A comprehensive study conducted by the Institute on Taxation and Economic Policy (ITEP) has brought to light a significant disparity in the U.S. tax system. According to the report, in 41 out of 50 states, the wealthiest 1 percent are subjected to lower tax rates compared to other income groups. This revelation underscores the growing concerns about the inequality crisis in the nation.
The ITEP report, titled “Who Pays?”, offers an in-depth analysis of the tax systems across all 50 states. The study examines the tax rates paid by various income segments, utilizing a methodology that provides a clear picture of the distributional impact of state and local tax policies.
ITEP’s findings are stark: in 41 states, the tax system is skewed in favor of the richest 1 percent. Furthermore, the study reveals that 46 states tax the top 1 percent at rates lower than those imposed on middle-income families. This disparity highlights a significant imbalance in the burden of taxation across different economic strata.
Carl Davis, ITEP’s research director, noted the gap between public expectations and the reality of state tax codes. “When you ask people what they think a fair tax code looks like, almost nobody says we should have the richest pay the least,” he said. This contrast between public opinion and actual tax policies in the majority of states points to a significant misalignment.
The report contextualizes the current tax systems against the backdrop of recent trends in various states. Notably, several states have embarked on tax-cutting sprees, significantly reducing rates for corporations and the wealthy. This trend comes at a time when reports indicate that ultra-rich Americans hold an estimated $8.5 trillion in untaxed assets.
In contrast to the prevailing trend, six states – California, Maine, Minnesota, New Jersey, New York, and Vermont – along with the District of Columbia, have implemented progressive tax systems. For instance, Massachusetts’ introduction of a millionaires tax led to a substantial improvement in the state’s ranking on ITEP’s Tax Inequality Index. Similarly, Minnesota has enhanced its tax policies for high earners while providing benefits for lower-income families.
Florida stands out as having the most regressive tax code in the U.S., with the wealthiest 1% paying a tax rate of only 2.7 percent, in stark contrast to the 13.2 percent rate for the poorest 20 percent. The lack of personal income taxes in Florida and similar states leads to a heavier reliance on regressive consumption and property taxes.
Recent years have seen a trend towards more regressive tax systems in many states. Kentucky, for example, has moved toward a flat tax system, resulting in significant tax cuts for higher-income families, offset by increased sales and excise taxes on a range of services and goods.
Some states are showing that tax regressivity can be addressed. New Mexico and Massachusetts have made notable progress through reforms to refundable credits and increased taxation of top earners. These efforts demonstrate the potential for policy changes to create more equitable tax systems.
The ITEP report sheds light on the pervasive issue of tax inequality across the United States. With 41 states taxing their wealthiest citizens at lower rates than other income groups, the study calls into question the fairness and effectiveness of current state tax policies. As ITEP’s Aidan Davis puts it, “The regressive state tax laws we see today are a policy choice, and it’s clear there are better choices available to lawmakers.” This conclusion underscores the need for a reevaluation of tax systems in favor of a more equitable approach.
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