The state of tax progressivity across the United States
A group of Massachusetts advocates are working to get a ballot measure up for a vote that would create a new income tax bracket specifically for millionaires within the state. Despite the images of “Taxachusetts” that might dance in some people’s heads, the Massachusetts state government isn’t particularly tax happy when it comes to the high earners in the state. Massachusetts currently has a flat income tax where every resident pays 5.15 percent of their income. Adding a millionaire’s tax would make the state income tax system progressive. The income tax is also flat in Illinois, which considered and rejected a millionaire tax in May. (Six other states also have flat income taxes.)
These flat income taxes is one of a multitude of factors which make the overall tax systems in Massachusetts and Illinois regressive, with low-income taxpayers paying a higher percentage of their income than high-income taxpayers. The two states aren’t outliers—there isn’t a single state where residents face a progressive overall tax structure. This is because flat sales, property, and excise taxes often make the overall tax system regressive, even if there are progressive tax rates on personal income.
Regressive tax systems are not unique to Illinois and Massachusetts. The non-partisan Institute for Taxation and Economic Policy releases an annual analysis that looks at the income-distribution impact of state-and-local taxation in the 50 states and the District of Columbia. The 2015 report finds that (as in years past) the combined impact of state and local taxes in every state and the District of Columbia is quite regressive. Take the example of California, another state with a reputation for high taxes. According to the institute’s analysis, the bottom 20 percent of families pay an average of 10.5 percent of their income in state-and-local taxes. The top 1 percent, in contrast pays 8.7 percent.
The extreme example is the tax system of Washington. The state has no income tax and relies heavily on sales and excise taxes. The top 1 percent of families in the state pay, on average, 2.4 percent of their income in taxes. The bottom 20 percent? They pay 16.8 percent of their income.
It’s important to keep these statistics in mind amid all the discussion about the overall tax system in the United Sates. The federal tax system is progressive. But it has become less so since the late 1970s as policymakers have cut taxes, with an emphasis on lowering the top marginal tax rate. The top marginal tax rate in 1979 was 70 percent and had fallen to 39.6 percent by 2014, though this is an increase from its lowest level of 28 percent in 1990.
Looking at the total impact of all taxes—federal, state, and local—shows an overall higher tax burden for everyone, but this increased burden is borne more (as a share of income) by those at the middle and the bottom of the income distribution. So by ignoring the state and local tax system, we get a view of the tax system that understates its burden and overstates its progressivity.