Summer Rerun: Low tax state for who?

This post originally ran on our blog this past January

Like most state tax systems, Oklahoma takes a much larger share from middle- and low-income families than from wealthy families, according to the fourth edition of “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States,” released by the Institute on Taxation and Economic Policy (ITEP). The report measures the state and local taxes paid by different income groups in 2013 (at 2010 income levels including the impact of tax changes enacted through January 2, 2013) as shares of income for every state and the District of Columbia.

Combining all of the state and local income, property, sales and excise taxes that Oklahoma residents pay, the average overall effective tax rates by income group are 10.3 percent for the bottom 20 percent, 9.3 percent for the middle 20 percent and 4.6 percent for the top one percent. Nationally, those figures are 11.1 percent for the bottom 20 percent, 9.4 percent for the middle 20 percent and 5.6 percent for the top one percent. You can see the Oklahoma fact sheet from the report here.

Oklahoma Policy Institute has recommended several reforms that would reduce the tax load for Oklahoma’s low and moderate-income families. These include eliminating the sales tax on groceries, updating personal income tax brackets to tax less income at the top rate, and expanding the standard deduction while limiting itemized deductions.

In contrast, the benefits from Oklahoma’s most recent reduction of the top personal income tax rate at the beginning of 2012 went almost entirely to the already wealthy. The ITEP report shows that the bottom 60 percent of Oklahoma taxpayers received just 9 percent of the tax cut, while 42 percent went to the wealthiest 5 percent.

“Cutting the income tax and relying on sales taxes to make up the lost revenues is the surest way to make an already upside down tax system even more so,” said Matthew Gardner, Executive Director of ITEP and an author of the study.

The Who Pays report shows that of the ten most regressive states, four do not have any taxes on personal income, one state applies it only to interest and dividends, and the other five have a personal income tax that is flat or virtually flat across all income groups. State consumption taxes are particularly regressive, with an average 7 percent rate for the poor, a 4.6 percent rate for middle incomes and a 0.9 percent rate for the wealthiest taxpayers nationwide.

The data in “Who Pays?” demonstrates that states commended as “low tax” are often high tax states for low- and middle- income families. The ten states with the highest taxes on the poor are Arizona, Arkansas, Florida, Hawaii, Illinois, Indiana, Pennsylvania, Rhode Island, Texas, and Washington.

“When you hear people brag about their low tax state, you have to ask them, low tax for who?,” Gardner said.