Report: Low-income working families pay most in state and local taxes
Published: February 28, 2013
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Working families in Pennsylvania pay a far higher share of their income in state and local taxes than the state’s wealthiest earners, according to a new study by the Institute on Taxation and Economic Policy (ITEP).
Pennsylvania’s tax system scored so poorly that it made the list of the “Terrible 10” most regressive tax states in the nation.
“No one would deliberately design a tax system where low-income working families pay the greatest share of their income in taxes, but that is exactly the type of upside-down tax system we have in Pennsylvania,” said Sharon Ward, director of the Pennsylvania Budget and Policy Center (PBPC), which co-released the report with ITEP. PBPC is a liberal think tank based in Harrisburg.
The study, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, examines state and local taxes across the nation. It ranked Pennsylvania’s tax system as the eighth “most regressive” in the nation, meaning taxes fall disproportionately on middle-class, working and poor families to the advantage of the richest taxpayers.
Middle-income families in Pennsylvania pay more than double the share of their income in taxes than the very wealthiest Pennsylvanians, while low-income families pay nearly three times as much, the report found.
Some of the key Pennsylvania findings are:
* Pennsylvania families earning less than $19,000 — the poorest fifth of taxpayers — pay 12 percent of their income in state and local taxes.
* Middle-income Pennsylvania taxpayers — those earning between $36,000 and $58,000 — pay 10.1 percent of their income in state and local taxes.
* The richest 1 percent of Pennsylvania taxpayers — with average incomes of $1.067 million — pay only 4.4 percent of their income in state and local taxes.
* Washington, Florida, South Dakota, Illinois, Texas, Tennessee, Arizona, Pennsylvania, Indiana and Alabama are among the 10 most regressive tax states. Pennsylvania ranks eighth. Four of the states have no personal income tax, one state applies it only to interest and dividends, and the other five, including Pennsylvania, have a personal income tax that is flat or virtually flat across all income groups.
An upside-down tax system:
Pennsylvania’s state and local tax system asks more of lower-income families than the wealthy, compared to New Jersey and West Virginia.
The study examined what families pay in personal income, sales and property taxes, and took into account reductions in state and local taxes from federal deduction offsets.
“This report should bury once and for all the myth of the makers vs. the takers,” Ward said. “Low-income families in Pennsylvania are paying much more of their income in state and local taxes than the top 1 percent.”
Families who qualify for state personal income tax forgiveness still pay large shares of their earnings in sales, local income and property taxes, the report found. At the same time, wealthy taxpayers benefit greatly from tax laws that allow them to write off property and income taxes from their federal taxes. This is, at best, a modest benefit for middle-class families and no benefit to very low-income earners.
Pennsylvania’s flat income tax contributes to its regressive tax ranking. Without a graduated tax rate that rises on more affluent earners, the state’s income tax does little to offset more regressive sales and property taxes.
“It’s time to right this wrong by amending the state constitution to enact a graduated personal income tax,” Ward said. Even without a constitutional change, the state could set a higher income tax rate on investment income, which goes primarily to wealthy Pennsylvanians, without raising the rate on wage earners.
State legislation that would swap higher sales taxes for lower property taxes would make Pennsylvania’s tax system worse, benefiting the wealthy at the expense of middle- and lower-income families, Ward added.
The commonwealth could increase the effective tax rate on the wealthiest with little impact. Pennsylvania’s personal income tax has the lowest top rate among the 41 states and the District of Columbia that have income taxes on earnings. The top 1 percent of Pennsylvania earners, meanwhile, saw their average income grow in 2010 by more than $100,000 to slightly over $1 million. They captured 76 percent of all growth in personal income that year.
The fourth edition of Who Pays? measures the state and local taxes paid by different income groups in 2013 (at 2010 income levels including the impact of tax changes enacted through January 2, 2013) as shares of income for every state and the District of Columbia.