Thursday, January 15, 2015

State Taxes, Regressivity, and "Skin In the Game"

-- Posted by Neil H. Buchanan

Remember Mitt Romney?  He was the guy who dismissed the 47% of Americans who, per Romney, "believe that they are victims, that they are entitled to health care," and who will never "take personal responsibility and care for their lives."  Well, he might be back, if the political rumors of the week are to be believed.  Given that Romney's comments about "the 47%" were probably the biggest gaffe in his gaffe-prone 2012 presidential campaign, it is a mild coincidence that this week also saw the publication of a study that completely undermines the conservative mythology about the people with no "skin in the game," that is, who supposedly pay no taxes.

Romney is by no means the only conservative who has tried to misuse that statistic, and he will surely not be the last.  Here, therefore, I will briefly summarize that politically explosive distortion, and then I will describe the new study of state-level taxes that was released yesterday.

The infamous 47% statistic actually emerged in early 2010, when conservatives discovered that only 53% of the population had a positive federal income tax liability in 2009.  As I (and many others) wrote at the time, there were multiple problems with jumping from that statistic to the conclusion that "almost half of the people pay no taxes."  The year 2009 was the first and worst year of the Great Recession, meaning that a lot of people who would have been paying federal income taxes were instead unemployed and thus had no income to tax.  Those non-paying 47% also included retirees, who generally would not be expected to be paying income taxes in any case.

More to the point of this post, the statement that "x% of taxpayers pay zero federal income tax in a given year" may be true, but it ignores the other taxes that people pay.  Even at the federal level, the personal income tax constitutes less than half of government revenues.  In the most recent year available, 2013, the personal income tax constituted (purely coincidentally) 47% of federal tax revenues.  Everyone who earns even a dollar pays federal payroll taxes.  And if, as some conservative economists assert, the corporate income tax is passed on to workers in the form of lower wages, then workers paid the $280 billion collected from that ever-shrinking source of revenues.

In my initial Dorf on Law post in 2010, responding to the distorted claims about the 47% who were supposedly not paying taxes, I noted that most people "do pay mostly-regressive state and local taxes."  And that is where yesterday's report comes in.  The Institute on Taxation and Economic Policy (ITEP) is a liberal, nonpartisan group that (along with its sibling organization Citizens for Tax Justice), provides extremely high-quality numerical analyses of tax policy.  This is the fifth year that ITEP has issued "Who Pays?" a report that summarizes the tax systems of all 50 states and D.C.  The report makes for depressing reading for anyone who believes in progressive taxation, and it raises some interesting questions about some conservative talking points.

The report received a good write-up in The New York Times, but the report itself is worth reading (even for people who are not tax geeks like me).  In addition to links to the Full Report itself, an Executive Summary and a Press Release, the home page of the report  provides a clickable map of the United States, showing all kinds of interesting tax numbers for each state.  Those with addictive personalities are warned: You could spend a lot of time on this site!

The bottom line of the report is that state taxes are, indeed, "mostly regressive."  Indeed, if you take each state's tax system as a whole, there is not a single state in the country that is running a progressive tax system.  According to the study, this year the bottom 20% of income-earners nationwide will pay an average of 10.9% of their pretax incomes in state and local taxes, while the top 1% will pay 5.4% on average.  As I noted in my 2010 Dorf on Law post, the combined impact of federal and state taxes adds up to a proportional system, in which the poorest and richest all pay the same rates of taxes.  (That is bad enough, but there are further reasons beyond the scope of this post to believe that the measured tax rates for upper-income people are seriously overstated.)

Amazingly, not a single state has a progressive tax system.  Delaware is the least regressive, with the bottom 20% paying 5.5% and the top 1% paying 4.8%.  That is still regressive, of course.  The most regressive state is Washington, where the tax rates are 16.8% for the bottom fifth, and 2.4% for the top 1% of earners.  To Washington's credit, the Democrats there are at least trying to make their state's taxes less regressive, but the best way to do so is by adopting a state income tax, which voters there rejected in a ballot initiative a few years ago.

Interestingly, there is a state that imposes an even lower tax rate on its top 1% than Washington does.  Florida's aggregate tax rate on the top percentile is 1.9% (versus 12.9% rate on the bottom fifth).  This is so close to zero that I wondered whether Florida's affluent residents have enough "skin in the game" to be good citizens.  For those readers who have been spared this particular bit of sophistry, there is a claim among many conservatives that everyone should have to pay taxes, because otherwise, they will not be vigilant in making sure that their elected representatives are spending the tax revenues wisely.  The further implication is that people with low or no tax liabilities will simply ignore the government, because it is ignoring them.

I find this argument laughable, as I have explained here and here.  Still, these data provide an opening for some empirical testing.  Do rich people try to influence state governments more in Delaware than in Washington or Florida?  If anyone can find a correlation, please let me know.  Color me skeptical.