CFED Assets & Opportunity Scorecard
States have the flexibility to design their own tax systems to fund public services. Most states rely on three types of taxes on individuals: income, property and consumption (sales and excise). Income taxes are usually progressive (i.e., they tax the rich at a higher percentage of income than the poor), whereas property taxes and consumption taxes tend to be regressive (i.e., they disproportionately tax the poor). However, almost all states, even those that have adopted a progressive income tax, have a tax system that is fundamentally unfair, requiring low- and middle-class families to pay a much higher proportion of their income than what wealthier families are asked to pay.
Whether a state’s tax system is progressive or regressive depends, in part, on how much the state relies on each of the three types of taxes. To make the system fairer, states should adopt an income tax and de-emphasize consumption taxes and property taxes, which are more regressive. States should ensure that the wealthiest families pay at a tax rate at least equal to what low- and middle-income families pay. Without changing the overall tax structure, states can adopt policies that help protect lower-income families, including raising the income threshold at which families start paying income tax or implementing refundable tax credits—like the Earned Income Tax Credit, Child Tax Credit, and Child and Dependent Care Tax Credit. By adopting policies both to ensure the wealthiest families pay an equal share and to protect low- and middle-income families, states can begin to create a fairer tax system.
Strength of State Policies: Tax Fairness
|Does state have an income tax? 1||Is state's effective state tax rate for bottom 20%|
of earners lower than for top 1% of earners? 2
|State||State income tax?||State income|
|Bottom 20%||Top 1%||Ratio|
|District of Columbia||$32,800||5.6%||6.4%||0.9|
|West Virginia 4||$22,400||8.7%||6.5%||1.3|
Notes on the Data
1. Phil Oliff, Chris Mai, and Nicholas Johnson, The Impact of State Income Taxes on Low-Income Families in 2011, Center on Budget and Policy Priorities, 2012. CFED uses the state income tax thresholds for a two-parent family of four for this analysis. States were assessed based on whether or not they have an income tax.
2. Carl Davis, Kelly Davis, Matthew Gardner, Harley Heimovitz, Robert S. McIntyre, Richard Phillips, Alla Sapozhnikova, and Meg Wiehe, Who Pays, Washington, DC: Institute on Taxation and Economic Policy, 2015. The data has been updated from the report to reflect tax changes enacted in the states through the end of 2014. States were assessed based on whether or not the effective tax rate for the bottom 20% was equal to or less than that for the top 1%.
3. This state levies taxes on families living in severe poverty by taxing the income of two-parent families of four earning less than three-quarters of the poverty line, or $17,264.
4. This state levies taxes on two-parent families of four earning less than the federal poverty line, or $23,018.
How States Are Assessed
States receive credit for meeting two criteria. First, states receive credit for adopting an income tax. Second, states receive credit if the effective tax rate for the bottom 20% of earners was equal to or less than the effective tax rate of the top 1% of earners.
What States Have Done
All but 9 states have an income tax, but those that do not lean heavily on regressive taxes, making their tax system less fair. Even including those with income taxes, almost every state has a system that taxes low- and middle-income households at a higher effective tax rate than it does high-income households. On average, the poorest 20% of households pay nearly double the effective rate of the top 20%. The only exception is the District of Columbia, where lower-income households pay a smaller share of their income in taxes than higher-income households. They accomplish a fairer tax system by combining a progressive income tax with a large refundable EITC.
Organizations and Experts:
Guides, Briefs and Reports:
- Davis, Carl et al, "Who Pays? A Distributional Analysis of the Tax Systems in All 50 States," Institute on Taxation and Economic Policy, January 2015.
CFED thanks Meg Wiehe of the Institute on Taxation and Economic Policy for her input and expertise on this issue.