Top 10 Most Regressive Tax States

The state and local tax systems have flat or no income tax and high sales and excise taxes

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State tax systems rake in a much larger share from middle- and low-income families than from wealthy families, according to a study released Wednesday by the nonprofit Institute on Taxation and Economic Policy.

For all of the combined state and local income, property, sales and excise taxes state residents pay, the average overall effective tax rates by income group nationwide are 11.1% for the bottom 20%, 9.4% for the middle 20% and 5.6% for the top 1%, the study found.

The fourth edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States” reported that in the 10 states whose tax systems most favor high earners, middle-income families pay up to three times as high a share of their income as the wealthiest families; low-income families pay up to six times as much.

“We know that governors nationwide are promising to cut or eliminate taxes, but the question is who’s going to pay for it,” Matthew Gardner, executive director of ITEP and an author of the study, said in a statement.

“There’s a good chance it’s the so-called takers who spend so much on necessities that they pay an effective tax rate of 10% or more, due largely to sales and property taxes. In too many states, these are the people being asked to make up the revenues lost to income tax cuts that overwhelmingly benefit the wealthiest taxpayers."

State consumption tax structures are particularly regressive, he said, with an average 7% rate for the poor, a 4.6% rate for middle incomes and a 0.9% rate for the wealthiest taxpayers nationwide.

The study found that of the 10 most regressive states, four have no taxes on personal income, one state applies it only to interest and dividends and the other five have a flat or virtually flat personal income tax across all income groups.

Five of the 10 most regressive tax systems rely heavily on regressive sales and excise taxes, deriving roughly half to two-thirds of their tax revenue from these taxes, compared with the national average of 34% in FY09-10.

In contrast, the study found that the least regressive tax systems—those of Delaware, District of Columbia, New York, Oregon and Vermont—had highly progressive income taxes and relied less on sales and excise taxes.

“Cutting the income tax and relying on sales taxes to make up the lost revenues is the surest way to make an already upside-down tax system even more so,” Gardner said.

Following are the 10 most regressive tax states, with each income group's effective tax rate, according to ITEP.

The capitol in Montgomery, Ala. (Photo: AP)10. ALABAMA

Bottom 20%: 10.2%

Middle 60%: 9.4%

Top 1%: 3.8%

Progressive Features

  • Provides one of the largest property tax homestead exemptions in the country

Regressive Features

  • Narrow income tax brackets mean majority of taxpayers pay top income tax rate
  • Sales tax base includes groceries
  • Fails to provide a credit designed to offset sales tax on groceries
  • Offers an income tax deduction for federal income taxes paid

Recent Developments

  • Enacted double-weighted sales factor ap­portionment rules for calculating the corporate income tax


9. INDIANA

Bottom 20%: 12.3%

Middle 60%: 10.7%

Top 1%: 5.4%

Progressive Features

  • Provides a refundable earned income tax credit
  • Sales tax base excludes groceries

Regressive Features

  • Income tax uses a single rate structure
  • Comparatively low income tax exemptions

Recent Developments

  • Enacted a gradual phase-out of the state’s inheritance tax
  • Enacted a gradual reduction in the corpo­rate income tax rate from 8.5% to 6.5%
  • Amazon will begin to collect sales tax from online purchases

The Liberty Bell in Philadelphia. (Photo: AP)8. PENNSYLVANIA

Bottom 20%: 12%

Middle 60%: 9.8%

Top 1%: 4.4%

Progressive Features

  • Provides a nonrefundable “tax forgiveness” credit to low-income taxpayers

Regressive Features

  • Income tax uses a single rate structure
  • Fails to use combined reporting as part of its corporate income tax

Recent Developments

  • Single-sales factor apportionment rules for calculating corporate income taxes fully phased in

 

7. ARIZONA

Bottom 20%: 12.9%

Middle 60%: 9.7%

Top 1%: 4.7%

Progressive Features

  • Income tax uses a graduated rate structure
  • Provides an income tax credit to offset the impact of sales tax
  • Sales tax base excludes groceries

Regressive Features

  • Provides a partial income tax exclusion for capital gains income
  • Comparatively high reliance on sales taxes
  • Comparatively high cigarette tax rate
  • Fails to provide an earned income tax credit

Recent Developments

  • Enacted a new capital gains exclusion from the personal income tax (applying only to assets purchased after 2011, and equal to 10% of gains in 2013, 20% in 2014 and 25% in 2015 and beyond)
  • Enacted a phased-in reduction in corporate income taxes that will cut the state rate to 4.9%
  • Enacted single-sales factor apportionment rules for calculating the corporate income tax (phased-in over 4 years)

Nashville, Tenn. (Photo: AP)6. TENNESSEE

Bottom 20%: 11.2%

Middle 60%: 8.6%

Top 1%: 2.8% 

Progressive Features

  • Taxes interest and dividend income

Regressive Features

  • No broad-based personal income tax
  • Comparatively high reliance on sales taxes
  • Groceries included in sales tax base, but taxed at a lower rate than other items

Recent Developments

  • Sales tax rate on groceries lowered from 5.5% to 5.25%
  • Amazon will begin to collect sales tax from online purchases in 2014
  • Gradual elimination of inheritance tax

 

5. TEXAS

Bottom 20%: 12.6%

Middle 60%: 8.8%

Top 1%: 3.2% 

Progressive Features

  • Sales tax base excludes groceries
  • Requires the use of combined report­ing

Regressive Features

  • No personal income tax
  • Fails to provide a property tax “circuit breaker” credit for non-elderly taxpayers

Recent Developments

  • Amazon will begin to collect sales tax from online purchases

The Chicago skyline. (Photo: AP)4. ILLINOIS

Bottom 20%: 13.8%

Middle 60%: 11.1%

Top 1%: 4.9% 

Progressive Features

  • Provides a refundable earned income tax credit
  • Provides a nonrefundable property tax credit

Regressive Features

  • Income tax uses a single rate structure
  • Comparatively low income tax exemptions
  • All business income is exempted through the personal income tax

Recent Developments

  • Temporarily increased personal and corpo­rate income tax rates
  • Increased and indexed the personal exemp­tion
  • Doubled refundable earned-income tax credit

 

3. South Dakota

Bottom 20%: 11.6%

Middle 60%: 8.2%

Top 1%: 2.1%

Progressive Features

  • No significant progressive features

Regressive Features

  • No personal income tax
  • Sales tax base includes groceries
  • No corporate income tax

Recent Developments

  • Eliminated refund for low-income taxpay­ers to offset impact of sales tax on food

Man fishing off the MacArthur Causeway in Miami. (Photo: AP)2. FLORIDA

Bottom 20%: 13.2%

Middle 60%: 8.3%

Top 1%: 2.3%

Progressive Features

  • Sales tax base excludes groceries

Regressive Features

  • No personal income tax
  • Comparatively high reliance on sales taxes

Recent Developments

  • Raised exemption from Corporate Income Tax to $50,000 (from $5,000)

 

1. WASHINGTON

Bottom 20%: 16.9%

Middle 60%: 10.5%

Top 1%: 2.8%

Progressive Features

  • Provides a refundable earned-income tax credit contingent on state appropria­tion

Regressive Features

  • No personal income tax
  • Comparatively high reliance on sales taxes
  • Comparatively high combined state and local sales tax rate

Recent Developments

  • Increased cigarette tax
  • Increased alcohol tax

 

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