Are Your State and Local Tax Systems Equitable?
November 29, 2018Print
By Devin Simpson
Chances are, they’re not. According to a recent report from the Institute on Taxation and Economic Policy (ITEP), most state and local tax systems are “inequitable and upside-down,” meaning they take a higher share of income from lower-wage households than from the wealthy.
The 6th edition of ITEP’s landmark “Who Pays?” report ranks each state’s tax system on a scale of least to most equitable. According to the report, only five states and the District of Columbia have tax systems that work to address income inequality. By contrast, in the ten states with the most regressive tax structures, those earning the least pay up to six times as much of their income in taxes as their wealthy neighbors.
The good news is there are several steps state and local policymakers can take to turn their tax systems right-side up. ITEP’s report finds that the most equitable tax systems tend to offer progressive income tax brackets and rates, lower reliance on regressive consumption taxes, and deductions and refundable credits for low-wage households, such as state-level Earned Income Tax Credits (EITCs).
Twenty-nine states and the District of Columbia have enacted state-level EITCs to complement the federal credit. According to ITEP’s rankings, all ten of the states with the most equitable tax systems offer refundable EITCs, and seven of the ten offer EITCs that are worth more than 25 percent of the federal credit. Refundability, the report’s authors note, is vital for ensuring state-level EITCs help offset sales and property taxes as well as income taxes.