Study reveals an unfair tax system
Many people believe that our state tax system is progressive. That is, they believe that wealthier taxpayers pay a higher percentage of their income in taxes than lower income taxpayers. But it is not so. When all types of taxes and deductions are taken into account, we tax the poorest taxpayers at over twice the rate at which we tax the wealthiest 1% of taxpayers.
The figure below shows the results of a recent analysis of the Massachusetts tax system by the Institute on Taxation and Economic Policy (ITEP), a nonpartisan think tank in Washington, D.C. It shows that taxpayers with the lowest 20% of incomes pay 9.3% of their income to taxes. In contrast, the wealthiest 1% of taxpayers pay an effective rate of only 4.3%.
Figure 1. Final Massachusetts tax burden after all taxes and deductions are considered.
——– Table 1 State & Local Taxes in Massachusetts ——–
| ||Lowest 20%||Second 20%||Middle 20%||Fourth 20%||Next 15%||Next 4%||Top 1%|
|State & Excise Taxes|| 5.4%|| 3.9%|| 2.9%|| 2.3%|| 1.8%|| 1.2%|| 0.6%|
|Property Taxes|| 3.0%|| 2.5%|| 2.8%|| 3.1%|| 2.8%|| 2.4%|| 1.1%|
|Income Taxes|| 0.9%|| 2.9%|| 3.5%||3.8%|| 4.3%|| 4.6%|| 5.1%|
|Total Taxes BEFORE|
| 9.3%|| 9.2%|| 9.2%|| 9.3%|| 8.8%|| 8.2%|| 6.8%|
|Total Taxes AFTER Federal Deduction|| 9.3%|| 9.1%|| 8.6%|| 8.2%|| 7.3%|| 6.2%|| 4.6%|
Source: Institute for Tax and Economic Policy
This picture of where the tax burden falls comes from considering all state taxes – income tax, sales tax, property taxes, and excise taxes. Taxes such as the sales tax are quite regressive since wealthier individuals invest most of their income rather than having to spend it on personal consumption and thus pay sales taxes. Property taxes are also regressive, since home ownership is usually where lower income families have their nest egg invested.
The ITEP analysis reflects the fact that wealthier taxpayers are able to deduct state taxes from their Federal income liability. This is a significant consideration, chopping 2.2% off the tax burden of the wealthiest 1% of taxpayers.
Massachusetts has a flat rate income tax. That is, the rate remains at 5.3% no matter how much income you have. Some states have truly progressive income tax rates for which the rate increases for higher income taxpayers. But despite lacking this feature, our state income tax is somewhat progressive due to the presence of deductions, Earned Income Tax Credit, and no-tax thresholds. When compared to other taxes, such as the sales tax, the state income tax is closer to being progressive.
Who is hurt by our unfair tax system? Obviously, lower income citizens who are struggling to get by are hurt by having to pay more than their fair share. Focusing taxes on working families while giving breaks to those who are merely investing capital earned in the past provides a disincentive to full participation in the economy. And making taxes painful to a broad range of citizens creates antagonism toward all taxes. This antagonism has been skillfully manipulated by corporate interests to prevent tax reform. The ill-will is also twisted into support for poorly-conceived tax cut proposals such as the recent ballot initiative to totally eliminate the state income tax. Having an unfair tax system practically guarantees that vital state programs will be underfunded year after year. In the final analysis, every one suffers from having a poorly designed tax system that does not fairly distribute the tax burden.
For a copy of the ITEP report on tax distributions, go to the Center for Tax Justice.