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

Tanvi Misra
Tanvi Misra

Tanvi Misra is a staff writer for CityLab covering demographics, inequality, and urban culture. She previously contributed to NPR's Code Switch blog and BBC's online news magazine.

Most Popular

  1. Two New York City subway cars derailed on the A line in Harlem Tuesday, another reminder of the MTA's many problems.
    Transportation

    Overcrowding Is Not the New York Subway's Problem

    Yes, the trains are packed. But don’t blame the victims of the city’s transit meltdown.

  2. Homeless individuals inside a shelter in Vienna in 2010
    Equity

    How Vienna Solved Homelessness

    What lessons could Seattle draw from their success?

  3. Members of a tenants' organization in East Harlem gather outside the office of landlord developer Dawnay, Day Group, as lawyers attempt to serve the company with court papers on behalf of tenants, during a press conference in New York. The tenant's group, Movement for Justice in El Barrio, filed suit against Dawnay, Day Group, the London-based investment corporation "for harassing tenants by falsely and illegally charging fees in attempts to push immigrant families from their homes and gentrify the neighborhood," said Chaumtoli Huq, an attorney for the tenants.
    Equity

    Toward Being a Better Gentrifier

    There’s a right way and a wrong way to be a neighbor during a time of rapid community change.

  4. Postcards showing the Woodner when it used to be a luxury apartment-hotel in the '50s and '60s, from the collection of John DeFerrari
    Equity

    The Neighborhood Inside a Building

    D.C.’s massive Woodner apartment building has lived many lives—from fancy hotel to one of the last bastions of affordable housing in a gentrifying neighborhood. Now, it’s on the brink of another change.

  5. Citi Bikes are pictured.
    Videos

    A Stark Comparison of Parking Vs. Bike-Share Spaces

    Watch New Yorkers swarm a Citi Bike station like mad ants while cars sit virtually idle across the street.