Making State and Local Taxes Fair Game

Robert Hiltonsmith

“Tax fairness” is defined very differently by Americans from various walks of life. Despite this divide, there is a substantial shared vision: a majority of Americans believe that the government should be doing more to help people, and the vast majority believe that wealthier Americans should be the ones paying higher taxes to support those priorities.

If that is the case, why do we have a state and local tax system that is the polar opposite of those beliefs, one where the better-off pay about half as much in taxes as the less-well-off? This inequity both contradicts our country’s shared beliefs on tax fairness and is the major cause behind the critical lack of state and local investment in social capital that I wrote about in my last piece. We need to correct this inequality immediately if we are going to maintain needed levels of investment in social capital in the face of a rapidly-aging society that will require progressively larger expenditures in the next two decades.

So, just how unequal are state and local taxes? In their comprehensive 2009 report, the Institute on Taxation and Economic Policy analyzed the tax systems of all 50 states and major localities, and found that, as a whole, state and local tax systems are extremely regressive. As the graphic shows, the poorest 20 percent of Americans pay, on average, a combined state and local tax rate of 11 percent, while the wealthiest 1 percent pays less than half that: 5.3 percent. This disparity is even more pronounced in the most regressive states: in Washington State, which has the most regressive tax system, the poorest 20 percent pay an average tax rate of 17.3 percent while the top 1 percent pays just 2.3 percent.

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