Sunday, April 29, 2012

Combined Federal and State Tax Regressivity

There has been a fair amount of research done on the regressivity of Washington taxes. The Gates Commission report concluded in 2007, "Most people agree that fairness requires relative tax burdens on households (taxes as a percentage of household income) to be the same for all households, or higher for households with higher incomes (i.e., a progressive tax system). Correspondingly, a tax system that imposes higher relative burdens on households with lower incomes (i.e., a regressive tax system) is considered inequitable. Washington's tax structure is regressive. The lowest income households pay 15.7 percent of income for total excise and property taxes, while the highest income households pay 4.4 percent of income for the same taxes. Sales tax is the main cause of regressivity.

Our state's system is pretty much the opposite of the federal system. Despite all the recent rhetoric about tax inequality at the federal level, the fact remains that the federal system is progressive. According to the Congressional Budget Office, the top 1% pays an average of 31% of their income in taxes and the bottom 20%, pays about 4%. This includes the federal income tax, the incidence of the federal corporate, federal excise taxes and federal payroll taxes for social security and medicaid.

State taxes are quite regressive with top 1% paying about 1.8% of taxes and the bottom 20% paying 17% of their income in taxes.

When you combine the two results, the bottom line (the second chart above) is that the state tax system cancels out almost all of the progressivity of the federal system.  This is not true of taxes in other states. On average, taxes in other states are slightly progressive.

Washingtonians often seems themselves living in a "progressive" state. When it comes to paying for government, that is far from the case. 

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