10 Worst States in America for Fair Tax Systems
Life is not always fair — especially when it comes to taxes. Many people would agree that the nation’s tax code is a bottomless pit of politics and controversy that tends to get deeper with each election. On a local level, tax debates typically pit red states against blue states in the name of ultimate tax fairness. However, what does a fair tax system look like and which states actually have the least fair tax systems?
Americans generally believe that higher income households should pay a greater percentage of their incomes in taxes than lower income households. Yet the exact opposite occurs. The Institute on Taxation and Economic Policy (ITEP) finds the nationwide average effective state and local tax rates by income group are 10.9% for the poorest 20% of individuals and families, 9.4% for the middle 20%, and 5.4% for the top 1%. This means the poorest Americans are paying two times more of their income in taxes than the top 1%.
Paying more with unfair tax systems
In the 10 states with the most unfair tax structures, the bottom 20% pay up to seven times as much of their income in taxes as their wealthy counterparts. A heavy reliance on sales and excise taxes are characteristics of the most unfair state tax systems. In fact, six of the 10 most regressive states derive roughly half to two-thirds of their tax revenue from sales and excise taxes, compared to a national average of roughly one-third.
“The bottom line is that every state fails the basic test of tax fairness,” explains the report. “The District of Columbia is the only tax system that requires its best-off citizens to pay as much of their incomes in state and local taxes as the very poorest taxpayers, but middle-income taxpayers in DC pay far more than the top one percent. In other words, every single state and local tax system is regressive and even the states that do better than others have much room for improvement.”
Let’s take a look at the 10 states with the least fair tax systems. Do you live in one?
The Hoosier State ranks No. 10 in the nation in terms of the least fair tax system. The poorest 20% of residents pay 12% of their income in taxes, compared to a rate of 5.2% for the state’s top 1% and 10.6% for the middle 60%. Since the last ITEP study two years ago, Indiana enacted across-the-board reductions in personal income tax rates, and is gradually reducing its corporate income tax rate form 7.5% to 4.9%.
Kansas ranks No. 9 in the nation in terms of the least fair tax system. The poorest 20% of residents pay 11.1% of their income in taxes, while the top 1% pay 3.6%. The middle 60% pay 9.2% of their income in taxes. While a majority of states offer some kind of credit to assist low-income taxpayers in paying their property tax bills, Kansas provides targeted property tax credits to elderly taxpayers based only on income without a provision requiring property taxes to exceed a set percentage of income to qualify.
Arizona ranks No. 8 in the nation for the least fair tax system. While the top 1% pay 4.6% of their income in taxes, tied for the highest rate on this list, the poorest 20% pay 12.5% of their income in taxes and the middle 60% pay 9.5%. Arizona collects personal income taxes, but has a graduated rate structure where there is little difference between the bottom marginal rate and the top marginal rate. The state also fails to provide a refundable Earned Income Tax Credit.
Tennessee ranks No. 7 in the nation for the least fair tax system. The poorest 20% of residents pay 10.9% of their income in taxes, the lowest percentage out of the 10 unfairest states. The middle 60% pay a rate of 8.4%. However, the top 1% of residents only pay 3% of their income in taxes. Tennessee only applies its personal income tax to interest, dividend, and capital gains income, but relies heavily on sales and excise taxes. On the positive, the sales tax on groceries was recently lowered from 5.25% to 5%.
Pennsylvania ranks No. 6 in the nation for the least fair tax system. The top 1% pay 4.2% of their income in taxes, but the poorest 20% and the middle 60% pay 12% and 10.1% of the incomes in taxes, respectively. Pennsylvania uses a flat rate which taxes the income of the wealthiest family at the same marginal rate as the poorest wage earner.
The Prairie State ranks No. 5 in the nation for the least fair tax system. The poorest 20% pay 13.2% of their income in taxes, the third highest amount in the country. In comparison, the middle 60% pay 10.9%, while the top 1% pay 4.6%. Like Pennsylvania and Indiana, Illinois uses a flat rate which taxes the income of the wealthiest family at the same marginal rate as the poorest wage earner. The state also fails to provide refundable child tax credits, while state and local sales taxes include groceries.
4. South Dakota
South Dakota ranks No. 4 in the nation for the least fair tax system. The top 1% enjoy the lowest rate on the list at a mere 1.8%. Meanwhile, the poorest 20% pay 11.3% of their income in taxes and the middle 60% pay 7.9%. South Dakota also relies heavily on sales and excise taxes since it doesn’t have a personal income tax or a corporate income tax.
Everything is bigger in Texas, including the amount of tax unfairness. The Lone Star State’s top 1% pays 2.9% of their income in taxes, compared to 12.5% paid by the poorest 20% and 8.8% by the middle 60%. The state’s sales tax base excludes groceries, but low-income taxpayers fail to receive tax credits to offset sales, excise, and property taxes. In lieu of a corporate profit tax, Texas imposes a gross receipts tax.
Florida ranks No. 2 in the nation for the least fair tax system. The poorest 20% of residents pay 12.9% of their income in the taxes and the middle 60% pay 8.3%. The top 1% pay 1.9%. Only Washington, Hawaii, and Illinois tax the poor more than Florida. With no personal income tax, the state has a comparatively high reliance on sales taxes, and fails to provide tax credits to offset impact of sales, excise, and property taxes.
Washington ranks as the least fair tax system in the Untied States. The poorest 20% are the most heavily taxed in the nation by paying 16.8% of their income in taxes. The middle 60% pay 10.1%, while the top 1% pay 2.4%. Washington has no personal income tax and has a high reliance on sales taxes. The state enacted a refundable Earned Income Tax Credit, but lawmakers failed to provide funding for it.
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