I am sure that most of you reading this article understand what a progressive tax is, but for the uninitiated, it is a tax structured so that the more money people make, the greater percentage of their income they pay in taxes. The federal income tax system is basically set up as a progressive tax. Under the federal tax system, taxpayers pay progressively more tax on the money earned at each higher level of net income. (What infamously allows Warren Buffet to pay less income tax than his secretary is the numerous loop holes in the federal tax laws which allow the wealthy take deductions which the rest of us find difficult or impossible to access.)
I believe most thinking people agree with, or at least understand, the reasoning behind progressive taxation. The first reason is practicality. Obviously the more income citizens earn, the more taxes they can pay without intruding on their ability to provide the basic necessities of life for themselves and their families. The philosophical reason goes something like this – those that profit most from their country’s economy and its form of government should pay the most to support it.
Now some have argued for a flat tax system where everyone pays the same percentage of the income earned over a certain level while eliminating the loopholes used by some to escape paying taxes. However, I have never heard anyone publicly argue for a regressive tax plan, one which would have the poorest among us pay the greatest percentage of their income in taxes while the wealthiest pay the least. Instituting such a system would clearly be immoral. Well, I should amend my original statement. I have never heard anyone publicly advocating for a regressive tax plan directly. The fact is that almost all American citizens live under regressive tax systems and the biggest culprits are state and local governments.
I have known for quite some time that in my home state of Alabama, state and local taxes combine to subject the state’s citizens to an excessively regressive tax system. In Alabama, families whose incomes are under $17,000 a year (those in the bottom 20% of earners) pay 10% of their incomes in state and local taxes. Those families in the next 20% pay slightly more, 10.2% of their income in taxes. Then the percentage of income paid by those in progressively higher income brackets is less and less with the top 1% of all earners, families with incomes of $392,000 or more, paying just 3.8% of their incomes in taxes.
No one could possibly argue that Alabama’s regressive tax system is fair. Why on the earth should the poor pay almost three times the percentage of their income in taxes than do the very rich? However, the manner in which this tax system was established was insidiously normal on the surface. On the whole Alabama’s state and local property taxes are among the lowest in the nation, a point of pride for some Alabama politicians. In addition special laws protect the owners of large tracks of farm and timber land from taxation on the true value of their property. Large land owners often pay less than $2 an acre per year on even the most productive land. All of this means that wealthy people with large property holdings don’t have to pay much in the way of property taxes.
On the other hand, sales taxes make up a high percentage of tax revenue at the state, county, and city levels in Alabama. Even groceries are subject to high sales taxes and sales taxes are among the most regressive in existence. The simple reason is that the poor have to spend a high percentage of their incomes for just the basic necessities of life and they have to pay sales taxes on all of those items. On the other hand, the wealthy spend a much smaller percentage of their income on items subject to sales taxes. Consequently a much greater percentage of the income of the poor is subject to taxation.
With Alabama’s wide gap in the relative taxation rates between the rich in the poor, I have always believed that Alabama’s tax systems must be among of the most regressive in the county. I was therefore shocked to read the 2014 report of The Institute on Taxation & Economic Policy which indicates that Alabama is not even among the top ten most regressive tax states. According to the institute’s most recent report entitled, “Who Pays, A Distributional Analysis of the Tax Systems of All Fifty States – Fifth Edition”, Alabama’s taxes are the twelfth most regressive in the nation.
Ranked from bad to worst, the states with the most regressive tax systems are: Indiana, Kansas, Arizona, Tennessee, Pennsylvania, Illinois, South Dakota, Texas, Florida and Washington. In Washington, the most regressive tax state, the poorest 20% saw state and local taxes consume 16.8% of their incomes while the richest 1% in the in the Evergreen State paid only 2.4%. The states were the taxation gaps between rich and poor are smallest are California and Delaware, but according to the report, “virtually every state tax system is fundamentally unfair, taking a much greater share of income from the low and middle income families than from wealthy families”.
According to the Institute’s report the following are the state and local taxation rates as a percentage of income for various income groups when averaged across the entire country:
Lowest 20% (less than $18K) 10.9%
Next 20% ($18K – $33K) 9.9%
Middle 20% ($33K – $54K) 9.4%
Fourth 20% ($54 – $88K) 8.7%
Next 15% ($88K – $175K) 7.7%
Next 4% ($175K – $419K) 7.0%
Top 1% (Over $4019K) 5.4%
We Americans consider ourselves to be fundamentally fair people, but somehow we have constructed state and local tax systems which require the poorest among us to shoulder a relatively higher percentage of the tax burden while the very rich pay relatively less than anyone else. How in the hell is that fair?
I will be charitable and suggest that most of our citizens are not aware of this injustice. However, these tax laws did not come into existence on their own; state and local politicians put them in place over time. I am sure those politicians had a great deal of assistance from wealthy special interests and their lobbyists. However, it is time to shine a bright light on this deplorable situation and insist that our state and local government representatives begin the long and difficult job of fixing the problem.
(You can access The Institute on Taxation & Economic Policy’s report in its entirety at: Who Pays, A Distributional Analysis to the Tax Systems of All Fifty States – Fifth Edition.)