Drum roll please.
The state with the most regressive tax system in the United States is....
Washington state.
If you live in Washington state you may have already suspected that was the case.
This July 20, 2019 New York Times editorial "State and Local Taxes are Worsening Inequality" and this 2018 study Who Pays? by the non-partisan Institute for Taxation and Economic Policy discuss the regressive/progressive state taxes for each state.
What does it mean to say a tax is regressive?
In a regressive tax system a low income tax payer pays a higher proportion of their income in taxes then a high income tax payer. Some examples of regressive taxes include sales taxes, property taxes, sin taxes, user fees, gas taxes, vehicle licensing fees and the payroll social security tax.
In contrast to a regressive tax system, a progressive tax system is intended to cause higher wage earners to pay a greater percentage of their income in taxes than lower wage earners. State and Federal income taxes are structured as progressive taxes.
Why are regressive taxes a bad thing?
If we assume for discussion purposes that in order to live a person must purchase $20,000 in items annually that are subject to a 50% sales tax. In other words they pay $10,000 a year in sales taxes. Then -
Someone earning $20,000 is paying 50% of their income in sales taxes, someone earning $50,000 is paying 20% of their income in sales taxes, someone earning $100,000 is paying 10%, someone earning $200,000 is paying 5%, and someone earning $1,000,000 is paying 1%.
The example is overly simplified and used only to illustrate the inequality of a sales tax. I chose the 50% tax rate to make the arithmetic easier. The relative difference in percentage of income paid between each income group will be the same regardless of the rate chosen.
Each of these regressive taxes and fees have their own unique set of rules but they all end up with the net effect of lower income people paying a greater share of their income in taxes and fees than higher income people.
In Washington state the effect is that the poorest 20% pay 17.8% of their income in state taxes, the middle 60% pay 10.9% and the top 1% pay 3% of their income in taxes according to the Who Pays? study.
The state with the least regressive, most progressive, tax system is California according to the paper because, "California’s overall tax system is relatively progressive largely because of graduated marginal income tax rates, additional tax on income over $1 million, and limits on tax breaks for upper-income taxpayers."
One more specific example of a regressive tax is the social security payroll tax. This description comes from Investopedia -
"Social Security tax obligations are capped at a certain level of income called a wage base—$132,900 in 2019. An individual's earnings above this base are not subject to the 6.2% Social Security tax. Therefore, the annual maximum that an individual pays in Social Security tax is capped at $8,239.80 in 2019, whether she earns $132,901 or $1 million."
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The following information comes from the 2018 study Who Pays? by the non-partisan Institute for Taxation and Economic Policy -
"The 10 states with the highest taxes on the poor are Arizona, Florida, Hawaii, Illinois, Indiana, Iowa, Oklahoma, Pennsylvania, Texas, and Washington. Six of these are also among the “terrible ten” because they are not only high-tax for the poorest, they are also low-tax for their richest residents."There are several effects of this sort of tax inequality where poor and middle class pay high taxes while the wealthiest individuals pay low taxes.
The most obvious is that most people (since there are way more poor and middle class people than wealthy people) believe they are paying too much in taxes.
Slightly less obvious is that wealthy people who can buy lots more free speech in the popular media with their wealth, then disingenuously "help" poor people make the case that "our" taxes are too darn high.
The most insidious effect of high taxes on the poor and low taxes for the wealthy is a gradual deterioration of the ability of the government to function at all. We see this in the deterioration of public schools, public infrastructure, and the ability of our nation to care for those unable to care for themselves (the mentally ill and the addicted). We see a downward spiral where government is insufficiently funded, therefore becomes more dysfunctional and causes more people to object to paying taxes to fund a broken system.
Under funding the government is a feature of the radical libertarian ideology implanted into our society by Ronald Reagan, Grover Norquist and the Kochtopus. If your ideology is such that all government programs and regulations are bad and you can't see any other side to the story you are a radical and also seriously misinformed or under-informed.
This should not come as a surprise since being misinformed or under-informed is a key feature to becoming a radical. If you look at any societal or governmental issue and propose there is a simple one size fits all solution (cut taxes for the wealthy/cut regulations for the polluters/Medicare for all/raise taxes for the wealthy) then you haven't looked hard enough. To put it another way if you are absolutely sure of your position regarding a complex societal or governmental issue then you don't know enough about the issue. Knowledge brings humility.
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The 2018 study Who Pays? by the non-partisan Institute for Taxation and Economic Policy is 140 some pages but the studies summary provides these seven main findings -
1. THE VAST MAJORITY OF STATE AND LOCAL TAX SYSTEMS ARE INEQUITABLE AND UPSIDE-DOWN, taking a much greater share of income from low- and middle-income families than from wealthy families. The absence of a graduated personal income tax in many states and an over reliance on consumption taxes contribute to this longstanding problem.
2. THE LOWER ONE’S INCOME, THE HIGHER ONE’S OVERALL EFFECTIVE STATE AND LOCAL TAX RATE. On average, the lowest-income 20 percent of taxpayers face a state and local tax rate more than 50 percent higher than the top 1 percent of households. The nationwide average effective state and local tax rate is 11.4 percent for the lowest-income 20 percent of individuals and families, 9.9 percent for the middle 20 percent, and 7.4 percent for the top 1 percent.
3. TAX STRUCTURES IN 45 STATES EXACERBATE INCOME INEQUALITY. Most state and local tax systems worsen income inequality by making incomes more unequal after collecting state and local taxes. Five states and the District of Columbia somewhat narrow the gap between lower- and middle- income taxpayers and upper-income taxpayers, making income slightly more equitable after collecting state and local taxes.
4. IN THE 10 STATES WITH THE MOST REGRESSIVE TAX STRUCTURES (THE TERRIBLE 10), THE LOWEST-INCOME 20 PERCENT PAY UP TO SIX TIMES AS MUCH OF THEIR INCOME IN TAXES AS THEIR WEALTHY COUNTERPARTS. Washington State is the most regressive, followed by Texas, Florida, South Dakota, Nevada, Tennessee, Pennsylvania, Illinois, Oklahoma, and Wyoming.
5. HEAVY RELIANCE ON SALES AND EXCISE TAXES ARE CHARACTERISTICS OF THE MOST REGRESSIVE STATE TAX SYSTEMS. Six of the 10 most regressive states derive roughly half to two-thirds of their tax revenue from sales and excise taxes, compared to a national average of about one-third. Seven of these states do not levy a broad-based personal income tax while the remaining three have a personal income tax rate structure that is flat or virtually flat. A calculation of effective sales and excise tax rates finds that, on average, the lowest-income 20 percent pays 7.1 percent, the middle 20 percent pays 4.8 percent and the top 1 percent pays a comparatively meager 0.9 percent rate.
6. A PROGRESSIVE GRADUATED INCOME TAX IS A CHARACTERISTIC OF THE LEAST REGRESSIVE STATE TAX SYSTEMS. States with the most equitable state and local tax systems derive, on average, more than one-third of their tax revenue from income taxes, which is above the national average of 27 percent. These states promote progressivity through the structure of their income taxes, including their rates (higher marginal rates for higher-income taxpayers), deductions, exemptions, and use of targeted refundable credits.
7. STATES COMMENDED AS “LOW-TAX” ARE OFTEN HIGH-TAX FOR LOW AND MIDDLE-INCOME FAMILIES. The 10 states with the highest taxes on the poor are Arizona, Florida, Hawaii, Illinois, Indiana, Iowa, Oklahoma, Pennsylvania, Texas, and Washington. Six of these are also among the “terrible ten” because they are not only high-tax for the poorest, they are also low-tax for their richest residents.