Earlier this year, freshman Congresswoman Alexandria Ocasio-Cortez made headlines when she first floated the idea of a 70% income tax for income greater than $10 million. This may have shocked some at first, but since then polling has firmly established that most Americans are in favor of taxing the rich.
While congressional action is an important part of addressing economic inequality at the national level, it’s not enough. A massive piece of our tax code, state-level taxes, is actually largely regressive in many parts of the country. The overwhelming majority of states have tax structures that penalize working class Americans while favoring the rich. Righting that balance is a key part of building an economy that works for everyone.
Last year, an Institute on Taxation and Economic Policy study found that in 45 out of 50 states, the rich pay a smaller share of their income in taxes than working class folks — on average, the bottom 20% earners pay 11.4% of their income, while the top 1% pay only 7.4%.
Every state taxes its residents differently, but there is a pattern. Sales and excise taxes are by far the most regressive component of state tax codes — 8 out of 10 of the most regressively-taxed states were found by ITEP to rely heavily on them. Indeed, how progressive a state’s tax system is essentially a measure of how much income taxes and other taxes offset their regressiveness. Since they are income-indifferent, consumption taxes like sales and excise taxes inherently impact those with lower incomes harder than those with higher incomes.
The average $1,145 a year Americans pay in sales tax can be the difference between putting food on the table or going hungry for the 4 in 5 Americans living paycheck to paycheck, but is essentially meaningless to the rich. Income-indifferent taxes that fail to recognize this reality penalize the poor, and since working class Americans are forced to spend a much larger share of their income on basic living expenses, more of their income is exposed to the point-of-sale taxes incurred when they make those purchases.
Thirty-four states have a progressive income tax, which certainly helps, but even about half of these states still end up taxing regular Americans at a higher rate than the wealthy overall once you take all state-level taxes into account. Seven states have a flat income tax, hitting a construction worker’s first dollar of yearly income just as hard as a corporate CEO’s last. Seven states have no income tax at all (two additional states tax investment income but not wages), relying disproportionately on consumption and property taxes, which impact the poor hardest because they are income-indifferent.
State taxes make the meat-and-potatoes work of government possible, but nickel-and-diming poor people on their meager incomes is not the way to raise them. Fortunately, one flat-tax state, Illinois, is moving toward a progressive tax system. This is an encouraging step, and more states should take similarly decisive steps to ensure the rich pay their fair share in taxes. The wealthiest among us derive the greatest benefit from society, and often in ways that aren’t reflected in day-to-day transactions; reliable infrastructure, an educated workforce, and stable markets. It’s only fair that they pay a greater share of the profit they make to the society that makes their wealth possible.