A new study shows residents in states with the lowest income taxes pay less to the IRS.
If you’re wealthy in Florida or Tennessee, you’re more likely to stay wealthy.
Both states have zero to very little income tax, meaning high-income residents pay the same in sales and property taxes as the poor.
Personal finance site WalletHub crunched data of the three most-pressing tax burdens in 50 states: property, income, and sales. Overall tax burdens are the worst in states with the lowest income taxes.
Is it fair? Experts say no.
“The income tax tends to be the fairest tax, using a taxpayer’s ability to pay as the measure of fairness. Income is closely tied to a person’s ability to pay taxes,” Mary L. Heen, University of Richmond law professor told WalletHub. “This is more difficult to achieve with sales taxes.”
Of the top five states with the lowest tax burden, only Delaware has an income tax.
What it lacks in taxing the rich, it makes up for wealthy business owners. The “Diamond State” is known as a “tax haven,” where business owners evade taxes and stakeholders keep more of their profits.
Regression in a progressive country
Experts argue having everyone pay the same in sales or property taxes makes it easier for low-income earners to slip into poverty.
It makes for an uneven playing field. When someone earning more than a six-figure salary pays the same sales tax as someone who earns $20,000 annually, the latter is more likely to struggle financially than the former.
“The burden of sales taxes falls much more heavily on lower-income taxpayers, a result that violates fundamental fairness norms,” Heen said. “Although sales taxes can be structured to provide exemptions or lower rates for the purchase of basic necessities, such as food, medicine, or certain essential services, these types of offsetting adjustments tend to introduce problematic inefficiencies into the system. In sum, primary reliance on sales taxes for state and local revenues results in a more regressive tax system.”
Find out: Understanding Income Tax Brackets
A growing income gap
A 2015 study by economists at the Federal Reserve explored how income taxes in states like Florida and Tennessee contribute to a “widening income gap.”
The study says, “Income inequality has risen dramatically in the United States since at least 1980.” The majority of the country does follow a progressive tax system: Higher-income earners pay more in income but lawmakers in states like Florida and Tennessee have made it a mission to avoid the tax.
The Florida Policy Institute, a nonpartisan, nonprofit organization dedicated to improving economic mobility, has noted the “Sunshine State’s” tax system is “among the most regressive in the country.”
In 2018, the organization published a joint study with the Institute on Taxation and Economic Policy that found, “ the lowest-income Floridians – those earning less than $18,700 – pay five and a half times as much in taxes as a share of their household income than the state’s wealthiest residents, or those earning upwards of $548,700.”
The tax burden may indeed be among the lowest in the country. But Meg Wiehe, deputy director of ITEP and an author of the study, says the effects have been significantly damaging to lower-income earning residents.
“Rising income inequality is unconscionable, and it is certainly a problem that local, state and federal lawmakers should address,” Wiehe said. “State lawmakers have control over how their tax systems are structured. They can and should enact more equitable tax policies that raise adequate revenue in a fair, sustainable way.”
Published by Debt.com, LLC