Tax Analysts Blog

State Taxes and the Poor

Posted on Oct 2, 2013

I believe liberals are most convincing when they are arguing for tax relief for the poor. Too often liberals are consumed with either screwing the rich or raising revenue from any source to fund crony public works or bloated union bureaucracies. The Institute on Taxation and Economic Policy (ITEP) recently released a report showcasing how state tax laws can affect the poor. "State Tax Codes as Poverty Fighting Tools" is well worth reading. It discusses two very serious state tax policy issues.

First, ITEP asserts that the heavy reliance on the sales tax hurts the poor. There is nothing new with that argument; we have known the sales tax is regressive since its inception. But it is important to consider as more states are thinking about reducing their reliance on income taxes and shifting the burden to those paying sales taxes. I'm no fan of the income tax. But I would reduce income taxes by cutting government services, not by shifting the burdens to the poor. In any event, the ITEP argument is sound and deserves consideration.

As importantly, ITEP highlights the problems with states reducing their earned income tax credits. I have never been a great fan of the EITC because it puts the tax collector in the position of benefits distributor. Twenty-six states currently operate EITC systems. And the truth is that they provide meaningful relief to poor taxpayers. Remember, you have to work to receive the credits -- so they're not exactly providing an incentive to the proverbial moochers.

The new report is a follow-up to ITEP's January 30 report, "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States." That report found that the poorest 20 percent of American taxpayers paid an average 11.1 percent of their incomes in state and local taxes, and middle-income taxpayers paid an average of 9.4 percent, but the wealthiest 1 percent of taxpayers paid 5.6 percent. There is nothing just in that outcome. In this latest report, ITEP gets it right by focusing on tax outcomes for the poor.

Read Comments (9)

amt buffOct 2, 2013

What's wrong with Cara Griffith's argument that state taxes should aim for
stable revenue, leaving the federal government to do all the redistribution?
That made perfect sense to me. If a state wants to redistribute more than the
federal government does, it can enact a progressive tax system. If a state
wants to redistribute less, it can enact a regressive tax system.

Where are the stone tablets on which it is written that all tax systems at
every level must be progressive, and that progressivity must only increase over
time?

David BrunoriOct 2, 2013

AMT, I am on board 100 percent. I am for a flat (ish) income tax (with a very
low rate) and a big exemption for the poorest citizens. I do not think looking
out for the poor necessarily means wanting high rates on the rich. And I of
course agree with idea that only central (i.e., federal) governments should
redistribute wealth. Please keep writing -- I find your commentary
enlightening.

emsig beobachterOct 2, 2013

A rational blog post and responses. A flat rate income tax with substantial
standard deduction and personal exemptions is a progressive tax -- the
proportion of income going to taxes rises as income rises.

David BrunoriOct 2, 2013

Emsig, Thanks. If the goal is providing tax relief for the poor -- and most
folks would endorse that idea -- a flat tax with a big exemption at the bottom
works. The problem is that if you need more money then it almost has to come
from the top.

vivian darkbloomOct 4, 2013

"The problem is that if you need more money then it almost has to come from the
top."

Pls explain. Wouldn't raising the flat rate raise income from the middle and
the top? And, wouldn't lowering the exemption a bit come from the upper, the
middle and the upper lower? And, "if you need more money" could not the
solution be to cut spending and "need" less? Are not the possible combinations
myriad?

vivian darkbloomOct 4, 2013

David,

Sorry for the sequential posting and pestering you with additional questions;
however:

If additional revenue is "needed" would not raising the flat rate raise revenue
from the upper and middle cohorts proportionately to their income? As such,
would it not tend to involve the "skin" of a greater percentage of the populace
than picking off a few at the top? Is this a bad thing? Would it help to
prevent "class warfare" whereby in the "democratic process" a majority of the
population vote to increase entitlements to themselves at the expense of a few
(or the many in the future)? Would it help to balance our urge to spend with
our responsibility to pay for that spending if it is understood that if the
flat rate is increased all but the "poor" will need to make a contribution?
Would it not better align incentives to improve economic efficiency and
performance? Would it not tend to contribute to the stability and continuity of
the tax system? Would that be a bad thing?

vivian darkbloomOct 5, 2013

" I tend to be less concerned about skin in the game as the poor pay plenty of
excise, sales, and
wage taxes. "

That was not really my point. The point was that the middle and the top would
all need to pay more in the event that "more money was needed". It would, I
hope, preclude future situations in which one tries to pick off the top 1
percent (or 10 or 20 percent) for the additional revenue because that is
politically expedient in the electoral politics sense. If one has the
situation in which, say, 60 percent of the populace pays income tax and the
rest are exempt because they are "poor" then the decision to raise income taxes
in order to meet spending would affect at least 60 percent rather than, say 6
percent.

emsig beobachterOct 6, 2013

Define limited government. Almost everyone is for "limited government." It's
just that most of us have differing views of just what constitutes "limited."

I don't understand your comment that state and local taxes fund union
bureaucracies. I naively thought that unionized state and local government
workers more or less voluntarily funded these bureaucracies out of their
bloated paychecks. The unions extract monopsonistically generated quasi-rents
from taxpayers. Why save your wrath for teachers, cops, firemen, and sanitation
workers and not fulminate against contractors and others who also extract these
rents from the unorganized.

David BrunoriOct 6, 2013

Vivian, Yes, I agree! I did not articulate that point well. I think the ideal is a flat tax with a generous exemption. If more revenue is needed, the flat
rate would be increased (on all above the exemption). I tend to be less concerned about skin in the game as the poor pay plenty of excise, sales, and
wage taxes.

My idea for a "generous" exemption is more limited than I implied. I am okay with looking out for the very poorest (maybe defined by poverty levels).
Everyone else pays.

Remember at the state level, most of your tax dollars are supporting a government machine and its attendant beneficiaries (public employee unions and government contractors) -- not the poor.

I am for limited government. But I would rather have the public cut a check to a poor working mother than fund union bureaucracies, an oppressive regulatory regime, and well connected businesses.

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