Sunday, January 3, 2010

State and Local Tax Policy and the Depression

$80,000. That's the amount a household in Washington has to make before its taxes are lower than they would be in Oregon. Even so, a poor family in Oregon pays 1.3% more in taxes than a rich one. In Washington, the difference is more marked; 10.6%. The poor family is in the poorest 1/5 of the population; the rich family in the richest. If one takes the rich family from the top 1% of incomes, the difference is more marked: in Oregon, 2.5%, and in Washington, 14.7%. Justice would dictate that the poor man's rent be taxed less than the rich man's yacht money, but in most states it is just the reverse.

"[...] only two states require their best-off citizens to pay as much of their incomes in taxes as their very poorest taxpayers must pay, and only one state taxes its wealthiest individuals at a higher effective rate than middle-income families have to pay." (Who Pays, 2009) The report goes on to list the "terrible ten:" the states which have the most regressive tax systems. These are, starting with the most regressive: Washington, Florida, South Dakota, Tennessee, Texas, Illinois, Arizona, Nevada, Pennsylvania, and Alabama.

The US Federal government, we already know, is not going to be supporting the state governments in maintaining their services in this new depression. Yet if the states raise taxes, that also works to deepen the depression. However, if instead taxes are lightened on the poor, and raised on the rich, that is neutral. In addition, there is a multiplier: if the poor have more money to take home, they will spend it, because they need to, and that provides a stimulus.

Institute on Taxation and Economic Policy, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, Third Edition, 2009.

[minor changes made on day of publication]

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