Tax fairness has become a hot-button issue, with a big debate over whether the rich and the poor pay their fair share of federal taxes. But at the state level, many states have tax structures that make poor people pay a far greater percentage of their incomes in taxes than those who are better off.
Back in January, the Institute on Taxation & Economic Policy released an analysis (opens a PDF) of the tax systems in all 50 states, with the goal of figuring out how different groups of taxpayers fared under each state's tax laws. What it found was that when you divide people into groups by income, the poorest 20% paid more than 11% of their income in taxes on average, compared with just half that rate for the wealthiest 1%.
But in many states, the poor paid even higher taxes. Let's look at the six states that the Institute on Taxation & Economic Policy identified as taxing the poor the hardest.
Texas imposes taxes on the poor equal to 12.6% of their income, compared with just 3.2% in tax on its wealthiest taxpayers. Like many of the states on this list, Texas doesn't have an income tax, relying instead on more regressive sales taxes of 6.25% statewide, with an average of 1.89% added on for local taxes. Oil revenue does play a major role in funding state government, with Occidental Petroleum (OXY -0.39%) and EOG Resources (EOG -0.95%) far outpacing their peers in total oil production during 2012. But that doesn't keep the state from ranking in the top 30% of states for sales-tax collections, hitting the poor especially hard.
In Arizona, the poor pay 12.9% of their income in taxes, compared with 4.7% for the wealthy. Arizona does have an income tax, but it has a relatively low top rate of 4.54% compared with a sales tax that send 6.6% to the state and another 2.56% on average to local governments. Property taxes are also in the lower half of the nation, benefiting high-value property owners disproportionately.
The poor pay 13% of their income in taxes in Hawaii, although the state has relatively high taxes across the board. Even tourists end up paying at least their fair share of taxes, with a double-digit percentage hotel tax imposed on Starwood (NYSE: HOT), Hyatt (H 1.59%), and other hotel chains, which they then pass on to their guests. The wealthy in Hawaii pay an average tax rate of 8%, the highest of the states on this list, because of extremely high marginal rates on income taxes that range as high as 11%. The sales tax is relatively reasonable at 4%, but the key problem is that the sales tax applies to grocery purchases, which hits the poor especially hard.
The poor in Florida pay taxes equal to 13.2% of their income, compared with just 2.3% for its wealthiest citizens. With no income tax and a 6% sales tax, Florida is among the more regressive of the states, and a recent increase in the exemption for business from corporate income tax adds to relative burden that the poor bear in the Sunshine State.
Illinois taxes its poor at a rate of 13.8%, versus 4.9% for the wealthiest 1%. Illinois has an income tax, but it has a flat rate, and the sales tax of 6.25% rises to more than 8% when you include typical local taxes. Illinois even charges a sales tax on grocery items, although they qualify for a lower rate than the sales tax on most purchases.
Washington is by far the most regressive state in the nation, with the poor paying 16.9% of their income in taxes, while the figure for the richest citizens is 2.8%. Washington not only has no income tax but has one of the highest sales taxes in the country, with a 6.5% state rate combining with 2.36% more from local governments.
Is taxing the poor unfair?
As you can see, states that rely on sales taxes more than income taxes tend to be harsher on the poor, who have to pay a greater percentage of their incomes on living expenses that are often subject to sales tax. With other states offering less regressive taxes for their poorer citizens, the poor face the difficult choice of leaving their homes for more favorable treatment or having to pay up in order to stay put.