The Evaluation of Tax Reform Strategies in the United States

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Table of Contents

In Massachusetts
Conclusion
Works Cited

The financial crisis of 2008 resulted in massive layoffs and missed opportunities. As a result there were many states that experienced budget deficits on a large scale.

It is therefore imperative to evaluate tax reform strategies in order to increase revenue. But there is one thorny issue that has to be resolved before taxpayers are encouraged to embrace taxation reforms. The issue concerns fairness and it is related to the realization that state tax systems placed a heavy burden on poor taxpayers but not on more affluent members of American society. In the present time almost every state in America extracts a significant share of income from middle and low-income residents.

The good news is that there is growing awareness among lawmakers, media and the general public regarding this issue. The bad news is that there is no serious and long-term commitment to reduce tax burdens for the poor. At first glance there are states that appeared to be generous to the poor but in reality these states were more generous to the rich because of the tax rate reduction schemes made available to them.

It can be argued that state and local government taxes were mostly regressive. This assertion is based on analysis of data pertaining to non-elderly families. This assertion includes singles and couples, with and without children. The analysis of available data revealed that the average state and local tax rate for the top 1 percent earner is 6.4 percent.

On the other hand “the average state and local tax rate for residents in the middle 20 percent of the income spectrum is higher at 9.7 percent” (Davis, p.15). Furthermore, the average state and local tax rate “for the poorest 20 percent of families is highest at 10.9 percent” (Davis, p.16).

At this point the observation that the U.S. tax system is unfair is true. But this is just the beginning of the problem. There is an added feature of the U.S. tax system and it is the federal government’s itemized deductions for state and local taxes. It is popularly known as the “federal offset.”

Using this framework it was discovered that the rich are not compelled to pay the 6.4 percent tax rate even if it is the lowest rate among the three major groups of taxpayers. Due to the “federal offset” the 6.2 percent tax rate was reduced further to 5.2 percent.

After taking a closer look at the mid-income earners and the poorest taxpayers, it was discovered that these two groups did not benefit from the “federal offset” as much as the top 1 percent top earners. In fact, the 9.7 percent tax rate for the middle-income families was reduced to a mere 9.4 percent.

If one will compare it to the tax rate applied to wealthy residents, the figure was almost double the tax rate levied on the more affluent citizens of America. But more importantly the poor were compelled to pay a 10.9 percent tax rate because they did not benefit from the “federal offset.” Therefore, the U.S. tax system is regressive because state and local tax rate does not increase commensurate to the increase in income.

There are ten states that are considered to be the most regressive and these are listed as follows: 1) Washington; 2) Florida; 3) South Dakota; 4) Tennessee; 5) Texas; 6) Illinois; 7) Arizona; 8) Nevada; 9) Pennsylvania; and, 10) Alabama. In order to have a clear understanding of the disparity between the tax rates levied on rich and poor one has to take a closer look at the tax system used by Washington and Alabama.

Washington has the most regressive tax system in America. In this particular example, the said tax system required the poorest residents to pay as high as 17.3 percent tax rate. In the state of Washington the middle-income earners had to pay a 9.5 percent tax rate on their income. But residents in the top 1 percent of the income bracket were only required to pay a 2.9 percent tax rate on their income.

In the state of Alabama, the tax rate was not as high as Washington but the same pattern emerged. Alabama required the poorest 20 percent to pay 10.2 percent tax rate on their income. The middle-income earners on the other hand were required to pay 8.6 percent tax rate on their income. However, the residents who were in the top 1 percent of the income bracket were only required to pay 4.8 percent tax rate on their income.

In Massachusetts

The state of Massachusetts adopted a regressive tax system. But it was not included in the top-ten-list of most regressive tax systems because of the presence of progressive features applied to the income tax rate, sales tax rate and the refundable earned income tax credit. But if one will set aside these features, it is easy to conclude that the state’s tax system favors the affluent residents rather than the poorest residents of the state.

Consider one component of the tax system, which are the sales and excise taxes. By doing so one can see the disparity in the treatment of rich and poor. For instance, a 5% tax is levied on the lowest 20% income bracket. The families that comprise this income bracket earned less than $20,000 per year.

Now, consider the more affluent residents that earned more than $240,000 a year. In this particular bracket the sales and excise tax paid was a mere 1.7% of their income. But the residents in the top 1 percent of the income bracket, those who earned more than $683,000 per year, they were only expected to pay 0.5% in sales and excise tax.

Massachusetts’ regressive tax system was made more evident when it came to property taxes. The poorest residents were expected to pay 4.6% in property taxes. But the higher the income, the lower the tax rate that was imposed by the state. For example, non-elderly residents that earned an average of $151,000 a year need only to pay 3.2% in property taxes. But another resident that earned $2.6 million a year the applicable property tax was pegged at 1 percent.

State legislators demonstrated their attempt to remove disparity and usher in a new era of fairness by modifying an aspect of the tax system. The improvement can be seen in the personal income tax category. In Massachusetts the poor were only expected to pay 0.5 percent of their personal income as taxes. On the other hand those with higher income were supposed to pay higher tax rates. For example, residents with income higher than $100,000 per year were supposed to pay a 4.1 percent tax rate on their income.

The 3.8 percent tax rate is significant compared to the 0.5 percent tax rate imposed on poor resident. But there were two issues that came to the fore with regards to this particular system, especially when it pertains to the heavy burden shouldered by the middle-income earners.

This particular group earned $52,000 per year and they were expected to pay 3.8% in income tax. It has to be pointed out that the 3.8% tax rate is significantly higher than what poor residents were supposed to pay. But if compared to the tax rate imposed on earnings higher than two million dollars, the tax rate was 4.4 percent on their income. A comparison between 3.8% and 4.4% will lead to the conclusion that there is not much difference between the two figures.

The implication is that although the Massachusetts state tax system appeared generous to the poor, it cannot be considered as a model of fairness especially if one will considers the different income brackets. Based on the information given, it seems that the state placed a heavy burden in the hands of the middle-income earners but not the millionaires.

The poor and middle-income earners were the ones who generated a great deal of revenue for the state, if one will consider tax rates and income levels. But their frustration may boil over if they will also discover the intricacies of the “federal offset” when applied to the income of multi-millionaires. The disparity may even widen because the application of the “federal offset” enable wealthy residents to pay a lower amount.

Conclusion

Without a doubt America’s state and local tax system is regressive in nature. Almost every state imposed a higher tax rate for the poor residents than the more affluent members of society. The disparity was significant. The examination of the Massachusetts tax system revealed that although it attempted to be more generous to the poor, the tax system used was more onerous to the middle-income earners. There is a need to evaluate tax policies in this country.

Works Cited

Davis, C. Who Pays: A Distribution Analysis of the Tax Systems in All 50 States. Washington, D.C.: Institute on Taxation and Economic Policy, 2009. Print.

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The Evaluation of Tax Reform Strategies in the United States

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