Who Pays? Distributional Analysis of State Tax Systems
February 13, 2003 10:20 AM Subscribe
Most state tax systems are regressive. That's the thesis of "Who Pays: A Distributional Analysis of the Tax Systems In All 50 States" published by the Institute on Taxation and Economic Policy. The writers argue that states actually augment the effects of the Bush tax plan by replacing income taxes with sales and property taxes, a move that disproportionately hurts the poor and middle classes. Scroll down to the charts to see how your state matches up. (Link is PDF 653 KB, and is summarized at TomPaine.com. Via Talking Points Memo.)
Well, I think probably the biggest obstacle to more progressive tax systems in the states is the huge populist opposition to it in many states. Tennessee recently had near-riots over the possibility that the state might institute an income tax. For lots of other states, a low or nonexistent income tax helps them to draw in rich people, who theoretically are good for the local economies. Rich people that work in NYC tend to live in Connecticut for tax reasons, which is great for CT but bad for NY. People retire to Florida so much in part because there is no income tax down there. So the tax systems actually do affect behavior and thus, the regressivity of it all. That's not necessarily a good reason for a regressive tax regime, but it is a factor that the report totally ignores.
Also, I didn't see the part where it argues that the regressive state regimes "augment" the Bush tax plan. Are you saying that the Bush plan will magnify the regressivity of state tax systems somehow? Or just that both systems are regressive and therefore the two combined are even more regressive?
posted by boltman at 11:07 AM on February 13, 2003
Also, I didn't see the part where it argues that the regressive state regimes "augment" the Bush tax plan. Are you saying that the Bush plan will magnify the regressivity of state tax systems somehow? Or just that both systems are regressive and therefore the two combined are even more regressive?
posted by boltman at 11:07 AM on February 13, 2003
The reason most states are looking to impose personal graduated income taxes recently as I understand it is that they relied on corporate revenue sources (corporate income taxes, sales taxes, property taxes etc.) through out the long 90's boom. Since these sources of revenue dried up with the DotCom crash, and these states are prohibited by their respective constitutions from deficit spending, they're now finding themselves committed to a number of public programs which in fact they cannot afford to pay for. Tennessee's income tax was intended to pay for TennCare, a semi-socialised health care system.
What one ought to realise though, is that government is unlikely to cut sales and property taxes should a graduated income tax be implemented, unfortunately.
posted by Pseudoephedrine at 11:13 AM on February 13, 2003
What one ought to realise though, is that government is unlikely to cut sales and property taxes should a graduated income tax be implemented, unfortunately.
posted by Pseudoephedrine at 11:13 AM on February 13, 2003
on preview:
vis10n, there's an economic principle known as the declining marginal value of money. It states that every additional dollar of income has slightly less value than the one before. This is a fancy way of saying that $10 for a person earning $500K/year is worth less (from the perspective of welfare economics) than $10 for a person earning $20K/year. Because of this principle, if you take away $10 from the rich person you are actually taxing them less than if you take away $10 from the poor person. So, in that sense, it's not misleading at all.
posted by boltman at 11:16 AM on February 13, 2003
vis10n, there's an economic principle known as the declining marginal value of money. It states that every additional dollar of income has slightly less value than the one before. This is a fancy way of saying that $10 for a person earning $500K/year is worth less (from the perspective of welfare economics) than $10 for a person earning $20K/year. Because of this principle, if you take away $10 from the rich person you are actually taxing them less than if you take away $10 from the poor person. So, in that sense, it's not misleading at all.
posted by boltman at 11:16 AM on February 13, 2003
Boltman, I understand the concept... I'm an erstwhile economics major, and a fairly astute observer otherwise. My problem is that if one is going to use a basis of comparison that differs from the standard, you should be up-front.
It's not an enormous issue... but I'd rather eat my news without spin.
(I know: fat chance of that!)
posted by silusGROK at 11:32 AM on February 13, 2003
It's not an enormous issue... but I'd rather eat my news without spin.
(I know: fat chance of that!)
posted by silusGROK at 11:32 AM on February 13, 2003
I actually stopped working in NYC (i live in CT) because not only do they get you for state taxes, but there is a metropolitan tax if you work in Manhattan, and then the state you live in always gets a little in the end too. The three years I did that were a nightmare.
But then again, this is the first time since I stopped working in NYC that I ended up owing the state of CT money. Hmmmm.
posted by archimago at 11:40 AM on February 13, 2003
But then again, this is the first time since I stopped working in NYC that I ended up owing the state of CT money. Hmmmm.
posted by archimago at 11:40 AM on February 13, 2003
there's an economic principle...
On Tuesday, Mr. Bush's newly confirmed Treasury Secretary John Snow said balanced budgets can actually damage the economy.
posted by larry_darrell at 11:44 AM on February 13, 2003
On Tuesday, Mr. Bush's newly confirmed Treasury Secretary John Snow said balanced budgets can actually damage the economy.
posted by larry_darrell at 11:44 AM on February 13, 2003
In real terms, the utility of wealth and the cost of spending vs. saving are absolutely standard measurements. Consider:
A and B both live in a state with a flat 5% sales tax.
Person A makes $200,000 a year and buys a $40,000 car. His sales tax on the purchase is $2,000, or 1.0% of his income.
Person B makes $30,000 a year and buys a $15,000 car. His sales tax is $750, or 2.5% of his income.
Put another way, Person B is likely spending over 90% of his income on consumable necessities - rent, food, healthcare, etc. Person A lives much more comfortably and has much higher expenses but even so may only be spending 50% of his income. There's no public policy justification for local governments to ignore this when they compute individual tax liabilities.
posted by PrinceValium at 11:50 AM on February 13, 2003
A and B both live in a state with a flat 5% sales tax.
Person A makes $200,000 a year and buys a $40,000 car. His sales tax on the purchase is $2,000, or 1.0% of his income.
Person B makes $30,000 a year and buys a $15,000 car. His sales tax is $750, or 2.5% of his income.
Put another way, Person B is likely spending over 90% of his income on consumable necessities - rent, food, healthcare, etc. Person A lives much more comfortably and has much higher expenses but even so may only be spending 50% of his income. There's no public policy justification for local governments to ignore this when they compute individual tax liabilities.
posted by PrinceValium at 11:50 AM on February 13, 2003
Nice links. This is the first year in which I will actually pay for what my state and country gives me (read: get screwed in taxes). With that in mind, I have been increasingly paying attention to this stuff. That and I just got married, and we don't own any property, now i am back to the getting screwed part - oh well...
Thanks nontheless for the enlightenment (thank jeebus we live in Cali and are (now) middle class I guess)
posted by Big_B at 11:52 AM on February 13, 2003
Thanks nontheless for the enlightenment (thank jeebus we live in Cali and are (now) middle class I guess)
posted by Big_B at 11:52 AM on February 13, 2003
I've always gotten a kick out of how people feel it's perfectly reasonable to discriminate against someone based on the income they make when charging taxes. Just because someone makes more than you doesn't give you the right to take more of their money away.
I also question some of the things they say in that study. Among other things, they mention that Michigan doesn't have a homestead exemption for property taxes. One of the forms I filled out when buying my house was the application for the homestead exemption. (And if you don't fill it out, you pay far more in property taxes, and I think if you buy the house after a certain point in the year you can't claim it for that first tax year).
posted by piper28 at 12:22 PM on February 13, 2003
I also question some of the things they say in that study. Among other things, they mention that Michigan doesn't have a homestead exemption for property taxes. One of the forms I filled out when buying my house was the application for the homestead exemption. (And if you don't fill it out, you pay far more in property taxes, and I think if you buy the house after a certain point in the year you can't claim it for that first tax year).
posted by piper28 at 12:22 PM on February 13, 2003
Perhaps it would help you understand, piper28, if you considered that tax is on money, or wealth, not on people or horses. If you have more money then if follows that your tax burden would be greater. That's progressive and not at all unfair. I just wish I made enough money to have to pay $100,000 in taxes. I guarantee I would not complain.
Many people expect the services that taxes afford but want someone else to pay for it. That isn't right. (picture offshore corps)
Others would point to their religious beliefs that to whom much is given much is also expected. Won't hear Falwell preach that one. And how about the render unto Caesar what is Caesar's? Will that preach?
posted by nofundy at 1:11 PM on February 13, 2003
Many people expect the services that taxes afford but want someone else to pay for it. That isn't right. (picture offshore corps)
Others would point to their religious beliefs that to whom much is given much is also expected. Won't hear Falwell preach that one. And how about the render unto Caesar what is Caesar's? Will that preach?
posted by nofundy at 1:11 PM on February 13, 2003
I've always gotten a kick out of how people feel it's perfectly reasonable to discriminate against someone based on the income they make when charging taxes
Well, I've always gotten a kick out of how people feel that the very rich have some sort of moral entitlement to huge capital gains (i.e. interest income) that they "earned" solely by having vast quanities of wealth to invest in the first place.
posted by boltman at 1:26 PM on February 13, 2003
Well, I've always gotten a kick out of how people feel that the very rich have some sort of moral entitlement to huge capital gains (i.e. interest income) that they "earned" solely by having vast quanities of wealth to invest in the first place.
posted by boltman at 1:26 PM on February 13, 2003
PrinceValium, nice article. Given that states are experiencing the worst fiscal outlook since World War II, I think the unequal state tax burden on the poor is likely to grow if voters don't get involved.
Not only are states relying more heavily on sales taxes, but as the article points out, there has been a massive increase in cigarette taxes across the states. The cigarette tax increases have also contributed to the larger tax burden (as a percentage of income) the poor are shouldering now.
What's more, many states with estate tax systems that piggyback on the federal scheme have lost large amounts of revenue due to the federal phase-out. Florida, for instance, is one state that ties its estate tax to the federal system, and is already losing revenue due to the estate tax repeal. Some states are decoupling from the federal system, but some are trying to make up for revenue shortfalls through budget cuts.
Those of you who live in New York should be aware that Governor Pataki's 2003 budget proposal calls for eliminating the sales tax exemption for items of clothing costing less than $110. If Pataki's proposal is passed by the legislature, the sales tax burden on the poor in the state will increase significantly.
Archimago--the former New York City commuter tax was ruled unconstitutional several years back (after the state legislature amended it so that it only applied to city nonresident commuters). While Bloomberg has called for a revival and expansion of the tax, Pataki is completely opposed. I just thought I'd mention this development since you said that you're working outside of NYC due to the burden of the former commuter tax.
posted by maud at 2:15 PM on February 13, 2003
Not only are states relying more heavily on sales taxes, but as the article points out, there has been a massive increase in cigarette taxes across the states. The cigarette tax increases have also contributed to the larger tax burden (as a percentage of income) the poor are shouldering now.
What's more, many states with estate tax systems that piggyback on the federal scheme have lost large amounts of revenue due to the federal phase-out. Florida, for instance, is one state that ties its estate tax to the federal system, and is already losing revenue due to the estate tax repeal. Some states are decoupling from the federal system, but some are trying to make up for revenue shortfalls through budget cuts.
Those of you who live in New York should be aware that Governor Pataki's 2003 budget proposal calls for eliminating the sales tax exemption for items of clothing costing less than $110. If Pataki's proposal is passed by the legislature, the sales tax burden on the poor in the state will increase significantly.
Archimago--the former New York City commuter tax was ruled unconstitutional several years back (after the state legislature amended it so that it only applied to city nonresident commuters). While Bloomberg has called for a revival and expansion of the tax, Pataki is completely opposed. I just thought I'd mention this development since you said that you're working outside of NYC due to the burden of the former commuter tax.
posted by maud at 2:15 PM on February 13, 2003
Follow-up regarding the unconstitutionality of the NYC commuter tax: I meant to say that it was ruled unconstitutional after the state legislature amended it so that it only applied to out-of-state nonresident commuters. (I.e., those who lived in New York State but not New York City were not subject to the tax after the amendment.)
posted by maud at 2:26 PM on February 13, 2003
posted by maud at 2:26 PM on February 13, 2003
the very rich have some sort of moral entitlement to huge capital gains (i.e. interest income)
First of all, capital gains aren't interest income. Capital gains are the profit that one realizes if an investment is sold above it's purchase price. It's just as easy to invest in something that cannot be sold for a profit.
And for what it's worth, the capital gains tax is one of the hardest hitting taxes around. The "very wealthy" are paying a whopping 39.1% if the property was held for less than a year, or a more reasonable 20% if the property was held for more than a year. A policy which encourages the wealthy to invest in enterprises for the long-term, which has obvious economic benefits, since it encourages investment rather than merely stashing money into bank accounts that pay a guaranteed 5% APY.
Additionally, if that wealthy person has managed to get an effective tax rate below approximately 27%, alternative minimum tax rules kick in. These rules basically say that almost nothing is deductible, and you must pay at least 26% on the first $175k of profit, and 28% on additional income. You figure your taxes under both sets of rules, then are forced to pay whichever is higher.
You may not like that the rich have money, but to insinuate that their investments provide no secondary benefits, or that they don't support their fair share of the government is ridiculous.
posted by mosch at 2:33 PM on February 13, 2003
First of all, capital gains aren't interest income. Capital gains are the profit that one realizes if an investment is sold above it's purchase price. It's just as easy to invest in something that cannot be sold for a profit.
And for what it's worth, the capital gains tax is one of the hardest hitting taxes around. The "very wealthy" are paying a whopping 39.1% if the property was held for less than a year, or a more reasonable 20% if the property was held for more than a year. A policy which encourages the wealthy to invest in enterprises for the long-term, which has obvious economic benefits, since it encourages investment rather than merely stashing money into bank accounts that pay a guaranteed 5% APY.
Additionally, if that wealthy person has managed to get an effective tax rate below approximately 27%, alternative minimum tax rules kick in. These rules basically say that almost nothing is deductible, and you must pay at least 26% on the first $175k of profit, and 28% on additional income. You figure your taxes under both sets of rules, then are forced to pay whichever is higher.
You may not like that the rich have money, but to insinuate that their investments provide no secondary benefits, or that they don't support their fair share of the government is ridiculous.
posted by mosch at 2:33 PM on February 13, 2003
You may not like that the rich have money, but to insinuate that their investments provide no secondary benefits, or that they don't support their fair share of the government is ridiculous.
I wasn't insinuating anything about appropriate tax policy. I just think its arguable from a moral perspective whether investment income (whether it be interest or capital gains--my bad for equating the two) should be viewed as equivalent to income from wages (i.e. actual work). Obviously, there are sound policy reasons to provide adequte tax incentives for investment. But piper, by using the word "discriminate," seemed to be arguing that the rich have some sort of moral right to be taxed at the same rate as working-class people. My point was that people with hight net wealth get an awful lot of their incomes from investments, and thus, have less of a moral claim to it since it is not a direct product of their own labor. It's the same idea that has been articulated by everyone from John Locke to Adam Smith, that the strength of your moral entitlement to money or property is based on the labor you put into creating it.
Which tax rates produce optimal economic efficiency is a totally different question that I was not trying to respond to. As to whether the rich are pulling their "fair share," given that tax rates in this country are nearly the lowest in the industrialized world and even quite low relative to historical income tax rates in this country, I think that is a highly debatable question.
posted by boltman at 4:14 PM on February 13, 2003
I wasn't insinuating anything about appropriate tax policy. I just think its arguable from a moral perspective whether investment income (whether it be interest or capital gains--my bad for equating the two) should be viewed as equivalent to income from wages (i.e. actual work). Obviously, there are sound policy reasons to provide adequte tax incentives for investment. But piper, by using the word "discriminate," seemed to be arguing that the rich have some sort of moral right to be taxed at the same rate as working-class people. My point was that people with hight net wealth get an awful lot of their incomes from investments, and thus, have less of a moral claim to it since it is not a direct product of their own labor. It's the same idea that has been articulated by everyone from John Locke to Adam Smith, that the strength of your moral entitlement to money or property is based on the labor you put into creating it.
Which tax rates produce optimal economic efficiency is a totally different question that I was not trying to respond to. As to whether the rich are pulling their "fair share," given that tax rates in this country are nearly the lowest in the industrialized world and even quite low relative to historical income tax rates in this country, I think that is a highly debatable question.
posted by boltman at 4:14 PM on February 13, 2003
right on, boltman.
Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.
-Abraham Lincoln (Republican)
December 3, 1861
posted by Ty Webb at 4:33 PM on February 13, 2003
Labor is prior to, and independent of, capital. Capital is only the fruit of labor, and could never have existed if labor had not first existed. Labor is the superior of capital, and deserves much the higher consideration.
-Abraham Lincoln (Republican)
December 3, 1861
posted by Ty Webb at 4:33 PM on February 13, 2003
Perhaps it would help you understand, piper28, if you considered that tax is on money, or wealth, not on people or horses. If you have more money then if follows that your tax burden would be greater. That's progressive and not at all unfair.
No, it's completely unfair. You may not agree with it, but there's nothing fair in saying that just because you make more money, you get to pay a higher percentage of that. It's convenient for people to say "well, you make more, so it doesn't hurt you to pay a significantly higher percentage of your income, so you should." That doesn't mean it's right. "Progressive" is just a code word for rob from the rich (and not necessarily all that rich) and give to the poor.
15% of 100k is still a lot larger than 15% of 20k. Arguing that they're not paying their share of the taxes and need to be charged a higher percentage is just an attempt by certain groups to try to enact wealth redistribution.
posted by piper28 at 5:43 PM on February 13, 2003
No, it's completely unfair. You may not agree with it, but there's nothing fair in saying that just because you make more money, you get to pay a higher percentage of that. It's convenient for people to say "well, you make more, so it doesn't hurt you to pay a significantly higher percentage of your income, so you should." That doesn't mean it's right. "Progressive" is just a code word for rob from the rich (and not necessarily all that rich) and give to the poor.
15% of 100k is still a lot larger than 15% of 20k. Arguing that they're not paying their share of the taxes and need to be charged a higher percentage is just an attempt by certain groups to try to enact wealth redistribution.
posted by piper28 at 5:43 PM on February 13, 2003
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Problem with lambasting "regressive" tax systems that are regressive because they rely heavily on sales tax, is that both sides of the aisle use sales taxes for social engineering of one sort or another... so there's little room to throw any dirt.
Moreover, saying that the poor pay "more" in taxes when what they're really saying is that the poor pay a greater share of their income is disingenuous.
posted by silusGROK at 10:59 AM on February 13, 2003