It’s Not All in Your Head, You’re Getting Screwed on Your Taxes

Source: Filippo Monteforte/AFP/Getty Images

Source: Filippo Monteforte/AFP/Getty Images

Ever feel like you’re paying more than your fair share when it comes to taxes? With all the talk surrounding inequality, economic opportunity, and government funding problems, it’s difficult to actually determine how much is enough. We have bad tax policies, and we have strategies that work, but in the end, we all end up with the feeling that we’re getting screwed by Uncle Sam.

If a new study from the Institute on Taxation and Economic Policy (ITEP) holds true, then it may be more than just a feeling. According to the ITEP’s study, individuals who earn lower incomes tend to get hit harder and pay a higher share of their income in local taxes than their higher-earning counterparts.

ITEP ranks every state in the union from fairest to most regressive based on local tax burdens. What they found is that Delaware residents enjoy the fairest tax environment in the country, while residents of Washington state have the most regressive. While that may or may not come as a surprise, it’s the balance of taxes paid by low- and high-income earners that is truly the most surprising finding.

ITEP found that the lowest-earning 20% of Americans will pay an average of 10.9% of their income in state and local taxes, while the richest 1% will only end up paying 5.4%.

“In recent years, multiple studies have revealed the growing chasm between the wealthy and everyone else,” said Matt Gardner, executive director of ITEP, in a corresponding press release. “Upside down state tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem. State policymakers shouldn’t wring their hands or ignore the problem. They should thoroughly explore and enact tax reform policies that will make their tax systems fairer.”

It’s important to keep in mind that this study only involves state and local taxes, not federal. Since local taxes can vary so wildly from place to place, certain areas of the country tend to make for fairer environments than others. One reason that local taxes often become so skewed in favor of the wealthy is a reliance on consumption-based taxes, rather than taxing earnings. The federal tax structure, on the other hand, uses a graduated system — meaning that the more you earn, the more you pay.

“State and local tax systems are unfair, or regressive, because the lower one’s income, the higher one’s tax rate,” the study says. “This is due in part because states tend to [rely] more heavily on sales taxes to raise revenue and not as much on personal income taxes, which tend to be more progressive.”

taxes

Source: ITEP

For example, Washington state — which has by far the most regressive local tax structure in the country — does not tax income for residents. Instead, the state relies on a hefty sales tax of between 9.5-10%, which naturally places a heavier burden on lower-income workers. As a result, the poorest 20% of Washington residents end up paying 16.8% of their total income in taxes, whereas the wealthiest 1% only shell out 2.4% of their income.

Even with Washington as the most extreme case in the whole country, ITEP does conclude that each and every state has an inherently flawed tax structure. “Virtually every state’s tax system is fundamentally unfair. The over-reliance on consumption taxes and the absence of a progressive personal income tax in many states neutralize whatever benefits the working poor receive from low-income tax credits,” the study concludes. “The path that states choose in the near future will have a major im­pact on the well-being of their citizens.”

Even with the most regressive tax structure in the country, Washington residents have repeatedly voted down a state income tax, which would have moved much of the burden from the poor to the wealthy, and made the system much more fair.

“Americans generally have a visceral reaction to taxes, but the truth is we need them to make state governments work for all citizens,” said Meg Wiehe, ITEP state policy director. “The problem with our state tax systems is that we are asking far more of those who can afford the least.”

Follow Sam on Twitter @Sliceofginger

More from Business Cheat Sheet: