Tax Analysts Blog

Regressive Taxes Are Neither New Nor Good

Posted on Jan 28, 2015

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.

Read Comments (6)

Ryan FJan 27, 2015

I would love to see an alternative state tax system that is flatter or even
progressive. But what would it look like given that each state is different?
States like Texas and Florida do not have an income tax because they have
natural resources - oil and beaches (tourists).

Florida has a lot of seasonal vacation homes that are currently taxed more than
primary homes. How would the retirees report an income tax to a state they
live in five months of the year? Florida also has hotel and resort taxes,
again to tax the tourists.

robert goulderJan 28, 2015

All this obsessing over regressive taxation strikes me as a uniquely American
problem. As a culture, we get all worked up about whether our consumption and
excises taxes are the fiscal equivalent of throwing the poor under the bus.

Let's take a cue from other countries' play book. Why are we viewing regressive
taxation as an isolated issue? As an alternate model, one might dare to
consider the so-called 'portfolio view' of governmental activity. That is,
evaluate the taxing function as one component of the public sector's overall

As David mentions, state tax regimes are all regressive. Okay, that makes up
half the portfolio (where revenue comes from). The other half is a state's
spending profile (where the revenue goes). Equity demands a high degree of
correlation between the two halves, i.e., that state spend money on things that
directly benefit those who contribute.

One must ask whether a state spends their revenue on things like low-income
health clinics or public school lunch programs (which help the poor), versus
dubious projects like building fancy sport stadiums so entertainment oligarchs
can fill sky boxes (which does nothing for the poor).

My point: Shouldn't our notions of regressive taxation be placed in context? I
notice that the great social welfare states of Europe like Sweden and Norway
easily justify having the highest VAT rates in the world by pointing to what
the taxes buy. Those Europeans seem to care plenty about the poor, but they
don't lose any sleep about VAT being really regressive.

david brunoriJan 28, 2015

Ryan, You describe the reasons why taxes are very different across state lines.
Some states are unlikely to ever adopt a sales tax (NH, OR), yet Texas and
Florida will not impose income taxes in your lifetime. You also note that some
states have unique sources of revenue (from natural resources and tourists).
This complexity complicates how much the poor versus the rich pay in the overall system.
Nine states do not tax income -- that makes things more regressive. But many states raise
money from severance taxes on oil and coal -- which probably makes things more
progressive. But you are unlikely to ever see an alternative system across
state lines -- too much disagreement.

emsig beobachterJan 28, 2015

One cannot look at only the tax system without looking at the uses to which the
revenues are put. It is quite possible that some of the states which ITEP says
have regressive tax systems may have spending patterns that tend to benefit low
and middle income households more than others(Washington, IL, PA) which could
mitigate some of the regressivity of the tax system

david brunoriJan 28, 2015

Bob and Emsig,
You fellas are way smarter than me. But consider this. A lot of what state
governments spend their money on benefits the middle class and the rich. Public
sector unions, construction companies, privatized jails, etc. get a big chunk
of the state fisc. States do not do a lot of welfare like Scandinavians. There
is a lot of redistribution going on; it's just not from the rich to the poor.
But that might be the libertarian in me talking.

emsig beobachterJan 28, 2015

David: States are not independent actors. They must compete with other states
for new investment jobs, etc. Therefore, they are not completely free to impose
steeply progressive taxes and large income transfers.

The states compete with each other in a milieu of asymmetric information -- the
firms they with to attract, or retain, know what their "bottom line" is
regarding any investment. The states do not. This is not the same as two
parties bargaining over the purchase of a car. In that situation the goal is
money. In the investment arena, the goal for the firm is money (profits) while
the the goal for the policy maker is the investment itself. Because policy
makers are not using their own funds to make a deal, they are not interested in
getting the best price (least tax concessions) to make a deal. No politician
was elected on how little the concession had to be to make the deal; they get
elected because they can brag about how many jobs they brought to the state. It
matters not to them that they may have "over paid" considerably. Further, it is
obvious that our elected policy makers have never read John Nash and his
findings regarding the benefits of collusion. This is strange since there are
no laws barring states from entering into agreements to restrain trade; i.e, no
tax concessions, etc.

P.S. David we are not necessarily smarter than you. We don't have the pressure
to get out a blog or an article every day so we have time to cogitate.

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