The Institute on Taxation and Economic Policy (ITEP) released its annual "Who Pays" report. The report should be read by everyone in the state and local tax policy business. Once again, ITEP has found that state and local tax systems are decidedly regressive. In fact, ITEP concluded that the effective tax rate of the 20 percent of taxpayers with the lowest incomes is more than twice that of the top 1 percent of taxpayers. That is the definition of regressivity.
I know no one who thinks regressive taxes are normative goods. The most conservative folks will tell you it is wrong to foist the burden of paying for government onto the backs of the poor and dispossessed. Indeed, many well-intentioned but poorly designed relief mechanisms are promoted by conservatives -- exemptions for necessities, for example.
We know why the state and local tax systems are regressive. And let's be clear -- every state system is regressive. The regressivity is caused by heavy reliance on general sales taxes, gross receipts taxes, and excise taxes. Consumption taxes tend to be regressive, especially in America, where we exempt a lot of things rich people buy. Interstate competition keeps income taxes in check. ITEP says the property tax is regressive, but there is a long-running debate over whether that's true -- some argue that it's progressive, while others argue that it works like a benefits tax. Still, there is no question that the poor pay disproportionately for subnational government.
If you're keeping score, ITEP says the 10 most regressive states are Washington, Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas, and Indiana. The least regressive states are California, Delaware, the District of Columbia, Minnesota, Montana, Oregon, and Vermont.
I think the ITEP report is terrific -- but it asserts that the tax system is driving income inequality. That assertion was jumped on by liberal pundits. E.J. Dionne Jr., writing in The Washington Post, said the regressive system is "exacerbating" income inequality. He wasn't alone. Lots of folks took the ITEP report as proof that the Koch brothers are winning their war on America.
But the top 1 percent are not enriched by the tax system. Obviously they aren't hurt by it either. But it's silly to argue that George Soros, Sheldon Adelson, or the Koch brothers owe even a tiny part of their success to the tax system. The partners in Big Law or the Big Four accounting firms -- all firmly entrenched in the top 1 percent -- aren't wealthy because the states have high sales or cigarette taxes. Rich folks getting richer has little to do with state taxes.
Keep in mind that state tax systems have always been regressive. States have always been heavily reliant on consumption taxes, and most states have imposed modestly progressive income taxes that cannot overcome the regressiveness of other tax sources. Still, the effect on the poor cannot be denied. There are ways to alleviate the burden on the poor -- greater use of earned income tax credits and more generous income exemptions are a start. States should also broaden the sales tax base to tax things rich folks buy, while lowering the tax rates on the things the poor consume the most. But the rich will remain rich.
Matt Gardner and his team at ITEP deserve praise for the annual report because who pays matters -- or should matter. Regressive taxes are wrong. Indeed, even an income-tax-deriding libertarian like me would rather see a mildly progressive system than a significantly regressive one. And as a society, we should know and care about who pays.