By Fred Kammer, S.J.

We hear a lot about “tea party politics” and so-called taxpayer-revolts, but I wonder whether the participants have looked at the facts about taxation and aimed their protests in the right directions. Two recent reports have highlighted the acute disparities in taxation in the fifty states—namely, how it is the poor who carry the greatest tax burdens and how regressive are state and local tax systems. State taxes only reinforce the income distribution trends of the past several decades where—you guessed it—the rich are indeed getting richer, the poor poorer, and the middle class largely standing still (until the recent recession knocked many of them down). The five states of the Gulf South, sadly, are among the most regressive.

Many States Tax Working-Poor Families into Deeper Poverty

On November 4, 2009, Phil Oliff and Ashali Singham of the Center on Budget and Policy Priorities (CBPP) released a new report demonstrating that, out of 42 states with income taxes, sixteen—including Louisiana, Mississippi, and Alabama—are taxing families whose incomes are below the federal poverty line (in 2008, $22,017 for a family of four and $17,165 for a family of three). Six states, including Alabama, tax families living in severe poverty, earning less than 75 percent of the federal poverty line. In addition, from those living just above the official poverty line (up to 125 percent of the poverty line), a majority of the states collect income taxes. This is despite the fact that many studies indicate that in most parts of the U.S. the basic costs of living exceed the federal poverty line.

There are many ways states can protect their poorest families from such exploitive taxes. Twenty-four states, including Louisiana, have adopted an Earned Income Tax Credit modeled on the federal EITC which reduces the tax obligation of working families, especially those with children. Others have a no-tax floor, personal exemptions, or standard deductions to reduce the amount of income subject to taxation. In some cases, states took no particular action to increase taxes on the poor but simply failed to adjust exemptions, deductions, and floor levels to account for inflation, thus subjecting poor families to increased taxes. One example is the state of Mississippi, where the failure to adjust its standard deduction caused an increase of 46 percebt (adjusted for inflation) in the taxes for poor families of four from $48 in 2007 to $73 in 2008. The dollar amount may seem small, but not to a family already living in poverty. See the full report The Impact of State Income Taxes on Low-Income Families in 2008 for details (accessed 1/7/10).

Catholic Social Teaching on Taxes and the Poor

The clearest statement on taxes and the poor came in the U.S. Bishops’ pastoral on Economic Justice for All in 1986. There the bishops urged that, “The tax system should be continually evaluated in terms of its impact on the poor.” (No. 202, italics in original.) They enunciated three principles to guide such evaluations:

First, the tax system should raise adequate revenues to pay for the public needs of society, especially to meet the basic needs of the poor.

Second, the tax system should be structured according to the principle of progressivity, so that those with relatively greater financial resources pay a higher rate of taxation. The inclusion of such a principle in tax policies is an important means of reducing the severe inequalities of income and wealth in the nation.

Third, families below the official poverty line should not be required to pay income taxes. Such families are, by definition, without sufficient resources to purchase the basic necessities of life. They should not be forced to bear the additional burden of paying income taxes. (No. 202)

While the CBPP study focused on states with income taxes and their impact on working poor families, often more regressive tax systems exist in states without an income tax, including Texas and Florida. Overall tax systems of states were the subject of the second important report released in November 2009.

Most States Have Regressive Overall Tax Systems

A more intense look at state tax systems is important, especially in the current economic context where almost every state is scrambling to identify ways to close enormous recession-driven revenue shortfalls. A new study, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States (3rd edition), was released by the Institute on Taxation and Economic Policy in November. Its key finding is on page one:

The study’s main finding is that nearly every state and local tax system takes a much
greater share of income from middle- and low-income families than from the wealthy. That
is, when all state and local income, sales, excise and property taxes are added up, most state tax systems are regressive.

Of the 10 “particularly regressive” states in the nation, three are in the Gulf South: Florida (2nd), Texas (5th), and Alabama (10th). They are the most regressive because of the relative overall tax burdens on the poorest families (the bottom quintile) when compared with the wealthiest families. And families in the middle also carry a greater tax burden than the most wealthy.

The institute’s report breaks out the relative tax burdens for the year 2007 of first four quintiles of the families in each state—from, first, the poorest 20 percent to the fourth 20 percent—and then divides the top 20 percent into three groups (the top 1 percent, the next 4 percent, and the remaining 15 percent, due to sharp disparities even in their wealth). In the Gulf South, the relative tax burdens (measured in percentage of income paid in taxes) are as follows:

Taxes in the Gulf South in 2007

State and Local Taxes as Shares of Income for Non-Elderly Residents

The study limited its scope to non-elderly families (singles and couples, with or without kids) because state tax systems often treat elderly families very differently.

While the table depicts the respective quintiles by each state, the actual income ranges for each quintile vary due to the overall income levels of the state population, e.g. the lowest quintile’s income is below $15,000 in Mississippi, but below $18,000 in Texas.

As you can see just from the Gulf South states, in Florida, the poorest families pay a six-times-heavier tax burden than the most wealthy, and in Texas a four-times greater percentage of the poorest families’ income goes to state and local taxes.

What makes state taxes regressive?

The first factor is the decision by some states not to levy a broad-based personal income tax. The personal income tax can be the most progressive tax system, if it is structured progressively. A flat tax is much less progressive since, by definition, it taxes the income of the wealthiest family at the same marginal rate as that of the poorest family. Even states with nominally graduated income tax rates may be regressive where, for instance, the percentage of those paying the highest rate is very large (66 percent of Alabama families pay the highest rate, which kicks in at $6,000 of taxable income for married couples). This is especially true if the state also provides special tax breaks targeted to upper-income families.

Property taxes typically are “somewhat regressive” according to the report because poor homeowners and renters pay more of their income than other groups and the wealthiest property owners pay the least.

Finally, sales and excise taxes (e.g. on cigarettes, gasoline, and beer) are the most regressive because they take a larger share of the income from low and moderate income families than they do from wealthy families. When states rely heavily on sales taxes, as Florida, Texas, and Alabama do, their tax systems are very regressive. One moderating factor in sales taxes is the exclusion of necessary items such as groceries (Florida, Louisiana, Texas).