Yesterday, we presented data showing that the United States’ taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. 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 rateThe average tax rate is the total tax paid divided by taxable income. While marginal tax rates show the amount of tax paid on the next dollar earned, average tax rates show the overall share of income paid in taxes. paid by an individual increases as their income increases. A flat taxAn income tax is referred to as a “flat tax” when all taxable income is subject to the same tax rate, regardless of income level or assets. , 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 taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. systems can appear otherwise because of interactions with federal tax policies that redefine taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross 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 rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. s, 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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