do you think there is so little awareness about this topic?
DYLAN GRUNDMAN: That’s a great question. I think federal taxes really capture our attention, and to some extent, that’s for good reason. They are probably a greater impact on most of our budgets. But the state and local picture, it does make a very significant impact on that change.
TAYA GRAHAM: I just want to know, what you think state governments, or even activists, can do to make a state tax system more progressive. Like for example, is there such a thing as a progressive property tax?
DYLAN GRUNDMAN: Progressive property tax is possible. I don’t think there’s any state that currently has a tax structure where the higher value homes are taxed at a higher rate across the board. There are some states that have a structure like that on their commercial property. There are certainly policies, called circuit breakers and other credits, that are actually delivered through the income tax side of the code, but are meant to offset the regressive nature of property taxes. A circuit breaker is a little bit complicated, but it works like a circuit breaker in your house, where if your system is overloaded it, it shuts the electricity off. So the idea is that if your property taxes exceed a certain share of your budget, that’s considered overloaded and the state income tax credit kicks in at that point to help you with those property taxes.
TAYA GRAHAM: Wow, that’s really interesting. So it’s called a circuit breaker?
DYLAN GRUNDMAN: Mhmm.
TAYA GRAHAM: Okay. I had no idea that type of progressive tax structure even existed. So my last question is kind of a big picture question. Usually, when we talk about income inequality, we discuss it in the parlance of the federal tax system. How deep an impact to local taxes have on inequity? I mean, is it proportionate to the federal impact?
DYLAN GRUNDMAN: It really is, overall, close to proportionate. If you add up all the state, local and federal taxes, the system looks a little bit more proportional because the federal income tax, and of course there is no federal sales tax, the federal income tax is rather progressive. Not as progressive as it has been in the past, but it does function in such a way that the higher your income, the higher your tax rate. But the effective state and local taxes generally erases that progressive effect, and in many cases reverses it. So it’s a really important area for policymakers and the general public to be aware of, that these state and local tax decisions, they’re not only important for funding our schools and roads and police forces, but they also have a real impact on the inequalities that we’re facing all around.
TAYA GRAHAM: Thank you, Dylan. I want to thank my guest, Dylan Grundman, for joining me, and I want to thank my reporting partner, Stephen Janis, for his research. I’m your host, Taya Graham, and I want to thank you for joining me at The Real News Network.