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How Regressive Local Taxes Are Rewarding the Rich

NewsOctober 11, 2020

Here’s something nearly every state in the nation has in common: a regressive state tax system that is exacerbating the wealth divide.

So finds the newest edition of Who Pays: A Distributional Analysis of the Tax Systems in All Fifty States from the non-partisan Institute on Taxation and Economic Policy (ITEP).

The organization looked at sales and excise taxes, property taxes and income taxes across all 50 states, and found that, on average, the poorest 20 percent of households pay more than double (10.9 percent) the effective tax rate paid by the top 1 percent (5.4 percent).

“The problem with our state tax systems is that we are asking far more of those who can afford the least,” Meg Wiehe, ITEP state policy director, said in a press statement.

States’ heavy reliance on consumption (sales and excise) taxes to generate revenue contributes to a “fundamentally unfair” system by which lower- and middle-income households pay a greater percentage of their income, the report states.

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The organization placed on its Terrible 10 list the states that have the greatest gap between tax rates for low- and upper-income households—Washington, Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas and Indiana. Washington state has the dubious distinction of being ranked with the most unfair state and local tax system in the country, as it taxes the poorest residents at 16.8 percent but the top 1 percent just 2.4 percent.

Delaware ranked at the opposite end, having the least regressive tax system. That, the report states, is “not because any one of its taxes is exceptionally progressive, but because it relies so heavily on a modestly progressive income tax and relies very little on regressive sales and excise taxes.”

“In recent years, multiple studies have revealed the growing chasm between the wealthy and everyone else,” stated Matt Gardner, executive director of ITEP. “Upside down state tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem.”

Gardner says state policymakers should address the issue by enacting tax reform policies.

Click here to see how your state ranks.

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