“The vast majority of states allow their very best-off residents to pay much lower effective tax rates than their middle- and low-income families must pay — so when the richest taxpayers grow even richer, these exploding incomes hardly make a ripple in state tax collections,” they write. “And when the same states see incomes stagnate or even decline at the bottom of the income distribution it has a palpable, devastating effect on state revenue.”
To rank states on tax fairness, the authors developed a Tax Inequality Index, based on comparisons of pre- and post-tax incomes by income group. Less equal — or regressive — systems, based on their analysis, widen the income gap after taxes and credits are applied. A more equal, or progressive, system narrows that gap.
Hover over each state to its tax inequality ranking. Darker shading and lower numbers represent less fair tax systems.
Washington was the most regressive state, based on their analysis of a number of factors. (For a complete list of their rankings, scroll to the end of this post.) For the bottom fifth of earners there, the bite that state and local taxes take of their incomes is seven times as large as the bite taxes take out of incomes for the top 1 percent. Florida was next, followed by Texas, South Dakota and Illinois.
What makes a regressive system
The taxation systems in the 10 most regressive states shared a number of features, the authors found. Four lack personal income taxes, while five have virtually flat (or non-progressive) personal income taxes. Six of the states rely too heavily on sales taxes, which are regressive because consumption and incomes do not rise in lockstep. (Consumption accounts for a larger share of income for low-wage earners than high-wage earners.) In September, economists at Standard & Poor’s, the credit ratings agency, suggested that such an over-reliance on sales taxes may exacerbate income inequality and act as a drag on revenues.
As the chart below shows, income taxes are typically the most progressive, on average, while property taxes are slightly regressive. Sales and excise taxes tend to be very regressive, since spending as a share of income tends to fall as income rises.
What makes a progressive system
The least regressive tax systems — and each state’s system was found to be at least somewhat regressive — exhibited the opposite, typically levying highly progressive income taxes; relying heavily on those taxes as opposed to sales and excise taxes; and using refundable tax credits to offset the tax impact on those who earn less.
While Delaware’s income tax is not particularly progressive, it’s heavy reliance on income taxes instead of consumption taxes make its system the least regressive overall. Though not comparable to a state, D.C. ranks as the next least regressive tax system, followed by California, Oregon, Montana and Vermont. D.C., Minnesota and Vermont make their tax systems fairer by providing generous refundable Earned Income Tax Credits to lower-wage earners.
Of course, the way a tax is structured matters, too. An income tax’s progressiveness is often determined by two factors: a tax rate that gradually rises with income and the availability of refundable tax credits targeted at the lowest earners. As the chart below shows, while California, Louisiana and Alabama all levy personal income taxes, California’s is far more progressive.