Title: An In-Depth Analysis of State and Local Tax Burdens Across Income Groups: Insights from ITEP’s 7th Edition of the “Who Pays?” Study
Introduction
The Institute on Taxation and Economic Policy (ITEP), a respected nonprofit research organization, recently released its 7th edition of the “Who Pays?” study in January 2024. This comprehensive study critically examines how state and local taxes affect families across all income brackets in the United States. Unlike many other studies that focus on just one type of tax or narrow economic segments, the Who Pays? study offers a holistic view of state and local tax systems, considering sales taxes, income taxes, excise taxes, property taxes, estate taxes, and other forms of state and local taxation.
This multi-faceted approach allows for a more thorough understanding of the total tax burden on households, especially as it varies with income levels and geographic location. The study is especially important because it challenges common narratives surrounding tax burdens in certain states, providing a clearer picture of how taxation truly impacts different demographics.
The 7th edition builds upon previous reports while introducing new findings that reflect shifts in population and changes in tax structures. One of the major takeaways from this year’s study is the revelation that California, traditionally viewed as a high-tax state, actually has a relatively moderate tax burden on families with modest incomes compared to many other states. This detailed exploration into how different states levy taxes helps policymakers, advocates, and citizens understand the dynamics of tax equity and how reforms can be pursued.
In this comprehensive analysis, we will break down the key findings of the report, examine the methodology used to gather data, and explore the implications of these findings on various income groups. We will also offer insights into how tax systems can be reformed to reduce inequality, with a focus on the progressive taxation model that states like California employ.
Key Findings of the Study
California’s Tax Burden for Low-Income Families
One of the most striking conclusions from the Who Pays? study is that California is not necessarily a “high-tax” state for families in the bottom 80% of income earners. California has long been associated with high taxes, particularly for high-income earners, due to its progressive income tax system. However, the report finds that for families earning modest incomes, the state’s tax burden is relatively comparable to the national average. This conclusion directly contradicts the common belief that California’s tax rates are excessively burdensome for middle- and low-income households.
In fact, when comparing tax burdens across different states, California emerges as a more favorable state for lower-income families than commonly assumed. For families in the bottom 40% of the income distribution, California’s tax burden is lower than that of states like Florida and Texas, which are frequently labeled as tax-friendly states. Both Florida and Texas are notable for having no state income taxes, which appeals to many taxpayers, particularly those in higher income brackets. However, these states rely heavily on sales taxes and other consumption-based taxes, which disproportionately impact lower-income families who spend a larger portion of their income on taxed goods and services.
For families in the bottom 40% of income earners, the study suggests that California’s progressive taxation model—with higher taxes on the wealthy and a more balanced tax structure for middle- and low-income families—provides a more equitable tax system compared to states like Florida and Texas, where sales and excise taxes put a disproportionate burden on less wealthy households.
Wealthy Californians vs. Low-Income Families in Other States
The Who Pays? study also draws attention to the tax disparities between high-income Californians and low-income families in other states, especially those with regressive tax systems. One of the more surprising findings is that California’s wealthiest citizens are taxed at lower rates than low-income families in sixteen other states, including Texas, Tennessee, and Florida. This is due to the highly progressive income tax system in California, which imposes a larger percentage of taxes on the wealthy compared to other states where sales taxes and property taxes take a more significant portion of income from lower-income groups.
In states like Texas and Tennessee, which have no state income tax, low- and middle-income households bear a greater share of the tax burden through sales taxes on everyday goods and services. These states rely heavily on regressive taxes that impact those with lower earnings more than those in the higher brackets. Tennessee, for instance, has a combined state and local sales tax rate of 9.55%, making it one of the highest in the country. Similarly, Texas and Florida impose high sales tax rates, placing a disproportionate burden on families that spend a significant portion of their income on goods and services.
In contrast, California’s high earners are taxed at progressive rates, with the state’s top income tax rate reaching 13.3% for individuals earning over $1 million annually. This progressive structure helps offset the relatively moderate tax burdens on lower-income groups, making the state’s overall tax system more fair and balanced compared to states with regressive tax policies.
Regressive Tax Systems: The National Trend
The Who Pays? study highlights a national trend where many states continue to operate under regressive tax systems that disproportionately affect the poor. In a regressive system, lower-income families pay a higher percentage of their income in state and local taxes compared to wealthier families. This happens because states with regressive tax structures often rely on sales taxes, excise taxes, and property taxes, which apply equally to all taxpayers regardless of their income level.
One of the key drivers of this inequality is the reliance on sales taxes, which make up a significant portion of state revenue in many parts of the country. Sales taxes are uniform and do not account for differences in income. Consequently, lower-income families, who spend a higher percentage of their income on taxable goods, bear a heavier burden compared to wealthier individuals. This is especially true in states that have high combined state and local sales tax rates, such as Alabama (9.29%), Arkansas (9.45%), and Louisiana (9.56%).
Another example of a regressive tax system is the use of property taxes, which tend to affect lower-income homeowners more heavily than wealthier residents, especially in regions where property values are high but incomes are not. States with high property taxes and low or no income taxes, such as Texas, Tennessee, and Florida, often see low- and middle-income families paying a disproportionate share of the state’s tax revenue.
State and Local Sales Tax Rates: A Deeper Dive
The Who Pays? study also provides a detailed look at state and local sales tax rates, which are central to the overall tax burden in many states. Sales taxes are considered one of the most regressive forms of taxation because they do not account for the taxpayer’s ability to pay. Lower-income households spend a greater share of their income on goods and services subject to sales tax, which exacerbates economic inequality.
The study identifies Alabama, Arkansas, Louisiana, Tennessee, and Washington as the states with the highest average combined sales tax rates—all of which exceed 9%. These high rates are especially burdensome for families with low to moderate incomes, who spend a greater portion of their income on taxable items like food, clothing, and gasoline.
In contrast, Alaska, Delaware, Montana, New Hampshire, and Oregon do not impose statewide sales taxes, which can significantly reduce the tax burden on low- and middle-income families. However, Alaska is an outlier in that it permits local governments to levy sales taxes, which means that certain regions of the state still impose taxes on residents.
While Alaska has the lowest average combined sales tax rate at just 1.82%, states like Hawaii (4.50%) and Wyoming (5.44%) also have relatively low rates compared to states with the highest taxes. In these states, the overall tax burden on families is less severe, although they still rely on sales taxes as a major revenue source.
Methodology: Ensuring Accuracy and Fairness in Data
A key aspect of the Who Pays? study is the methodology used to gather and analyze data. This year’s edition uses the most recent Census population data to weight sales tax information by ZIP code at the state, county, and local levels. By using this more precise weighting system, the report offers a more accurate representation of how taxes affect residents in different parts of the country.
The study compares the results based on the population-weighted data, which helps account for varying regional tax rates and population densities. This method differs from earlier editions, which used data from a decade ago. The modifications in weighting offer a more up-to-date perspective on tax rates and their effects on families across income levels.
Although the new methodology makes the data less directly comparable to previous editions, the differences are minor and do not significantly alter the overall conclusions of the report.
Conclusion: Key Takeaways and Policy Implications
The ITEP’s 7th edition of “Who Pays?” offers valuable insights into how state and local taxes impact families in the U.S. The findings underscore the importance of progressive taxation in promoting equity in tax systems. States like California, which rely on progressive income taxes for high earners, reduce the tax burden on lower-income families compared to states that depend on sales taxes and excise taxes. The study also demonstrates the harmful effects of regressive tax systems, where low- and middle-income families pay a disproportionate share of their income in taxes.
For policymakers, the study provides a clear argument for tax reforms that reduce reliance on regressive taxes like sales and property taxes. Shifting toward progressive taxation, where high earners contribute a fair share, could help alleviate the financial strain on low-income families and ensure a more equitable distribution of the tax burden.
Ultimately, the Who Pays? study is a call to action for state and local governments to reconsider their tax structures and focus on making taxes fairer for all citizens, regardless of income level.