Editorials of The Times: State and Local Taxes Are Worsening Inequality

That gap between the poor and the wealthy in Illinois is one of the largest in any state, but the poor pay taxes at higher rates in 45 of the 50 states, according to a 2018 study by the Institute on Taxation and Economic Policy.

It’s a bipartisan phenomenon. The institute’s list of the 10 states with the most regressive tax systems — the states doing the most to increase inequality through taxation — also includes conservative Tennessee and Texas, purple Nevada and Florida, and liberal Washington.

Now Illinois is trying to take its name off the list. The state plans to hold a referendum next year on a constitutional amendment that would authorize the state to tax higher incomes at progressively higher rates — the system used by the federal government and 32 states.

Illinois currently taxes income at a flat rate of 4.95%. Under the proposed system, income below $100,000 would be taxed at a slightly lower rate. Income up to $250,000 would be taxed at the current rate. And income above that amount would be taxed at rates of up to 7.99%. There is also a kind of millionaire’s tax: Individuals making more than $750,000, or couples making more than $1 million, would pay the 7.99% rate on all their income.

Economic inequality in the United States has reached the highest levels since the 1920s, and there is mounting evidence that the unequal distribution of income and wealth is contributing to the nation’s economic and political problems. Reducing inequality ought to be a focus of public policy. Rewriting state tax laws to place the greater burden on those with greater means is an effective and sensible response.

Taxation in the United States remains progressive because the federal income tax remains the largest source of government revenue. But the distribution of the total burden has become much less progressive. In 1961, Americans with the highest incomes paid an average of 51.5% of that income in federal, state and local taxes. Half a century later, in 2011, Americans with the highest incomes paid just 33.2% of their income in taxes, according to a study by Thomas Piketty, Emmanuel Saez and Gabriel Zucman published last year. Over that same period, the bottom 90% of Americans, ranked by income, saw their tax burden increase from 22.3% of income to 26% of income.

(Since 2011, federal income taxation has increased under President Barack Obama and declined under President Donald Trump. Data on the full impact of those countervailing changes is not yet available.)

The headline problem is that Congress sharply reduced taxation of the wealthy, cutting top income tax rates as well as corporate and estate taxation.

Meanwhile, the tax burden on everyone else has increased. One reason is the gradual rise of federal payroll taxation, the flat-rate income tax that provides funding for Social Security and Medicare. The Social Security tax is particularly regressive because it applies only to income up to $132,900. The relative scale of state and local taxation also has risen, partly because the federal government increasingly funds its operations with borrowed money rather than tax dollars.

State and local governments rely heavily on sales and property taxes, which impose a greater burden on less affluent households because wealthier people typically spend a smaller share of income on food, housing and other forms of consumption. In roughly one-third of states, this effect is partly offset by progressive income taxation. But even in most of those states, the overall burden still falls more heavily on those with lower incomes. Only a handful of states — California, Delaware, Minnesota, New Jersey and Vermont — and the District of Columbia have written their tax laws so that those with the highest incomes pay the largest share of their incomes.

The Illinois plan is a step in the right direction rather than a complete corrective. Under current law, households in the bottom quintile of the income distribution pay 14.4% of their income in taxes on average, while those in the top 1% pay 7.4% of their income in taxes — a difference of 7 percentage points. The proposed changes in the income tax would cut that gap to 4.3 percentage points, according to the Institute on Taxation and Economic Policy.

Illinois is seeking to address long-standing fiscal problems, notably an underfunded pension system, so it is raising taxes on the rich without significantly reducing taxes for everyone else. Other states, however, could do better by raising taxes on the rich and using the money to reduce the taxation of low-income families.

Opponents of progressive taxation warn that wealthy people and businesses will flee to other states, and that those with the most money are the most mobile. People can vote with their feet, and some do prefer low-tax states like Florida. But a quick look at the list of states with progressive tax structures should make clear that plenty of rich people choose to stay put.

Indeed, Stanford sociologist Cristobal Young has calculated that people with million-dollar incomes move across state lines less often than other Americans. They are more likely to be married, more likely to have children, more likely to be involved in civic and social groups — and, in many cases, their wealth stems from their communities. A successful Springfield dentist cannot relocate her patients to Missouri. A man who owns a chain of gas stations around Peoria is likely to remain in Peoria. A company that relies on Chicago’s highly educated workforce may not be focused on finding the place with the lowest tax rates.

The potential cost of losing a few millionaires also needs to be weighed against the benefits of equitable taxation. By imposing a somewhat larger burden on high-income households, states can significantly improve the material circumstances of lower-income households and slow the troubling expansion of economic inequality.

At the very least, states ought to stop making things worse.

This article originally appeared in The New York Times.

Editorials of The Times: State and Local Taxes Are Worsening Inequality

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