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off the charts

Swapping State Income Taxes for Bigger Sales Taxes Would Make Tax Systems Even Less Fair

My recent post explaining that there are far better ways to address state tax volatility than replacing income taxes with larger sales taxes noted that such a swap would tilt state tax systems even more against low-income families.  This two-part graphic shows why.

Most states’ income taxes are at least somewhat progressive.  That is, income taxes represent a smaller share of income for low-income families than for high-income families.

On average, the poorest 20 percent of taxpayers pay only 0.2 percent of their income in state and local personal income taxes, according to a recent study by the Institute on Taxation and Economic Policy, while the richest 1 percent of taxpayers pay 4.3 percent (see top chart).

State and local sales taxes, in contrast, fall harder on low-income families than on wealthy ones.  The bottom fifth of taxpayers pay 3.2 percent of their income in general sales taxes, while the top 1 percent of taxpayers pay only 0.5 percent (see bottom chart).

As a result, eliminating the state income tax and offsetting the revenue loss with higher sales taxes, as several governors have proposed, would shift the state’s tax burden from the wealthiest households to those lower on the income scale.