The federal government implemented an income tax in 1861 to pay for the Civil War. It levied a flat tax of 3 percent on all incomes above $800. A year later, Congress changed the system, creating the first progressive tax structure: The more money an individual made, the higher the percentage he or she paid in taxes. A century and a half later, Americans still think the progressive income tax is the fairest way for the government to raise revenue.
When it comes to tax burdens, conservatives and liberals agree that the wealthy should pay more, according to a new survey conducted by WalletHub, a personal-finance Web site. And no state is rated more fair in how it distributes its tax burden than Montana, where wealthy property owners and energy producers pay more to keep the government functioning.
Montana is one of five states, along with Delaware, Alaska, Oregon and New Hampshire, that don’t have a general sales tax. Because sales taxes spread the burden evenly across all income earners — Bill Gates spends just as much on sales tax when he buys groceries as someone who earns minimum wage — they are considered less fair. So the less a state relies on a sales tax for its revenue, all else being equal, the more fairly the tax burden is shared. No surprise, then, that Oregon and Delaware both land among WalletHub’s five fairest states.
Rather than sales taxes, Montana depends more on income taxes to raise the money the state government needs to operate. About $1.2 billion of the $2.6 billion in taxes the state collected in 2013 came from individual and corporate taxes, by far the state’s largest source of income. Individual earners fall into seven tax brackets, ranging from 1 percent to 6.9 percent for the highest earners.
However, states must be careful not to rely excessively on income taxes; when the economy suffers and jobs disappear, their budgets will be severely squeezed. Fortunately, Montana is still less dependent on income taxes than about half the states; Oregon, for example, gets about three-quarters of its total tax revenue from income taxes and thus is more vulnerable to downturns.
Beyond income taxes, Montana relies on selective sales taxes on items such as tobacco and gasoline for about a fifth of its total tax revenue. Taxes on licenses — such as licenses for alcohol sales and operating licenses — and taxes on oil and gas production account for another fifth, and all are more stable revenue sources than income taxes.
On the other end of the spectrum, Montana’s Northwest neighbor Washington is rated to have the least fair tax structure in the country. It is one of seven states with no income tax, which means it raises most of its money through those regressive sales taxes. Census Bureau figures show that Washington took in $18.6 billion in tax revenue in 2013, $14.6 billion of which came from sales taxes. Hawaii, Arkansas and Florida are also dependent on sales taxes, while Illinois lands on the least-fair list because it relies heavily on property taxes.
“The key to fairness,” Nancy Shurtz, a tax expert at the University of Oregon, wrote in the WalletHub study, “is not only the redistribution of wealth under the tax systems, but making education and other governmental expenditures equitable.”