Wednesday, January 30, 2013

‘Fundamentally Unfair’: How States Tax The Richest 1 Percent At Half The Rate Of The Poor

The poorest Americans are subject to a tax rate at the state and local level that is twice as high as the tax rate paid by the wealthiest earners thanks to “fundamentally unfair” state tax laws, according to a new report from the Institute on Taxation and Economic Policy (ITEP). Middle-class taxpayers also pay higher effective rates than the wealthy.

When state, local, property, and sales taxes are taken into account, the poorest 20 percent of Americans pay an average effective tax rate of 11.1 percent, the report found. The middle 20 percent pays a 9.4 percent rate, while the rate for the top 1 percent is just 5.6 percent. The lack of progressive income taxes and an over-reliance on consumption taxes are the primary culprit, the report says.

In the 10 most regressive states, the poorest 20 percent pay a rate as much as six times as high as the rate for the richest 1 percent. Four of those states — Washington, Texas, Florida, and South Dakota — have no income tax; one, Tennessee, has a limited income tax that only applies to dividends and interest. In these five states, half to two-thirds of revenue comes from sales and excise taxes, well above the national average of one-third.

Still, Republicans across the country are pushing tax plans that would replace income taxes — typically the only form of progressive taxation at the state level — with sales taxes. Republicans in Nebraska, Kansas, North Carolina, and Louisiana have advanced such plans, even though their state tax systems are already regressive.

In Louisiana, worst of the four, the poorest 20 percent pay 9.2 percent of their income in sales taxes, while the wealthiest 1 percent pay just 1.3 percent. Even in North Carolina, the best of the four, the poor pay six times as much of their income in sales taxes as the richest one percent. Shifting to a tax code that relies solely on sales taxes would make these states even worse.

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