State tax systems rake in a much larger share from middle- and low-income families than from wealthy families, according to a study released Wednesday by the nonprofit Institute on Taxation and Economic Policy.
For all of the combined state and local income, property, sales and excise taxes state residents pay, the average overall effective tax rates by income group nationwide are 11.1% for the bottom 20%, 9.4% for the middle 20% and 5.6% for the top 1%, the study found.
The fourth edition of "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States" reported that in the 10 states whose tax systems most favor high earners, middle-income families pay up to three times as high a share of their income as the wealthiest families; low-income families pay up to six times as much.
"We know that governors nationwide are promising to cut or eliminate taxes, but the question is who's going to pay for it," Matthew Gardner, executive director of ITEP and an author of the study, said in a statement.
"There's a good chance it's the so-called takers who spend so much on necessities that they pay an effective tax rate of 10% or more, due largely to sales and property taxes. In too many states, these are the people being asked to make up the revenues lost to income tax cuts that overwhelmingly benefit the wealthiest taxpayers."
State consumption tax structures are particularly regressive, he said, with an average 7% rate for the poor, a 4.6% rate for middle incomes and a 0.9% rate for the wealthiest taxpayers nationwide.
The study found that of the 10 most regressive states, four have no taxes on personal income, one state applies it only to interest and dividends and the other five have a flat or virtually flat personal income tax across all income groups.
Five of the 10 most regressive tax systems rely heavily on regressive sales and excise taxes, deriving roughly half to two-thirds of their tax revenue from these taxes, compared with the national average of 34% in FY09-10.
In contrast, the study found that the least regressive tax systems—those of Delaware, District of Columbia, New York, Oregon and Vermont—had highly progressive income taxes and relied less on sales and excise taxes.
"Cutting the income tax and relying on sales taxes to make up the lost revenues is the surest way to make an already upside-down tax system even more so," Gardner said.
Following are the 10 most regressive tax states, with each income group's effective tax rate, according to ITEP.
10. ALABAMA
Bottom 20%: 10.2%
Middle 60%: 9.4%
Top 1%: 3.8%
Progressive Features
- Provides one of the largest property tax homestead exemptions in the country
Regressive Features
- Narrow income tax brackets mean majority of taxpayers pay top income tax rate
- Sales tax base includes groceries
- Fails to provide a credit designed to offset sales tax on groceries
- Offers an income tax deduction for federal income taxes paid
Recent Developments
- Enacted double-weighted sales factor apportionment rules for calculating the corporate income tax
9. INDIANA
Bottom 20%: 12.3%
Middle 60%: 10.7%
Top 1%: 5.4%
Progressive Features
- Provides a refundable earned income tax credit
- Sales tax base excludes groceries
Regressive Features
- Income tax uses a single rate structure
- Comparatively low income tax exemptions
Recent Developments
- Enacted a gradual phase-out of the state's inheritance tax
- Enacted a gradual reduction in the corporate income tax rate from 8.5% to 6.5%
- Amazon will begin to collect sales tax from online purchases
8. PENNSYLVANIA
Bottom 20%: 12%
Middle 60%: 9.8%
Top 1%: 4.4%
Progressive Features
- Provides a nonrefundable "tax forgiveness" credit to low-income taxpayers
Regressive Features
- Income tax uses a single rate structure
- Fails to use combined reporting as part of its corporate income tax
Recent Developments
- Single-sales factor apportionment rules for calculating corporate income taxes fully phased in
7. ARIZONA
Bottom 20%: 12.9%
Middle 60%: 9.7%
Top 1%: 4.7%
6. TENNESSEE
4. ILLINOIS
