Econintersect: The Institute on Taxation & Economic Policy has published a comprehensive state-by-state analysis of personal taxation. The findings show there is a wide discrepency of taxes at the state and local level across the U.S.. Furthermore, for the most part, these taxes are highly regressive. In the states rated as worst the lower income levels pay as much as 6 times as much of their income in taxes as do the the highest income.
The following graphic shows the average tax burdens across all 50 states for various income levels.
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The following table shows the ten most regressive states.
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Here are the characteristics that the study identified as most important in establishing the highly regressive nature of taxation in these ten states:
• Four of the ten states do not levy a personal income tax— Florida, South Dakota, Texas, and Washington. An additional state, Tennessee, only applies its personal income tax to interest and dividend income.
• Five states do levy personal income taxes, but have structured them in a way that makes them much less progressive than in other states. Pennsylvania , Illinois and Indiana use a flat rate which taxes the income of the wealthiest family at the same marginal rate as the poorest wage earner. Arizona and Alabama have a graduated rate structure, however there is little difference between the bottom marginal rate and top marginal rate.
• Five of the ten most regressive tax systems— those of Washington, South Dakota, Tennessee, Arizona and Alabama— rely very heavily on regressive sales and excise taxes. These states derive roughly half to two-thirds of their tax revenue from these taxes, compared to the national average of 34 percent in FY09-10.
The four least regressive state and local taxes were found in Vermont, followed by Delaware, New York and the District of Columbia. Here are the relevant highlights from the report:
• Vermont’s tax system is among the least regressive in the nation because it has a highly progressive income tax and low sales and excise taxes. Vermont’s tax system is also made less unfair by the size of the state’s refundable Earned Income Tax Credit (EITC) — 32 percent of the federal credit.
• Delaware’s income tax is not very progressive, but its high reliance on income taxes and very low use of consumption taxes nevertheless results in a tax system that is only slightly regressive overall. Similarly, Oregon has a high reliance on income taxes and very low use of consumption taxes. The state also offers a refundable EITC and has a fairly progressive personal income tax rate structure.
• New York and the District of Columbia each achieve a close-to-flat tax system overall through the use of generous refundable EITC’s and an income tax with relatively high top rates and limits on tax breaks for upper-income taxpayers.
In the least regressive state, Vermont, there is only a little difference between the tax burden on the bottom 20% (8.7%) and the top 1% (8.0%). The highest tax rate in Vermont is 10.4% for the middle 20%.
- Who Pays? (Institute on Taxation & Economic Policy, January 2013)