State and Local Tax Fairness

Some of the most progressive taxes are the exact opposite of regressive taxes.  A policy of low or no sales tax is a way in which some states try to make their tax structure more progressive.  Many states also use an Earned Income Tax Credit.  An “EITC” is a credit to low income working families who make an amount below the level determined by the Federal Earned Income Tax Credit.  The state tax is an additional sum derived from the Federal EITC.  States that are the most progressive tend to be the states which rely most heavily on income tax as a majority of the total tax levy. 

The states which are the most progressive in terms of their tax structure are Vermont and Delaware.  Vermont is considered progressive principally because of its use of a 32% Earned Income Tax Credit, but Vermont also employs the use of a gradual rate for income tax structure.  Delaware has no statewide sales tax and it relies heavily upon income tax as a source of state revenue. 

The state of Massachusetts has a generally progressive tax structure.  An example of the ways in which Massachusetts is progressive is the exemption of food from the state sales tax.  This is progressive because more food is generally consumed by the lowest income brackets due to the fact that families in this bracket tend to have more children, this exemption does not however, restaurant dining as these transactions are covered by the meals tax.   The state is also progressive in the way that it gives a state earned income tax credit.  The Massachusetts Earned Income Tax Credit is 15% of the Federal Earned Income Tax Credit.  Massachusetts tax structure does have regressive its qualities; the most notable of these is the state income tax uses a single rate structure.  A single rate structure is inefficient because it taxes people at set thresholds so that rate is always adjusted as income rises or falls.  Massachusetts taxes have also stayed relatively constant.  In the period from 1997 to 2007 as a percentage of state revenue property tax fell 1%, sales tax climbed 2.25%, and income tax remained the same percentage.  

The two of the states with the worst structures are Alabama and Texas.  Alabama is very regressive in that it includes groceries in its state sales tax.  Alabama also has very narrow tax brackets so that a majority of people pay at the top tier of income tax.  Texas is regressive in that it has no state income tax.

States do their best to make everyone happy and to provide fair taxation for all.  This made difficult by the competing interests of people within a taxable community.  The tax structure is also complicated in that some taxes though regressive in nature are necessary.  For instance the excise tax on cigarettes is a regressive tax it is a necessary tax, the increased price of cigarettes decreases consumption of the product which will save the initial purchase price once the person has quit smoking and it is proven to help with the cost of medical expenses.  Taxes are complex but it is clear that they are not as good as they could be.  Down to the state taxes are regressive.  This trend becomes even clearer when comparing taxation as a percent of income between the top and bottom one percent. The regressive structure of income tax is making state budgets harder to balance and harder to live with.