The Institute on Taxation and Economic Policy (ITEP), a non-partisan research institute, just released the fourth edition of their landmark study “Who Pays? A Distributional Analysis of the Tax Systems in all 50 States.” The study analyzes the tax structures of all 50 states — the degree to which each state relies on the different types of taxes (income, property, and sales and excise taxes), the rate structures of each of these taxes, and the overall rates paid by different income groups of taxpayers.
Indiana, unfortunately, made #9 on the list that the authors call the “Terrible 10” — the 10 states with the most regressive tax structures (i.e. tax structures in which the share of family income paid in taxes goes down as income goes up).
In Indiana, the poorest taxpayers (those in the bottom 20% of the income distribution) pay 12.3% of their income on average in state and local taxes. On the other hand, the top 1% pay only 5.4% of their incomes in state and local taxes. Features that make Indiana’s taxes more regressive includes the flat income tax rate and relatively few low income tax exemptions, as well as its dependence on sales and excise taxes. Mitigating factors include the refundable Earned Income Tax Credit and the fact that groceries are exempt from sales tax.
Just as a point of comparison, it is probably not surprising that Vermont has one of the least regressive tax structures. In Vermont, the bottom 20% pay 8.7% of their income in state and local taxes, while the top 1% pay 8%. Not progressive (as the Federal tax system is) — but not nearly as regressive as many other state and local systems.
The study also provides an analysis of the regressivity of various types of taxes. In general, sales and excise taxes are highly regressive — particularly if groceries are included in the base (fortunately in Indiana they are not). Property taxes are mildly regressive. Income taxes can range from mildly regressive to progressive, depending on the way the local income taxes are structured.
Rounding out the Terrible 10 are:
- South Dakota