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Most State Tax Systems Are Highly Regressive, Report Finds

In a large majority of states, low- and middle-income residents pay an effective tax rate that's higher than top earners, a think tank finds.

In Brief:
  • The vast majority of state and local tax systems are regressive, costing lower-income workers more of their income than wealthier residents.
  • Although top earners contribute more total dollars, lower-income individuals pay a higher share of their income due to sales taxes, which are regressive.
  • Florida has the nation’s most regressive system in the nation.

  • In a large majority of states, the combined state and local tax burden falls harder on low- and middle-income residents than on top earners.

    That's according to the Institute on Taxation and Economic Policy (ITEP), a liberal think tank in Washington. In 41 states, high-income residents are taxed at lower rates than those who earn less, according to a new report from ITEP.

    Although many states have progressive income taxes, with California, Hawaii, New Jersey and New York all taxing top personal incomes at rates topping 10 percent, the overall state and local tax burden falls heavier on lower-income workers in most states, according to ITEP, largely because of the regressive nature of consumption taxes. As a share of income, sales and excise taxes fall heavier on lower-income individuals.

    Core to ITEP's findings are the ways that the majority of state and local tax systems — 46 states, in fact — contribute to worsening inequality. The most regressive states tend to rely heavily on sales taxes. Florida, which has no personal income tax, is the nation's most regressive state, dropping down two spaces in the rankings since ITEP's previous look at tax systems, back in 2018.

    Florida’s reputation as a low-tax state is one of the reasons people — especially primarily retirees and the well-to-do — move to the Sunshine State. However, the state’s tax system prioritizes the top 1 percent of earners, with ITEP noting that the bottom 20 percent of Florida earners pay over 13 percent of their income, compared to 2.7 percent for the very wealthy.

    “The Who Pays report really helps us to reframe the narrative of Florida as a low-tax state,” says Sadaf Knight, chief executive officer of the progressive Florida Policy Institute, during a news conference about the report. “We think this resonates because the actual experiences of Floridians, who are struggling with such a high cost of living ... doesn’t match up to that reputation of it being a low-cost state.”

    Like Florida, over half of the nine other states at the bottom of the ITEP report lack an income tax and rely heavily on sales taxes, which the group describes as “significant drivers of economic and racial inequity in state and local tax codes."

    By contrast, the 10 most progressive state and local tax systems have personal income taxes and utilize low-income tax credits, while relying less on sales taxes. Fourteen states offer child tax credits. ITEP notes that this significant increase is partially due to these states modeling their own tax credits on the expanded federal child tax credit that was adopted in 2021. That expansion cut child poverty nearly in half before it lapsed.

    The ITEP report notes that there is an incredible racial wealth gap. In states with more regressive tax policies, people of color are paying more, while earning less. However, ITEP stresses that changes in tax policies won’t cure inequity alone. “Fully addressing these disparities will require a concerted effort across policy areas at all levels of government," the report says.

    Zina Hutton is a staff writer for Governing. She has been a freelance culture writer, researcher and copywriter since 2015. In 2021, she started writing for Teen Vogue. Now, at Governing, Zina focuses on state and local finance, workforce, education and management and administration news.
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