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. A photo of an encampment of homeless people outside Minneapolis,
    Equity

    Why Minneapolis Just Made Zoning History

    The ambitious Minneapolis 2040 plan will encourage more dense housing development in single-family neighborhoods.

  2. Equity

    The ‘Sweeping’ Effect of a $15-an-Hour Job Guarantee

    A new report analyzes the complicated labor market impact of a radical proposal that’s gaining traction on the left.

  3. Tesla vehicles sit in a parking lot in California.
    Transportation

    America’s Power Grid Isn’t Ready for Electric Cars

    The challenge isn’t just about how much energy electric vehicles will need. A more important question is when they’ll need it.

  4. The opulent anteroom to a ladies' restroom at the Ohio Theatre, a 1928 movie palace in Columbus, Ohio.
    Design

    The Glamorous, Sexist History of the Women’s Restroom Lounge

    Separate areas with sofas, vanities, and even writing tables used to put the “rest” in women’s restrooms. Why were these spaces built, and why did they vanish?

  5. A photo of skyscrapers in Nashville.
    Equity

    The Big Stakes in a Fight Over a Little Park in Nashville

    Church Street Park is a small downtown space known to draw people experiencing homelessness. Now it’s slated to be replaced with a condo tower.