Why it’s not as simple as ‘New Jersey is a high-tax state’ or ‘Texas is a low-tax state’

Do you think that New Jersey is a “high tax state” while Florida is a “low tax state”? Think again.

An individual’s tax burden depends on the level of taxes, the types of taxes, and, critically, the income of the household.

State and local taxes come in all types. There are income taxes, property taxes, sales taxes, and just about every other kind of tax possible. Some fall more heavily on higher-income wage earners while others hit lower-income families hardest. This differential tax impact across income groups needs to be brought into the light.

First, some definitions. A progressive tax is one whose burden or rate rises as incomes rise. The U.S. income tax is an example. In contrast, a regressive tax impact falls as incomes rise. Sales and property taxes are examples. Finally, a proportional (or flat) tax is the same regardless of income. Pennsylvania’s income tax closely matches that definition.

The mixture of these types of taxes determines the extent that all taxpayers bear equal (or fair) burdens.

Creating a “fair” tax system is difficult because different taxes affect families of different incomes differently. A family earning $20,000 that pays $1,000 in taxes may find that sum burdensome. But a family earning $200,000 and paying twice as much, or $2,000, may see those taxes as modest.

Even if the higher-income household paid the same percentage as the lower-income household, or $10,000, the burden may differ. That’s because the upper-income household would still have significant after-tax income to spend.

Economists argue that progressive taxes even the tax burden across income groups. Higher-income households would not just pay more in terms of dollars but also a higher share of their income. That is, tax rates should rise as incomes increase.

With that concept of “fairness” as a starting point, how do states compare?

A recent study by the Institute on Taxation and Economic Policy analyzed the burdens of state and local taxes across the nation.

The results were eye opening, though hardly surprising. Nationally, households in the lowest 20 percent income group spent 11.4 percent of their income on state and local taxes. In comparison, the top 1 percent paid 7.4 percent. The rate fell as incomes rose, meaning that nationally, state and local taxes are regressive.

Locally, the results differed dramatically.

Pennsylvania has the seventh most regressive state and local tax structure in the nation. The poorest income group pays 13.8 percent of income in state and local taxes. The poor and middle-income tax rates are well above the national average. The top 1 percent pays 6 percent, well below the nation.

In contrast, Delaware tax structure is one of the least regressive, ranking 48th. The lowest 20 percent pays 5.5 percent while the top 1 percent pays 6.5 percent. Only Vermont and California have less regressive tax systems than Delaware.

High-tax New Jersey came in just below Delaware, at 46th. The poorest pay 8.7 percent in taxes, well below the national average, while the top 1 percent’s tax bite was 9.8 percent. The effective tax rate exceeds the national average for middle- and upper-income households.

Looking across the nation, high-tax states such as New Jersey, California, Massachusetts, and New York generally had modestly regressive tax structures. Meanwhile, the so-called low tax states, such as Texas and Florida, were in the top 10 in regressivity.

In Texas, the poorest pay 13 percent of their income in state and local taxes, while in Florida, they pay 12.7 percent. Those rates are well above the rates paid in the “high tax” states listed above.

So, what is a low-tax state? It depends upon your income. If you are poor, it’s not Florida, Texas, and especially not Pennsylvania, where the poor and middle class pay more.

Claiming that Pennsylvania’s state and local tax structure is fair because the income tax is a low, flat rate misses the point. The state depends significantly on property, sales and excise taxes, and those fall most heavily on the poor.

As for changing the structure, good luck. Pennsylvania’s lower- and middle-income households would benefit from more services funded at the state level, paid for by a graduated income tax. But upper-income households would scream.

Finally, there is one result that should open the eyes of all middle-income households. In all but four states, the middle 60 percent pay higher effective tax rates than upper-income households.

I suspect if that result were known, there just might be a national movement to change the way services are funded and taxes are collected at state and local levels.

Joel Naroff is president and chief economist at Naroff Economic Advisors, Inc.