AUSTIN, Texas - Texas’ state and local tax system takes a much larger share of income from low- and middle-income households than of higher-income households, according to a new study.
The Institute on Taxation and Economic Policy’s Tax Inequality Index measures the effects of each state's tax system on income inequality. According to this measure, Texas has the 7th most regressive state and local tax system in the country. Income disparities are larger in Texas after state and local taxes are collected than before.
ITEP is non-profit and non-partisan.
“States described as "low tax" are often high tax for low-income families. States such as Florida, Tennessee, and Texas are often described as “low tax” due to their lack of personal income taxes. While this characterization holds true for high-income families, these states levy some of the nation’s highest tax rates on the poor. This is indicative of a broader pattern,” the study states.
“In the 10 states with the most regressive tax structures, the lowest-income 20 percent pay three times as much of their income in taxes as the wealthiest 1 percent. In Florida, home to the nation’s most regressive tax system, low-income families pay almost five times as much as the wealthy. After Florida, the next most regressive tax codes can be found in Washington, Tennessee, Pennsylvania, Nevada, South Dakota, Texas, Illinois, Arkansas, and Louisiana.”
The study concludes that Texas households in the lowest 20% of income – those with incomes less than $21,700 per year – pay 2.75 times the proportion of their income in sales, property, and other Texas taxes compared to families in the top 1% – those with annual incomes over $744,800.
“Ten states — Florida, Washington, Tennessee, Pennsylvania, Nevada, South Dakota, Texas, Illinois, Arkansas, and Louisiana — are particularly regressive, with upside-down tax systems that ask the most of those with the least. These states tax their poorest residents — those in the bottom 20 percent of the income scale — at rates averaging three times higher than those charged to the wealthy,” the ITEP study states.
“Middle-income families in these states pay an average rate more than twice as high a share of their income than the wealthiest families. Florida, which has the most regressive state tax system in the nation, fares worst by these two measures, with low-income families paying almost 5 times more than the wealthy and middle-income families paying more than 3 times more.”
Dick Lavine, senior fiscal analyst at Every Texan, has analyzed the new study in detail. He titled a recent blog, “Latest Study Confirms Unfairness of Texas’ State and Local Tax Systems.”
Lavine wrote: “In its 50-state study, ITEP measures the effects of each state’s tax system on income inequality. The income disparities in Texas are significantly larger after state and local taxes are collected compared to before. By this measure, Texas has the 7th most regressive tax system in the country.
“Several features of Texas’ tax system put a disproportionate share of the responsibility for supporting public services on the lower- and middle-income families that can least afford it.”
Lavine said that since Texas lacks a state personal income tax, it relies heavily on sales and property taxes.
“The sales tax is particularly unfair, requiring families with the lowest incomes to pay nearly 5.5 times the percentage of their income in these taxes compared to families with the highest incomes. Texas also has a comparatively high reliance on property taxes, which is the largest tax paid by Texans and a key source of support for public education and local government services,” Lavine said.
Lavine said Texas’ property tax system is “relatively fair” because it required a similar percentage of income from most families. But, he said, “the lowest-income families still must pay 1.75 times the percentage of income that the families with the highest incomes do.”
Lavine says many states offer a “circuit breaker” that caps property taxes as a percentage of family income. He says these programs often protect renters as well as homeowners.
“Several states also levy a tax on estates or inheritances, though Texas does not take advantage of these tax system avenues to reduce income and wealth inequality.”
Lavine continued: “The Texas tax system is so unbalanced that the 40% of families with the lowest incomes in ‘low-tax’ Texas pay a larger portion of their income than similar families in ‘high-tax’ California. In contrast, the California families most able to contribute to the support of public services pay 12% of their income in taxes, while the wealthiest 1% of Texas families are asked to contribute less than other Texans – only 4.6% of their income.”
Lavine points out that the Texas Comptroller of Public Accounts also produces a study of tax incidence, showing by business sector and family income who pays Texas taxes and who doesn’t.
“Although the ITEP and Comptroller studies differ in certain specifics, they reach the same conclusion. Texas public services are supported by an unfair tax system that takes the most from those who can afford it the least,” Lavine wrote.
