Tax Center
10 states with the worst taxes for average Americans
By Thomas C. Frohlich
6 hours ago
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While a certain degree
of income inequality might be expected, the difference between rich and
poor Americans has grown dramatically in recent years. As of 2013, the
wealthiest 20% of Americans had more income in aggregate than the bottom
80% combined.
State and
local tax systems play a significant role in redistributing income among
people. The nationwide average effective tax rate for the poorest 20%
of Americans was 10.9%, roughly double the 5.4% rate for the top 1%.Related: The Poorest County in Each StateWhen
looking at taxes paid as a share of the income earned, all states have a
regressive tax system, which means poorer residents are taxed more than
the wealthiest ones. The difference in effective tax rates between
income groups, however, varies widely between states. According to “Who
Pays? A Distributional Analysis of the Tax Systems in All 50 States,” a
report released by the Institute on Taxation and Economic Policy (ITEP),
Washington has by far the most regressive tax system nationwide. Based
on the index score, a ratio calculated from a range of factors to
measure income inequality before and after taxes, these are the states
with the most unfair tax systems for the average American.In
fact, the poorest 20% of individuals paid at least 12% of their total
incomes in state and local taxes in seven of the 10 states with the most
regressive tax systems. In contrast, the wealthiest 1% of residents
paid no more than 3% in state and local taxes as a share of income in
six of the 10 states. In an interview with 24/7 Wall St., Meg Wiehe,
state tax policy director at ITEP, said that in most states, and these
10 especially, “tax distribution looks very much like a staircase going
down, where as your income goes up, your effective tax rate goes down.”Related: States With the Best (and Worst) SchoolsState
residents earning average incomes also often bore a higher tax burden
compared to the richest residents. The middle 60% of earners in all of
the 10 states paid at least three times what the wealthiest 1% paid, as a
share of income, in state and local taxes -- all of these ratios were
also among the highest nationwide. Middle earners in Washington and
Florida, the two most regressive taxation states, paid as a share of
their income more than 400% what the richest 1% of residents paid as a
share of their income.Often,
it's the presence or absence of a particular kind of tax that
determines the extent to which state tax systems are regressive. For
example, taxing goods and services consumed daily such as food is
especially regressive because food makes up a much larger share of
poorer Americans' income. A graduated income tax is far more
progressive, on the other hand. Five of the 10 states with unfair tax
systems taxed food at the state and local level. Also, all but one of
the 10 states had relatively low or flat income tax rates, and four had
no personal income tax.Related: America’s Most Hated CompaniesAccording
to Wiehe, these states “rely heavily on taxes that are paid
disproportionately by low- and middle-income households, and have very
little reliance on taxes that the top 1% or top 5% would be responsible
for paying.” In other words, states have to make up for that revenue in
one way or another. Nationwide, personal and corporate income taxes
accounted for an average of nearly 18% of state revenue. Yet in five of
the 10 states, the contribution to revenue from income taxes was less
than 5%. And while sales and excise taxes accounted for less than one
quarter of state revenue on average across the nation, they accounted
for more than 30% of revenue in six of the 10 states with the most
regressive tax policies.While
it is difficult to know the exact degree that these tax policies impact
income inequality, the states with the most regressive tax systems also
had relatively uneven income distribution even before taxes were
applied. In six of the 10 states, the 2013 Gini coefficient -- which has
values between zero and one, where one means all income belongs to a
single person and zero means uniform income distribution -- was higher
than in the majority of states.[Get the Latest Market Data and News with the Yahoo Finance App]To
identify the 10 states with the worst tax systems for average
Americans, 24/7 Wall St. reviewed ITEP’s Tax Inequality Index scores for
the 50 states. The index incorporated effective tax rates for the
poorest 20%, middle 60%, top 1%, as well as ratios comparing these
rates, among other measures. Effective tax rates were based on total
state and local taxes as a share of family income for non-elderly
taxpayers in all 50 states. ITEP’s model used 2012 income figures, and
considered tax laws from 2014 and 2015. Contributions to state revenue
by tax type were also provided by ITEP. We reviewed the Gini coefficient
from 2013 -- which is based on pre-tax income -- as well as additional
economic data from the Census Bureau’s 2013 American Community Survey.These are the states with the worst taxes for the average American.10. Indiana > ITEP index score: -6.6%> Effective tax rate lowest 20%: 12.0% (8th highest)> Effective tax rate top 1%: 5.2% (23rd highest)> 2013 Gini coefficient (pre-tax): 0.46 (17th lowest)A
negative score on the ITEP index means state residents' incomes were
less equal after taxes than they were before taxes. With a score of
-6.6%, Indiana’s tax system was the 10th most regressive among all
states. While what makes a tax code fair is a contentious issue, middle
class families are often among the hardest-hit by regressive tax
policies. Indiana households who earned between $34,000 and $56,000 paid
10.8% of their combined income in state and local taxes, the fourth
highest tax burden among that income group nationwide. Indiana’s
taxation policies may have had an effect on income inequality in the
state. Indiana’s Gini coefficient in 2013 had grown at nearly the
fastest pace from 2009.9. Kansas> ITEP index score: -6.9%> Effective tax rate lowest 20%: 11.1% (13th highest)> Effective tax rate top 1%: 3.6% (11th lowest)> 2013 Gini coefficient (pre-tax): 0.46 (20th lowest)While
Kansas has a graduated income tax structure -- widely regarded as a
progressive feature in a tax code -- the state has no corporate income
tax. This means that the vast majority of businesses in the state are
exempt from paying state taxes. Since business owners tend to have
relatively high incomes, wealthier Kansas residents have likely
benefited from this arrangement. As a share of income, the poorest
families in Kansas paid 310% what the wealthiest 1% of families paid in
state and local taxes, the ninth highest such ratio nationwide. As in
many states, incomes among the wealthiest Kansas residents grew between
2009 and 2013, while incomes among poorer residents shrank. The tax code
in Kansas will likely remain relatively unfair to poorer residents. The
state's aggressive income tax cuts of 2012 and 2013 resulted in a
budget shortfall. To address the shortfall, Governor Sam Brownback
proposed earlier this year to raise several excise taxes.8. Arizona > ITEP index score: -7.1%> Effective tax rate lowest 20%: 12.5% (5th highest)> Effective tax rate top 1%: 4.6% (19th lowest)> 2013 Gini coefficient (pre-tax): 0.47 (20th highest)Families
in Arizona earning $22,000 or less in 2012 paid 12.5% of their incomes
in state and local taxes, the fifth highest rate for that income group
in the country. The wealthiest 1% of Arizona households were subject to
an effective tax rate of only 4.6%, which was also smaller than the
average tax rate for the wealthiest people across the nation of 5.4%. As
in most states ITEP found to have unfair tax systems, sales and excise
taxes were considered particularly regressive. The poorest Arizona
residents paid more than 8% of their incomes in general sales and excise
taxes, while the wealthiest 1% paid just 1% of their incomes in such
taxes. States identified as having regressive tax codes did not
necessarily have dramatic income inequality. Arizona, however, had a
higher Gini coefficient than that of most states, and 18.6% of residents
lived in poverty in 2013, among the highest poverty rates nationwide.Related: Cities Where Crime Is Soaring7. Tennessee > ITEP index score: -7.3%> Effective tax rate lowest 20%: 10.9% (14th highest)> Effective tax rate top 1%: 3.0% (10th lowest)> 2013 Gini coefficient (pre-tax): 0.48 (12th highest)Like
in several other states reviewed, Tennessee does not have an individual
state income tax on earnings, although residents are required to pay a
6% tax on dividends and interest payments. While the lack of an income
tax lowers tax burdens on all residents, it does not do so equally. As a
share of income, Tennessee’s poorest 20% of households paid 366% what
the state’s wealthiest 1% paid in state and local taxes, the seventh
largest such discrepancy nationwide. The income group earning close to
average incomes was also disproportionately taxed. The middle 60% of
earners in the state paid 280% what the wealthiest 1% paid as a share of
income, also the seventh highest such percentage in the country.
Incomes among Tennessee’s wealthiest households grew by nearly 3%
between 2009 and 2013, versus the comparable national growth rate of
0.4%. Among the nation’s less wealthy earners, including those in
Tennessee, incomes shrank.6. Pennsylvania > ITEP index score: -7.3%> Effective tax rate lowest 20%: 12.0% (8th highest)> Effective tax rate top 1%: 4.2% (14th lowest)> 2013 Gini coefficient (pre-tax): 0.47 (18th highest)General
sales and excise taxes on everyday goods such as gas are considered
regressive because while everyone consumes very similar quantities, not
everyone has similar incomes. Pennsylvania, which has a long-term plan
to raise taxes to repair its transportation infrastructure, levies a tax
of 41.8 cents per gallon of gasoline, the fifth highest rate in the
nation. Residents with the lowest 20% of incomes paid 5.8% of their
incomes on sales and excise taxes like these, versus the comparable rate
of 0.6% for the state’s wealthiest residents. Similarly, while property
taxes tend to be levied more proportionately across the nation,
Pennsylvania’s poorest households paid nearly 4% of their income on
their homes, while the wealthiest 1% paid just 1.6%. This was a
relatively large gap compared to other states. Since the bulk of school
funding comes from property taxes, such disparity has prompted some to
argue that Pennsylvania children receive an “education by zip code.”5. Illinois > ITEP index score: -8.1%> Effective tax rate lowest 20%: 13.2% (3rd highest)> Effective tax rate top 1%: 4.6% (19th lowest)> 2013 Gini coefficient (pre-tax): 0.48 (8th highest)The
poorest 20% of Illinois households paid 13.2% of their incomes in state
and local taxes, and the middle 60% of earners paid 10.9% of their
incomes, both nearly the highest effective tax rates respectively.
Meanwhile, the state’s wealthiest residents paid 4.6% of their incomes
in state and local taxes, one of the lower effective tax rates. Looking
just at income tax, the wealthiest 1% paid a slightly higher effective
income tax rate than the poorest 20% of state households. However,
Illinois uses a flat income tax rate, which is widely considered to be a
regressive feature. The state’s wealthiest residents had especially
high incomes. A typical Illinois household in the top quintile earned
more than $200,000 in 2013, the ninth highest compared to the wealthiest
households in other states.4. South Dakota > ITEP index score: -8.4%> Effective tax rate lowest 20%: 11.3% (12th highest)> Effective tax rate top 1%: 1.8% (3rd lowest)> 2013 Gini coefficient (pre-tax): 0.44 (7th lowest)With
an effective tax rate of 1.8%, South Dakota’s wealthiest residents paid
less in state and local taxes as a share of their income than their
peers in nearly every other state. The poorest 20% of families, on the
other hand, paid among the higher effective tax rates. The difference is
due in large part to the complete lack of an income or corporate tax in
the state. While even states with regressive tax systems often exclude
groceries from the sales tax, this is not the case in South Dakota. In
fact, the state relies on consumption taxes as an important revenue
source. Sales and excise taxes accounted for 35.6% of the state’s tax
revenue, higher than the contribution in all but four other states.
Unlike many other state tax systems identified as regressive, income
inequality in South Dakota -- measured before taxes -- was not nearly as
prevalent compared to most states in 2013.Related: States Where the Middle Class Is Dying3. Texas > ITEP index score: -8.5%> Effective tax rate lowest 20%: 12.5% (5th highest)> Effective tax rate top 1%: 2.9% (8th lowest)> 2013 Gini coefficient (pre-tax): 0.48 (9th highest)Texas
is one of a handful of states levying no income tax. While the state
collects a gross receipts tax -- which is a tax on business transactions
-- it does not collect a tax on any corporate profits. As is common in
states with abundant natural resources, the oil and gas industry in
Texas stimulates the economy and helps the state raise revenues from
other sources. Yet, this may not be enough, as the state relies heavily
on sales and excise taxes. These consumption taxes accounted for nearly
32% of the state's revenue, the ninth highest nationwide in fiscal 2012.
The state also does not provide low-income residents with any tax
credits, which help offset sales, excise and property taxes in other
states. Partly as a result, the poorest 20% of Texas families paid an
effective state and local tax rate of 12.5%, higher than in all but a
handful of states, while the wealthiest 1% of families paid less than
3%, one of the lowest rates.2. Florida > ITEP index score: -9.5%> Effective tax rate lowest 20%: 12.9% (4th highest)> Effective tax rate top 1%: 1.9% (4th lowest)> 2013 Gini coefficient (pre-tax): 0.48 (5th highest)As
in other states ITEP identified as having state and local tax systems
that exacerbate income inequality, the lack of a personal income tax in
Florida disproportionately benefits the wealthiest residents of the
state. The lack of income tax also means the state relies more heavily
on sales taxes for its revenues. In fiscal 2012, sales and excise taxes
accounted for 30.8% of the state’s revenue, the 10th highest such share,
and well above the average national rate of 23.7%. The wealthiest 1% of
Florida families paid an effective tax rate of less than 2%, nearly the
lowest rate in that income group.1. Washington> ITEP index score: -12.6%> Effective tax rate lowest 20%: 16.8% (the highest)> Effective tax rate top 1%: 2.4% (5th lowest)> 2013 Gini coefficient (pre-tax): 0.46 (19th lowest)Washington’s
score of -12.6% was the worst in the nation. The poorest 20% of
families paid nearly 17% of their income in state and local taxes, the
highest such rate nationwide. With the wealthiest 1% of state households
paying just 2.4% -- nearly the lowest such rate -- Washington’s tax
system helped widen the income gap more than any other state.
Washington’s poorest residents paid nearly seven times what the
wealthiest 1% paid as a share of income, one of the highest such ratios
nationwide. While Washington’s tax code is considered by many to be
among the nation’s most unfair, residents are better-off financially
than in many other states. A typical household earned $58,405 in 2013,
one of the higher household median incomes. And while 15.8% of Americans
lived in poverty that year, 14.1% did in Washington.
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