How State Taxes Put a Bigger Pinch on the Poor - DailyFinance

Over the last few months, as Republican presidential candidates have unveiled a stream of plans to cut taxes, they've consistently focused their rhetoric on a very narrow spectrum of our tax burden -- income tax as a percentage of income -- to suggest that the poorest Americans get a free ride at the expense of the wealthiest.

But, as a recent study points out, income tax is only part of the equation, and when all the other taxes we pay are factored in -- especially our punishing state taxes -- it's clear that the poor often pay a far greater percentage of their income in taxes than the rich.

The most striking number to come out of the tax debate is 47%: That's the portion of the populace that doesn't pay federal income tax. Taken at face value, this is true: According to the nonpartisan Tax Policy Center, thanks to a combination of dependent deductions and other tax breaks, nearly half the population ends up with a federal income tax of zero -- and, in fact, often gets a bit of money back on April 15.

But let's widen our gaze to the other taxes that workers pay to the federal government. A variety -- including Medicare and Social Security taxes -- are taken out of every paycheck. Beyond that, some portion of federal corporate tax falls on every consumer and employee of a private company, and federal excise taxes hit many consumers. When measured properly, 86% of taxpayers pay into the federal system -- a far cry from the 47% that critics claim. And most of the remaining 14% don't exactly fit the freeloader cliche: More than half -- 8% -- are the retired elderly, and the remainder are largely students or disabled. And yes, some are the unemployed or those earning very low incomes

In fact, when it comes to some taxes -- such as Social Security and Medicare -- the poorest 20% of workers pay a far larger percentage of their income than the richest 20%. Still, taken as a total, the poor send less of their income to the IRS than do the rich: According to the TPC, the total effective federal rate -- the rate that people pay after all loopholes, tax breaks, deductions, and so forth -- is 4% for the poorest Americans and 25.1% for the richest.

So the poor are getting a huge break, right? Well, it depends on where they live. According to a recent study by the Corporation for Enterprise Development, while the federal tax rate is progressive -- that is, its levy increases as income increases -- state tax rates are all regressive. In other words, unless you live in Washington D.C., the richer you are, the smaller a percentage of your income you pay in state taxes.

Every State Puts More Burden on Low Income Workers

And the differences aren't minor: In the median state, Mississippi, the poorest 20% of workers pay almost twice as high a percentage of their income as the richest 1%. In Washington state, the worst, they pay 17.3% of their income -- more than six times as much as the top 1%. What's more, this is true in all states -- even those that don't have an income tax. In fact, states that rely on sales taxes to make ends meet tend to hit the poor even more harshly, as low-income workers spend most of their paychecks on necessities.

When state taxes are factored into our overall tax percentage, the results are striking. In Washington state, for example, adding 17.3% to the 4% effective income tax rate yields a whopping 21.3% tax on income. While still lower than the 27.7% total tax rate of a top income bracket worker, it's still pretty shocking.

The gap gets even wider when one considers the impact of historically low dividend and capital gains tax rates. For a Washington state billionaire like Bill Gates, most of whose income comes from investments, it's likely that his overall tax rate is lower than that of a bottom-tier worker.

Throughout its history, America's tax rate has been progressive -- the more you make, the greater a percentage you pay into the system. The main exception to that rule have been Social Security and Medicare: Since they're capped at a certain income level, the poor pay a larger percentage of their incomes into those programs than the rich. The political justification for this is that the poor take greater advantage of these programs than the rich, and should therefore pay more.

But do the poor take greater advantage of state roads or state parks, state police or state prisons? If not, the argument for making them pay a higher percentage of their income to the state seems to be a little thin.

Bruce Watson is a senior features writer for DailyFinance. You can reach him by e-mail at bruce.watson@teamaol.com, or follow him on Twitter at @bruce1971.

Source: http://www.dailyfinance.com/2012/02/13/how-state-taxes-put-a-bigger-pinch-on-the-poor/

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