The 2015 Who Pays: A Distributional Analysis of the Tax Systems in All Fifty States (the fifth edition of the report) assesses the fairness of state and local tax systems by measuring the state and local taxes that will be paid in 2015 by different income groups as a share of their incomes.1 The report examines every state and the District of Columbia. It discusses important features of each state’s tax system and includes detailed state-by-state profiles that provide essential baseline data to help lawmakers understand the effect tax reform proposals will have on constituents at all income levels.
The report includes these main findings:
• Virtually every state tax system is fundamentally unfair, taking a much greater share of income from low- and middle-income families than from wealthy families. The absence of a graduated personal income tax and overreliance on consumption taxes exacerbate this problem.
• The lower one’s income, the higher one’s overall effective state and local tax rate. Combining all state and local income, property, sales and excise taxes that Americans pay, the nationwide average effective state and local tax rates by income group are 10.9 percent for the poorest 20 percent of individuals and families, 9.4 percent for the middle 20 percent and 5.4 percent for the top 1 percent.
• In the 10 states with the most regressive tax structures (the Terrible 10) the bottom 20 percent pay up to seven times as much of their income in taxes as their wealthy counterparts. Washington State is the most regressive, followed by Florida, Texas, South Dakota, Illinois, Pennsylvania, Tennessee, Arizona, Kansas, and Indiana.
• Heavy reliance on sales and excise taxes are characteristics of the most regressive state tax systems. Six of the 10 most regressive states derive roughly half to two-thirds of their tax revenue from sales and excise taxes, compared to a national average of roughly one-third. Five of these states do not levy a broad-based personal income tax (four do not have any taxes on personal income and one state only applies its personal income tax to interest and dividends) while four have a personal income tax rate structure that is flat or virtually flat.
• State personal income taxes are typically more progressive than the other taxes that states levy (e.g. property, consumption). Sales and excise taxes are the most regressive, with poor families paying almost eight times more of their income in these taxes than wealthy families, and middle income families paying five times more. Property taxes are typically regressive as well, but less so than sales and excise taxes.
• Personal income taxes vary in fairness due to differences in rates, deductions, and exemptions across states. For example, the Earned Income Tax Credit improves progressivity in 25 states and the District of Columbia, while nine states undermine progressivity by allowing taxpayers to pay a reduced rate on capital gains income, which primarily benefits higher-income households.
• State consumption tax structures are highly regressive with an average 7 percent rate on sales and excise taxes for the poor, a 4.7 percent rate for middle-income people, and a 0.8 percent rate for the wealthiest taxpayers. Because food is one of the largest expenses for low-income families, taxing food is particularly regressive; five of the ten most regressive states tax food at the state or local level.
• Taxes on personal and business property are a significant revenue source for both states and localities and are generally regressive in their overall effect, particularly for middle-income households. A homestead exemption (exempting a flat dollar or percentage amount of property value from a property tax) lessens regressivity. A property tax circuit breaker that caps the amount a property owner pays in property taxes based on their personal income can also reduce regressivity; none of the 10 most regressive states offer this tax break to low-income families of all ages.
• States commended as “low tax” are often high tax states for low- and middle-income families. The 10 states with the highest taxes on the poor are Arizona, Arkansas, Florida, Hawaii, Illinois, Indiana, Pennsylvania, Rhode Island, Texas, and Washington. Seven of these are also among the “terrible ten” because they are not only high tax for the poorest, but low tax for the wealthiest…
For the complete report, Click Here.
Illinois’ tax system is regressive, because the lower one’s income, the higher one’s tax rate. This is in part because Illinois, unlike most other states, does not have an income tax where taxpayers with higher incomes pay a higher rate and taxpayers with lower incomes pay a lower rate. Without such a fair income tax, there is nothing to offset the higher share of income that poorer taxpayers pay in sales and property taxes.
How Illinois taxes residents matters for a variety of reasons. In recent years, anti-tax advocates have pushed for tax policies across the country that would reduce tax rates for the wealthy and businesses. In Illinois, the recent income tax cut disproportionately benefits the wealthy, while many of the proposed ideas to partially offset the deep revenue losses would increase taxes on poor and middle-income families.
There’s also a more practical reason for Illinois and all states to be concerned about regressive tax structures, according to ITEP. If the nation fails to address its growing income inequality problem, states will have difficulty raising the revenue they need over time. The more income that goes to the wealthy (and the lower a state’s tax rate on the wealthy), the slower a state’s revenue grows over time.
“In recent years, multiple studies have revealed the growing chasm between the wealthy and everyone else,” said Matt Gardner, executive director of ITEP. “Upside down state tax systems didn’t cause the growing income divide, but they certainly exacerbate the problem. State policymakers shouldn’t wring their hands or ignore the problem. They should thoroughly explore and enact tax reform policies that will make their tax systems fairer” (Capitol Fax).
It is also true that most state legislators lack the political backbone to address the causes of the budget problems but prefer scapegoating public employees and their pension systems instead. They are abetted by the Civic Committee of the Commercial Club of Chicago, the Civic Federation, Illinois Policy Institute, and the Chicago Tribune, to name just a few wealthy groups that perpetuate lies. Illinois legislators do not want to pay what is owed to the public pension systems even though past legislators, especially past governors, were the cause of the public pension systems’ lack of funding throughout the decades.
What is needed to solve the budget problems in Illinois is a better revenue base to pay the state’s self-induced debts. What is easier to do is to evade serious problem solving of the state's budget deficits and to incriminate the state’s public employees and retirees.
The issue at hand is the state’s regressive tax rate that no one wants to confront. The public lacks awareness and understanding about the main causes of the state’s budget deficits. Legislators, the Civic Committee, et al. have capitalized on the public's ignorance of the essential causes of the state's financial debacle by calling for budget cuts and radical pension reform as the solutions. They are diversionary, scapegoating tactics that will bring intentional, financial harm to public employees and retirees and allow legislators to escape legal and ethical responsibility.
“At the core of the budget ‘crisis’ facing [Illinois] is [its] regressive state tax structure… that is, low-and-middle-income families pay a greater share of their income in taxes than the wealthy… [A regressive tax] disproportionately impacts low-income people because, unlike the wealthy, [low-income people] are forced to spend a majority of their income purchasing basic needs that are subject to sales taxes” (United for a Fair Economy).
Instead of reforming the state's tax system, legislators (and their wealthy subsidizers) have focused on radical pension reform and severe budget cuts to services that the rest of us need. What do the wealthy elite and their puppet legislators propose? They propose sweeping, radical pension reform that will destroy the public employees’ defined-benefit pension plans, even though they know current unfunded liabilities will not be resolved by pension reform.
Furthermore, Illinois legislators propose budget cuts that will undermine healthcare for children, the elderly and low-income families; budget cuts that will prolong and increase the state’s unemployment; budget cuts in public safety and transportation; budget cuts in education; and budget cuts that will stifle economic recovery while increasing profits for the wealthy few among us.
According to the Center for Tax and Budget Accountability (CTBA), it is true that if the State of Illinois “does not [create] a contemporary tax system, one that is both sound and responsive to the needs of state, basic and necessary programs face the chopping block.”
Consider, for example, budget cuts in K through 12 and higher education: “Disparities in [the state’s] school funding and, therefore, quality of education, would be significantly reduced if the primary basis for school funding was on state revenues,” and that is why Illinois is “next to last in a ranking of states based on funds spent on education” (CTBA). As it is now, property taxes used as the main sources of revenue for school funding guarantee income inequalities among school districts throughout the State of Illinois.
Let’s be concerned about why the State of Illinois cannot obtain more revenue. Besides federal sources of income, the state uses only 11 sources of revenue: personal income tax (but note Illinois was tied for the fourth lowest individual tax rate on households in the top income bracket), corporate income tax (note the recent extortionate tax breaks given to some Illinois corporations), sales tax (note that Illinois does not tax services like most other states for another significant source of revenue), corporate franchise tax and fees, public utility taxes, vehicle use tax, inheritance tax, insurance taxes and fees, cigarette taxes, liquor taxes and other miscellaneous (or unsubstantial) tax sources (Commission on Government Forecasting and Accountability).
In regards to sales taxes, “a majority of states apply their sales tax to less than one-third of 168 potentially-taxable services… [States that do not tax services, such as Illinois], probably could increase [its] sales tax revenue by more than one-third if [it] taxed services purchased by households comprehensively” (the Center on Budget and Policy Priorities).
Consider that a broader-based taxation system would provide a decrease in taxes for low-income and many middle-income families. Taxing services alone “would generate enough revenue to stabilize the General Revenue Fund and prevent structural deficits that lead to cuts in basic needs and social service programs” (CTBA). As long as our legislators play their political ping pong game with one another, it is impossible to obtain any just resolutions to the state’s perpetuated budget problems.
So why can’t the State of Illinois provide a fair and sound tax system, one that is “efficient with minimal impact on the economic decisions that taxpayers have to make” (CTBA), one that captures increased revenues in times of economic growth, one that maintains revenue collections during poor economic times, one that is simple and not liable to inconspicuous error, one that is transparent and builds trust with the state’s government officials (CTBA), and one that helps 99 percent of the state’s population?
The answer is most legislators in the State of Illinois prefer the easy way out of a difficult and challenging situation. Illinois legislators will not address the most important causes of the state's budget deficits: the state's flat-rate taxation and pension debt because of their own self-interests and the wealthy one percent that bankrolls them.