Comparing Regressivity and Tax Burden

by Mark Huonder

As we evaluate individual taxes and eventually put them all together into our discussion of revenue structures as a whole, an important aspect of tax systems to keep in mind is the idea of regressivity.  In January 2013, the Institute on Taxation and Economic Policy (ITEP) released the 4^th Addition of the Who Pays Report, which analyzes the tax structures of individual states, focusing mainly on the aspect of regressivity.  This post will primarily be a summation of this report and will provide commonalities between the most regressive states. An analysis between regressivity and tax burden will conclude the research.

The “Terrible Ten”

The Who Pays Report specifically isolates the ten most regressive states into a list that it deems, “The Terrible Ten.”  On average, the lowest 20% earners in these states contribute 12.6% of their income, whereas the top 1% contributes 3.6% of their earnings.  Below is a breakdown of the “Terrible Ten.” 

Common Traits

-Four of the most regressive states (Texas, South Dakota, Florida and Washington) do not have a State Income Tax, which the ITEP considers to provide the best opportunity to improve progressivity.

-Three states (Pennsylvania-3.06%, Illinois-5 %, and Indiana-3.4%) implement a flat rate income tax.  

- These states exhibit a relatively high reliance on the sales tax, which is considered by the ITEP to be the most regressive tax.  As cited from the report, “Because sales taxes are levied at a flat rate, and because spending as a share of income falls as income rises, sales taxes inevitably take a larger share of income from low- and middle-income families than they take from the rich.”

- Four of the ten most regressive states have a tax on groceries, which is considered particularly regressive as lower-income families spend a higher percentage of their income on necessities. 

Measuring Regressivity against Tax Burden

In its October 2012 report, the Tax Foundation calculates tax burden by, “totaling the amount of state and local taxes paid by state residents to both their own and other governments and then divide these totals by each state’s total income.” Below is the map and rankings produced in that report. 

The average tax burden of the so-called “Terrible Ten” is 8.7%, which is significantly lower than the national average, which is 9.9%  Of the top ten most-regressive states, four were among the lowest ten of tax burden (Alaska, South Dakota, Tennessee, and Texas) and only one is in the top ten of the most tax burdened (Pennsylvania.)   

Another interesting finding from the comparison of the two reports is that the average sales tax was significantly higher (27.4%) for the most-regressive states the than the average sales tax (23%) for other states.  This makes sense, as states need to generate revenue from other tax sources, since many of the “Terrible Ten” relied very little on the income tax. However, the property tax rates for the most-regressive states and the other states were very similar.