State sales tax on food and other necessities place a higher burden on poor families. AP images

A new report shows that low-income Americans are taxed at twice the rate as the richest one percent.

In his State of the Union speech, President Obama will outline a plan to overhaul the federal tax code. His objective will be to reduce inequality in the tax structure, but even if these reforms are enacted, they might only help marginally, says Matthew Gardner, executive director of the Institute of Tax and Economic Policy. That's because they wouldn't address unfair tax systems at the state and local levels.

"At the state level, we're redistributing income away from poor people and giving it to rich people," says Gardner.

A new report released by ITEP illustrates just how bad the problem has become. The chart below, from the report, shows that the poorest Americans pay nearly 11 percent of their income in taxes. By comparison, the wealthiest only pay a 5.4-percent tax share.

The poorest 20 percent of the population end up paying double state tax rate as the top 1 percent. (Institute of Tax and Economic Policy)

Of the three main forms of state taxes—sales, property, and income—the sales tax hurts the poor most, says Gardner. State sales taxes are highly "regressive," he says. That is, they end up taking a bigger chunk of change from people that have smaller sums of money and slower income growth.

Let's say that a rich person and a poor person each spend $100 on taxable grocery items. This $100 expenditure—and the sales tax on that $100—both deal heavier blows on the poor person's income because it's smaller. The report backs up this hypothetical example: as a share of their income, the poor pay a 7 percent rate on sales and excise taxes, while middle-income families pay 4.7 percent rate, and the wealthy pay less than one percent, on average.

Low- and middle-income taxpayers pay a disproportionately large shares of their income as sales and excise tax. (Institute of Tax and Economic Policy)

Understandably, then, low-income Americans living in states that rely more on sales tax are worse off. In Washington State, for example, the poor pay nearly 17 percent of their income in state taxes, while the rich only pay 2.4 percent. On the other hand, in D.C. and California, more reliance on personal income taxes and better Earned Income Tax Credit policies make the tax system more equitable. (Though even there, low- and middle-income groups pay higher proportions of their comparatively smaller incomes).

Washington state has the most regressive tax policy, with the poorest paying 16.8 percent share of their income. (Institute of Tax and Economic Policy)

Giving too much weight to sales taxes isn't just bad for those living below the poverty line, it's bad for local economies. "You simply aren't going to be able to raise revenue from folks who have the least income," says Gardner. "That's a recipe for fiscal disaster."

Still, local governments have lacked the political will to lean more on income taxes, which are considered more fair and progressive, Gardner says. He thinks it's partly because sales taxes seem innocuous compared to income taxes.

"There's a bit of sticker shock with the personal income tax that makes it more visible than sales tax," he says. By comparison, taxpayers look at the small amounts at the bottom of their grocery receipt and think that sales taxes are a good deal. But they're not.

About the Author

Most Popular

  1. photo: Developer James Rouse visiting Harborplace in Baltimore's Inner Harbor.
    Life

    What Happened to Baltimore’s Harborplace?

    The pioneering festival marketplace was among the most trendsetting urban attractions of the last 40 years. Now it’s looking for a new place in a changed city.

  2. Equity

    What ‘Livability’ Looks Like for Black Women

    Livability indexes can obscure the experiences of non-white people. CityLab analyzed the outcomes just for black women, for a different kind of ranking.

  3. Design

    Why Amsterdam’s Canal Houses Have Endured for 300 Years

    A different kind of wealth distribution in 17th-century Amsterdam paved the way for its quintessential home design.

  4. Design

    Before Paris’s Modern-Day Studios, There Were Chambres de Bonne

    Tiny upper-floor “maids’ rooms” have helped drive down local assumptions about exactly how small a livable home can be.

  5. photo: Bernie Sanders
    Life

    Bernie Sanders Wins Endorsement From the Internet’s Premier Urbanist Meme-Makers

    In backing the Vermont senator, the popular Facebook group “New Urbanist Memes for Transit-Oriented Teens” is leveraging some offline political clout.

×