Which States Have the Most Progressive Income Taxes?

September 24, 2014

Yesterday, we presented data showing that the United States’ tax code is among the most progressive in the OECD when we compare Federal-level taxes, and an average value for state taxes. However, state income tax structures within the United States have just as much variation, in terms of progressivity, as OECD nations' income tax structures. We find that, using the same measure for the states as was used for the OECD, New York and California have tax codes more progressive than any OECD nation, even France or Portugal. Meanwhile, on the other end of the spectrum, 31 states have income taxes that would rank alongside the three least progressive income tax codes in the OECD. Five US states have income tax codes that are more progressive than the US federal tax code.

Progressivity and Top Marginal Rates of State Income Taxes, 2014

State Rank Multiple of Average Earnings at which the Top State Income Tax Rate Applies Rank Difference Between Top Income Tax Rate and Marginal Rate on $25,000 of Taxable Income Top State Individual Income Tax Rate

California

2

18.93

1

9.3%

13.3%

New Jersey

4

9.49

2

7.2%

8.97%

Vermont

5

9.42

3

5.4%

8.95%

Hawaii

11

4.48

4

3.4%

11%

District of Columbia

10

4.59

5

3.0%

8.95%

Minnesota

13

3.43

6

2.8%

9.85%

Iowa

17

1.74

7

2.5%

8.98%

West Virginia

18

1.65

8

2.5%

6.5%

New York

1

19.00

9

2.4%

8.82%

Rhode Island

14

3.02

10

2.2%

5.99%

Ohio

7

4.87

11

2.2%

5.392%

North Dakota

3

9.79

12

2.0%

3.22%

Louisiana

19

1.38

12

2.0%

6%

Nebraska

22

0.88

14

1.8%

6.84%

Connecticut

8

4.85

15

1.7%

6.7%

Arizona

12

3.54

16

1.7%

4.54%

Delaware

20

1.28

17

1.4%

6.6%

Wisconsin

6

5.93

18

1.4%

7.65%

Arkansas

21

0.98

19

1.0%

7%

Maryland

9

4.83

20

1.0%

5.75%

Oregon

15

2.77

21

0.9%

9.9%

Kentucky

16

1.96

22

0.2%

6%

Maine

23

0.75

23

0.0%

7.95%

New Mexico

24

0.63

23

0.0%

4.9%

South Carolina

25

0.63

23

0.0%

7%

Montana

26

0.59

23

0.0%

6.9%

Idaho

27

0.53

23

0.0%

7.4%

Mississippi

28

0.51

23

0.0%

5%

Kansas

29

0.49

23

0.0%

4.8%

Virginia

30

0.42

23

0.0%

5.75%

Missouri

31

0.41

23

0.0%

6%

Oklahoma

32

0.39

23

0.0%

5.25%

Georgia

33

0.31

23

0.0%

6%

North Carolina

34

0.18

23

0.0%

5.8%

Alabama

35

0.17

23

0.0%

5%

Michigan

36

0.09

23

0.0%

4.25%

Massachusetts

37

0.08

23

0.0%

5.2%

Utah

38

0.07

23

0.0%

5%

New Hampshire

39

0.05

23

0.0%

5%

Illinois

40

0.04

23

0.0%

5%

Tennessee

41

0.03

23

0.0%

6%

Indiana

42

0.02

23

0.0%

3.4%

Colorado

43

0.00

23

0.0%

4.63%

Pennsylvania

43

0.00

23

0.0%

3.07%

Alaska

50

No Income Tax

50

No Income Tax

0%

Florida

50

No Income Tax

50

No Income Tax

0%

Nevada

50

No Income Tax

50

No Income Tax

0%

South Dakota

50

No Income Tax

50

No Income Tax

0%

Texas

50

No Income Tax

50

No Income Tax

0%

Washington

50

No Income Tax

50

No Income Tax

0%

Wyoming

50

No Income Tax

50

No Income Tax

0%

 

* Income reflects May 2013 Bureau of Labor Statistics average earnings

* Tax rate and bracket information taken from here.

 

For a tax to be progressive, the average tax rate paid by an individual increases as their income increases. A flat tax, on the other hand, gives all taxpayers the same average tax rate regardless of income, while a regressive income tax would give taxpayers lower average tax rates as their incomes increase.

There are many ways to measure tax progressivity, especially when comparing effective rates. There is debate about what income measure should be used as a base, which deductions should be included in the comparison, and many other factors. At the state level, even very progressive tax systems can appear otherwise because of interactions with federal tax policies that redefine taxable income for states or allow deductions of state taxes, while state policies that allow federal taxes to be deducted also have major effects. Furthermore, many states offer a variety of credits and deductions that alter tax burdens, making the tax code more or less progressive.

Moreover, some states have a top rate that kicks in at a high threshold, but which isn’t very different from lower rates. Thus, a second way to measure tax progressivity is to measure the difference between top marginal tax rates, and some lower tax rate. The above table also shows the gap between the top marginal tax rate and the marginal tax rate on $25,000 of taxable income.

As can be seen, the list is similar, but not identical. Twenty-one states and the District of Columbia have progressive rate structures that rise after $25,000. California, New Jersey, and Vermont have the most progressive rate structures by a wide margin.

Policymakers may believe that more progressive rate structures will reduce inequality, however, there is relatively little evidence of this. In fact, states with more progressive tax codes have higher inequality, on average, than states with flat or no income taxes. Academic research by Raj Chetty and Emmanuel Saez (of Piketty and Saez fame) found that the progressivity of a state’s income tax had no significant correlation with upward mobility (though greater reliance on property taxes to fund local government apparently did increase economic mobility). Thus, policymakers may be adopting high tax rates that do real economic harm while doing little to encourage equality and upward mobility.

Read more on inequality here.

Read more on income taxes here.

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