Taxes are integral to the success and prosperity of any state. However, different US states have their own tax systems. These laws determine how much individuals and corporations pay in taxes and also have a strong impact on how much state governments collect each year. Our recent analysis looked at how much the richest 1% pay in taxes at the state and local level. We also compare that data to the amount of taxes paid by the poorest in each state.
A general trend emerged. Typically, the lower 20% (people at the lowest end of the wealth bracket) pay 50% more taxes at state and local level compared to the richest 1%. According to data from the Institute on Taxation and Economic Policy (ITEP), the average tax rate among people in the lower 20% in the wealth ladder stands at 14.4 percent of total income. As for the rich 1%, the tax stands at 7.4% of total income.
However, these figures vary from state to state depending on whether a state is characterized as regressive or progressive. In a “regressive” tax system, the average tax rates decrease as the taxable income increases. In other words, the richer you get the lower the taxes you pay. A progressive tax system is the exact opposite. The more money you make, the more taxes you end up paying.
10 Most Regressive States in the US
Based on our explanation above on regressive and progressive tax systems, we have categorized ten of the most regressive states in the US.
- Washington: 14.8% gap
- Florida: 10.4% gap
- Texas: 9.9% gap
- South Dakota: 8.7% gap
- Nevada: 8.3% gap
- Pennsylvania: 7.8% gap
- Tennessee: 7.7% gap
- Arizona: 7.1% gap
- Wyoming: 7.0% gap
- Oklahoma: 7.0% gap
Interestingly enough, seven out of these ten states don’t actually levy a state income tax. According to ITEP, because of this, they tend to rely heavily on excise duty and local sales taxes. This shifts the tax burden to the poor. Take this example. Let’s say that in Texas, the sales tax on bread is $1. For someone who makes an income of $100, this will translate to 1% of their income. For another person who makes $1,000, the tax roughly comes to around 0.1%. In terms of the tax burden, the person earning $100 (who is poorer) pays more than someone who makes $1,000. As for states that have progressive tax codes, the richest people pay the most. In fact, in these states, more than one-third of all taxes are collected through income tax. This means that the rich contribute more to the tax bracket than the poor.
Compared to the national average, progressive tax systems are doing well in collecting more money from the rich too. On average, the national share of taxes collected from income taxes stands at about 27%. It is slightly lower than the 33% reported by ITES in tax progressive states. This data will surely generate debate. As the gap between the rich and poor widens, many think that the share of taxes from the rich needs to be higher than from the poor.