Analysis: State and local taxes are making rich richer

 
 
Posted3/10/2019 6:00 AM
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  • Many state and local governments are heavily reliant on sales taxes, rather than income taxes.

    Many state and local governments are heavily reliant on sales taxes, rather than income taxes. (AP Photo/Rogelio V. Solis)

State and local taxes effectively redistribute national income from the poor to the very rich, according to data released by the Institute on Taxation and Economic Policy (ITEP), a progressive think tank.

Many state and local governments are heavily reliant on sales taxes, rather than income taxes. Lower-income households tend to spend a greater fraction of their earnings on purchases, including necessities like food and transportation, than higher-income households do. As a result, sales taxes take a bigger bite, percentagewise, from the paychecks of low-income households than high-income ones.

"On average," according to the institute's analysis, "the poorest 20 percent of taxpayers spend 11.4 percent of their income on state and local taxes, which is 50 percent higher than the 7.4 percent average effective rate for the top 1 percent." The net result is that the total share of post-tax national income flowing to poorer households shrinks as a result of state and local taxes, while the richest households see a boost in their income share after those taxes are applied.

"Oftentimes the absence of an income tax is interpreted as proof that a state is 'low tax,' " said Carl Davis, research director of ITEP, via email. "But while this is true for families with high incomes, it's often not the reality for low-income and sometimes even middle-income families."

Conservative analysts tend to have a more positive view of sales taxes, such as those levied at the state level. "Retail sales taxes are one of the more transparent ways to collect tax revenue," the Tax Foundation's Janelle Cammenga wrote in January. "While graduated income tax rates and brackets are complex and confusing to many taxpayers, sales taxes are easier to understand; consumers can see their tax burden printed directly on their receipts."

In addition, a 2016 Mercatus Center policy brief argued that "consumption (e.g. sales) and property taxes tend to be relatively more economically efficient than income taxes," meaning that they would distort individual decision-making less, which some economists believe leads to greater long-term economic growth.

But the past several decades have demonstrated to many economists that benefits of a booming economy don't necessarily trickle down to people at the middle and bottom of the income pole. Wealthy shareholders have seen their fortunes grow, while workers have had to make do with stagnant wage growth and rising prices of a range from education to health care.

"The world appears to be more like what lefties thought it was than what I thought it was for the last 10 or 15 years," Brad DeLong, a University of California Berkeley economist who worked in the Clinton administration, recently told Vox.com. As a result, the profession has seen a renewed interest in using tax policy to counter inequality.

As part of its annual analysis of state and local tax policy released last year, ITEP concluded that tax structures in 45 states expanded inequality by taxing low-income households at a higher effective rate. Five states -- New Jersey, Minnesota, Delaware, Vermont and California -- and the District of Columbia had tax codes that reduced the gap between the haves and the have-nots.

Thanks to recent tax-cutting binges, federal tax receipts have trended downward in recent years: In 2000, for instance, federal tax revenues were 19.8 percent of GDP. In 2018, following the passage of the Republican tax cuts, they fell to 16.2 percent. That's put increasing pressure on state and local governments to pick up the slack, according to ITEP's Davis. And often that ends up happening in the form of regressive sales taxes.

"The cost of regressive taxation is growing larger as income inequality worsens," Davis said. "The states are leaving huge amounts of revenue on the table when they choose to levy very low tax rates on high-income earners with surging incomes. That's revenue that could have been invested in education, or health or infrastructure in ways that would expand economic opportunity and build broadly shared prosperity."

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