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A new study finding an "unfair," rich-poor balance in state and local taxes has been getting big traction on the Web this week.
The study, from the Institute on Taxation and Economic Policy, found that "virtually every state's tax system is fundamentally unfair, taking a much greater share of income from low- and middle-income families than from wealthy families." It added that state and local tax systems are "indirectly contributing to growing income inequality by taxing low- and middle-income households at significantly higher rates than wealthy taxpayers."
In other words, it said the tax systems are "upside down," with the poor paying more and the rich paying less. Overall, the poorest 20 percent of Americans paid an average of 10.9 percent of their income in state and local taxes and the middle 20 percent of Americans paid 9.4 percent. The top 1 percent, meanwhile, pay only 5.4 percent of their income to state and local taxes.
Washington state had the most regressive state tax system, taxing the poorest residents at 16.8 percent while taxing the top 1 percent at only 2.4 percent, the study said. Florida ranked number two, with the poor paying 12.9 percent of their income to taxes, while the top 1 percent pay 1.9 percent. Texas ranked third, with the bottom playing 12.5 percent and the top 1 percent paying 2.9 percent. The main reason: None of those states have personal income taxes, which tend to be progressive.
California is the most progressive state, with the poorest residents paying 10.5 percent and the top 1 paying 8.7 percent. (You can check your own state here.) Among the other most progressive states are Delaware, Minnesota, Montana, Oregon and Vermont, which all have progressive state income taxes.
Yet while the report is sure to spur calls for higher taxes on the rich, its findings paint a misleading picture of the broader taxes paid by Americans, rich and poor included.
First off, Americans pay federal, state and local taxes. Federal taxes account for two-thirds of the taxes that Americans pay. So while it's true that state and local taxes by themselves are regressive, Americans pay far more in federal taxes, which are far more progressive with the rich paying a higher share—both of their own incomes and of total taxes.
According to the nonpartisan Tax Policy Center, the top 1 percent of Americans paid 33.4 percent of their expanded cash income (a broad measure of pretax income) in federal taxes. Middle class Americans—or those in the middle 20 percent—pay 13.7 percent of their income to federal taxes, while the poorest pay 3.1 percent.
So far, it doesn't appear that any study has looked at the combined federal, state and local tax burdens as a share of certain income groups. But Roberton Williams of the Tax Policy Center said that combining all taxes would almost certainly show that the wealthy pay more than the rest.
"Looking at state and local taxes gives you one picture of the impact of taxes," Williams said. "But you can't look at them in isolation."
The second problem with looking purely at state and local taxes is that taxpayers can deduct state and local taxes from their federal taxes. So some of that tax burden shifted to the middle and lower class at the state level is given back by the federal government. The federal tax system, in other words, rebalances or cancels out some of the regressive structure of the state and local taxes.
"There is an interaction between the federal, state and local systems," Williams said. "The federal system offsets some of the regressiveness of the state level."
In other words, saying the tax system is upside down based on state and local taxes is like studying the estate tax or mansion tax and saying millionaires pay all the taxes in America.
Nobody pays just one tax. Most Americans pay them all, and deduct or offset some from others. And when you look at the tax system as a whole, the rich pay more.
Does that mean the rich should pay more, or that the system is fair?
"That's subjective," Williams said. "To some people, we should have a flat tax. Others say we're not nearly progressive enough."
But any analysis of "fairness" should include the whole tax system, not just one part of it.