State Tax Policy: The Growing and Unsustainable Divergence

Regressivity, defined as the opposition to progress or returning to a former, less advanced state, is not a description to which policymakers should aspire.

Yet, overall, state and local tax policy is regressive, in many cases obscenely so. According to the most recent report from the Institute on Taxation and Economic Policy, the state and local tax burden, as a percentage of income, of those in the bottom 20 percent of earners is three or more times that of those in the top 1 percent in eight states. As of 2018, Washington had the dubious distinction of being the most regressive, taxing its poorest 20 percent at nearly six times the rate it taxed its top 1 percent. But Florida, Texas, South Dakota, and others were not far behind.

If you find that troubling, you may want to stop reading now because it only gets worse. Not only do the great majority of states currently have regressive tax systems in place, but most are working to make their tax systems more regressive.

In 2021, Arizona, flouting the 2020 ballot initiative passed by its voters, reduced its top income tax rate from 8 percent to 4.5 percent. About 93 percent of the benefit from the change, according to analysis by the Tax Policy Center [p. 17], would flow to those with incomes over $100,000. In 2023, Arizona will move to a 2.5 percent flat tax, further benefiting its richest residents at the expense of regular Arizonians.

In April of this year, Mississippi’s governor signed into law a $525 million state income tax cut, the benefits of which will flow mostly to high-income Mississippians. Just months later, the combination of a flood and years of neglect in maintaining the water system of Jackson, Mississippi’s capital and largest city, forced its mostly poor residents to go weeks without drinkable tap water. This overwhelmingly impacted the city’s poorest residents and could have been avoided by more infrastructure funding.

Also this year, Iowa and Georgia enacted massive, billion-dollar-plus income tax cuts, replacing their modestly progressive tax brackets with flat taxes. Those cuts will, once again, mainly benefit the rich.

In all, over the past two years, 17 states have enacted income tax rate cuts. The ultra-conservative Tax Foundation, trumpeting this development as a “flat tax revolution,” identified five states moving from graduated to flat income tax rate structures.

Since property and sales taxes are always a regressive form of taxation, the only state tax that can be progressive is the income tax. When a state adopts a flat, or worse, a zero-income tax, it guarantees that its overall tax distribution will be regressive, shifting the tax burden from the rich onto the working and middle class.

It’s all reminiscent of the days before the income tax when some politicians advocated a “head tax.” They wanted to assess an equal tax on each U.S. adult, regardless of wealth; as a result, plumbers would pay the same tax as CEOs. In many states, it seems that’s where we’re now headed. (no pun intended)

But that’s not the picture in all states. Those with more progressive (or at least less regressive) tax structures largely have refrained from income tax cuts benefitting mainly the rich, opting instead to help those at the bottom. Take Maryland, for example. In 2012, it increased its top income tax rate for those with six-figure incomes to 8.95 percent (including county-level income tax). Yet when monies were available in 2021, Maryland chose to increase its earned income tax credit. The benefit flowed nearly exclusively to those with incomes below $30,000. In 2022, Maryland suspended its regressive excise tax on gasoline.

New Jersey, which already had the sixth most progressive tax system, further decreased the threshold for its 10.75 percent top marginal income tax rate from $5 million to $1 million in 2020. When revenues were available the following year, it chose to help those at the bottom by expanding its earned income tax credit.

The District of Columbia, with the second most progressive tax system in the country, expanded its earned income tax credit in both 2021 and 2022 rather than cutting taxes to the highest earners.

And California, recognized by ITEP as having the nation’s most progressive tax system, used the excess revenue it had available in 2021 not to reduce the tax payments of the rich but instead to send stimulus checks to all its residents with incomes under $75,000.

Where will our diverging state tax systems leave us? It’s hard to predict, but something has to give. Right-wing groups like the Tax Foundation, Americans for Tax Reform, and Laffer Center are all promoting tax-motivated migration for high-income residents of states with progressive tax structures. How will states like California and New Jersey respond? When states that have succumbed to the temptation of a regressive tax system face budgetary challenges, how will they respond? Will they reverse their ill-conceived income tax cuts, as Kansas did, or will they impose painful cuts in state and local services?

One thing is certain. The growing tax policy gulf between states, often those neighboring one another, is unsustainable. Ultimately, the federal government will need to step in.

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