Though the predatory nature of capitalism has helped to create the greatest amount of wealth inequality in human history, government taxation policies are also contributing to the enormous income inequality in the U.S., forcing the poor to pay twice as high a percentage of their income in taxes as the rich.
The culprit is the state and local taxes Americans pay on top of the federal taxes. While the federal taxes are relatively progressive, meaning they take a higher percentage from the wealthy than they do the poor and therefore try to address poverty and inequality, the federal efforts are swamped by state and local taxes that take much more from the poor. The regressiveness of state and local taxes was the subject of a new report released this week by the Institute on Taxation and Economic Policy.
This is a huge issue for the nation—not just because it is incredibly unfair but also because it is also slowly destroying state budgets across the U.S. The more income that goes to the wealthy, the slower a state’s revenue grows.
While states are facing dropping revenue derived from income taxes because income for most people has been stagnant for decades, the wealthy manage to shield much of their income from taxes while also spending a lower percentage of their income. This results in a double hit for cash-poor states.
The regressive state and local taxes have a devastating effect on African-Americans, forcing families who are already challenged by economic pressures to send money they don’t have to their localities and the state—and most likely get a smaller share of that money used back in their communities, where government services and schools are likely to receive many fewer resources than they do in predominantly white communities.
The study by the Institute on Taxation and Economic Policy found that the effective state and local tax rates by income group nationwide are 10.9 percent for the bottom 20 percent, 9.4 percent for the middle 20 percent and 5.4 percent for the top 1 percent—meaning the poorest Americans are paying two times more of their income in taxes than the top 1 percent.
At least one silver lining for African-Americans is that the state’s that the Institute concluded had the most regressive tax policies, meaning they hit the poor the hardest, were states that have relatively low Black populations. The top five most regressive were Washington state, Florida, Texas, South Dakota and Illinois. Combined, their Black population is just 9 percent.
The Institute had harsh words for the tax policies of all the states: “The bottom line is that every state fails the basic test of tax fairness. The District of Columbia is the only tax system that requires its best-off citizens to pay as much of their incomes in state and local taxes as the very poorest taxpayers, but middle-income taxpayers in DC pay far more than the top one percent. In other words, every single state and local tax system is regressive and even the states that do better than others have much room for improvement.”
According to the report, the 10 states with the highest taxes on the poor are Arizona, Arkansas, Florida, Hawaii, Illinois, Indiana, Pennsylvania, Rhode Island, Texas, and Washington. Seven of these are also among the “terrible ten” because they are not only high tax for the poorest, but low tax for the wealthiest.
States that are commended for doing the best job in fairness—though they still have significant room for improvement—are California, Delaware, District of Columbia, Minnesota, Montana, Oregon and Vermont.
Compared to other economic powers, the US does one of the worst jobs in using taxes to equalize the playing field. Before you apply taxes, the United States is the 10th most unequal of the 31 wealthy OECD (Organization for Economic Co-operation and Development) countries. After taxes, the US is the fourth most unequal, behind Chile, Mexico, and Turkey.
If state and local government don’t take steps to reform their tax structures, the staggering inequality in the U.S. will only get worse and the poorest families will continue to suffer.