The federal tax code is a powerful tool for reducing income inequality: in general, high-earners are taxed at higher rates than low-income people, with a significant part of that money going toward programs that help the poor, like food stamps and other safety net payments.
But we don't usually think as much about the impacts of state taxes on inequality. A team of researchers at the Federal Reserve recently released a paper exploring the topic and found something, if not surprising, discouraging.
When it comes to taxes, some states build on federal efforts to reduce inequality and take steps to further decrease the gap between rich and poor. But plenty of others actually undermine the federal government's anti-inequality measures.
In essence, they take from the poor and give that money to the rich. I've mapped each state's contributions to inequality reduction below. States in green have tax policies that build on the federal tax code, making the gap between rich and poor smaller. States in purple have tax laws that undo federal measures to address inequality.
In some cases, the effects are quite large. The tax code of Tennessee, for instance, decreases federal anti-inequality efforts by nearly one-third. Other Southern states have laws that take a big bite out of inequality relief, too. On the other hand, places such as Minnesota and Oregon add to federal efforts by 18 percent or so.
There's no question that state-level laws can make a big deal of difference when it comes to income and wealth distribution, particularly for lower-income families. Kansas, for instance, recently restricted the amount of money that certain welfare recipients are allowed to withdraw from an ATM at any given time. Withdrawals are now capped, effectively, at $20. If you need to take out $200 in cash to pay rent or bills, you'll now be hit with 10 separate ATM fees. For families living on the economic edge, this could potentially be a disaster.
Overall, the Federal Reserve authors conclude that "state-levied taxes, on average, work to exacerbate income inequality." There are a number of factors driving this, including state-level gas taxes, which tend to be regressive (everyone pays the same rate) and serve to moderately increase inequality. On the other hand, state sales tax exemptions decrease inequality. And states that provide a version of the earned income tax credit can see a big reduction in inequality.
(h/t David Wessel for first pointing out the new study.)