After a presidential election campaign during which tax fairness debates figured prominently, the battle has now emphatically shifted to the states. Louisiana Gov. Bobby Jindal, for instance, recently announced his support for a "flatter, fairer" tax code, and lawmakers in more than a dozen other states are poised to grapple with major tax legislation in 2013. But how unfair are state tax systems right now -- and how can these flaws be remedied?
What the numbers tell us is astonishing. In almost every state, low- and middle-income families currently pay more of their income in state and local taxes than the best-off taxpayers pay. Nationwide, the poorest 20 percent of taxpayers pay 11.1 percent of their income in sales, property and income taxes -- while the best-off 1 percent pay just 5.6 percent. In other words, the best-off Americans are paying about half as much of their income in state and local taxes as those living on the margins of poverty. Middle income families pay more too -- 9.4 percent on average nationwide.
The reasons for this unconscionable inequity are straightforward. State and local governments typically rely on three types of taxes: income, sales and property. Sales taxes are inherently regressive, falling most heavily on low-income families, because poor families spend most or all of their income just getting by, while the better-off a family, the less of their total income they need to spend, on anything. Property taxes also tend to fall most heavily on the poor. This leaves only the personal income tax as a potential source of tax fairness. And many states' income taxes are either flat or only mildly progressive
In this context, a "fairer and flatter" tax system sounds like exactly the right step to take because it would mean requiring the best-off taxpayers to pay their fair share, while sheltering low-income families from the impact of regressive sales taxes. However, when elected officials, such as Gov. Jindal, call for a "flatter" tax system, their policy prescriptions often would make the inequities worse rather than better. Calls to replace the state's modestly progressive income tax with a higher sales tax, from Louisiana to Kansas, Nebraska, North Carolina and elsewhere, would inevitably shift the cost of public services even more heavily onto the poorest taxpayers, making an already-unfair tax system even more so. The sales tax might be a flat rate, but its effects are anything but even when it comes to who pays it.
Of course, in some states, proposals to shift from income to sales taxes aren't being described in tax fairness terms at all. Kansas Gov. Sam Brownback argues that repealing the state's income tax, and ramping up reliance on the sales tax, will be a recipe for faster economic growth. But such claims are typically based on half-baked "studies" from supply-side cheerleaders that don't withstand even the most basic scrutiny. In fact, the most likely impact of a "tax shift" from income to sales taxes is exactly what we saw when Kansas enacted a smaller one last year: less available funding for the public services that are essential for economic success, and higher taxes on the poor.
As states emerge from the fiscal pressures of the Great Recession, the politically lazy move would be cutting taxes. Instead, now is the time for lawmakers to do the responsible thing and make tax systems more sustainable so that future recessions present less of a crisis. Loophole-closing reforms are the best place to start, and could allow state income, sales and corporate taxes to become more reliable over the long haul.
Closing loopholes usually has the added bonus of making tax systems fairer as well. But the tax shifts being contemplated in a number of states this year would achieve neither fairness nor sustainability. Simply digging the hole deeper for families at or near the poverty line is a misguided substitute for the real tax reform states so desperately need.
Matthew Gardner, executive director of the Institute on Taxation and Economic Policy, is a co-author of the 2013 edition of "Who Pays? A Distributional Analysis of the Tax Systems in All Fifty States"; www.ITEP.org.