Tax Analysts Blog

Fairness and the Reality of State Tax Systems

Posted on Sep 17, 2014

WalletHub is a Web-based company that rates things. You can find the best place to retire, the worst place to have a baby, the best state to open a business if you are Hispanic, etc. This week WalletHub released a rating of the fairest state and local tax systems. Nothing is harder to determine than what is fair. It’s so, well, subjective. In any event, WalletHub surveyed 1,500 people across the country and came up with a list of the fairest and the least fair states.

The fairest states, according to the survey, were Vermont, Maryland, California, Minnesota, Virginia, Idaho, Delaware, South Carolina, Oregon, and -- the fairest of all -- Montana. The least fair were Tennessee, Texas, Arizona, Mississippi, Indiana, Florida, Illinois, Arkansas, Hawaii, and Washington. Basically, states more dependent on income taxes were judged to be fairer than those more dependent on sales taxes.

WalletHub then listed the states where the top 1 percent are most undertaxed – largely those heavily dependent on consumption taxes. Not coincidentally, WalletHub found the states where the bottom 20 percent were most overtaxed to be those heavily dependent on sales taxes.

WalletHub also found that Americans believe a fair state and local tax system taxes wealthy households at a higher rate than lower and middle income households. That is to say most Americans support progressive taxation. The survey was then meshed with some of the good work done by the Institute on Taxation and Economic Policy, which has demonstrated the fact that state tax systems are decidedly regressive.

I am not doubting the accuracy of WalletHub’s survey. But the results don’t align with political reality. People in places like Florida, Texas, and Washington don’t want an income tax. That is a fact. Indeed, an attempt to impose an income tax in Washington on those making more than $400,000 was rejected by a landslide. Also, the federal system prevents states from imposing high marginal taxes. That is a political reality, but one that most people understand. One of WalletHub’s expert advisers is University of Michigan law professor Reuven Avi-Yonah. In the Ask the Expert section of Wallet Hub’s website, Avi-Yonah said, “Fundamentally, I don’t think state and local tax systems can be fair in the sense they advance progressivity.” He added, “ For most states and localities, the mobility of the income tax base precludes progressive taxation.” Truer words were never spoken.

Read Comments (2)

edmund dantesSep 22, 2014

As JFK understood, a little progressivity in taxation may be a good thing, but
too much is poison, retarding economic growth. That's why he advocating
cutting the top rate from 90% to 70%. That's why when Reagan cut the top rate
to 50%, then to a nominal 28%, he unleashed an economic boom that reverberated
through the Bush I and Clinton administrations.

States should not be trying to implement progressivity in their taxation,
beyond the progressiveness that comes from people earning more and buying
more. They are ill-suited to the task.

Robert GoulderSep 22, 2014

I am curious whether the WalletHub survey instructed respondents to fully
consider the relative value of public services provided the state. In other
words, are they looking at what taxes buy. Presumably they should be for the
exercise to make sense.

If State X were to impose high taxes, but concurrently provides the citizenry
with excellent public schools and newly paved roads, etc., does that render our
view of the tax burden less unfair? I'm not sure one can accurately adjudge
perceived tax fairness without considering 'bang-for-the-buck' issues.

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