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.”