Dorothea Lange
In the early 1900s, Mississippi policymakers passed tax codes that favored the white and wealthy.
The Republican Party’s 2017 federal tax cuts for the rich are considered to be among the biggest transfers of wealth from the poor and working classes to the wealthy in U.S history. And states and municipal governments are making the problem worse.
A new report from the Center on Budget and Policy Priorities argues that state tax systems often embody racist legacies and extend or cement racial disparities in wealth. And a recent analysis of state and local tax systems by the Institute on Taxation and Economic Policy shows that, as a whole, state and local governments tax the poor at higher rates than they do the rich.
Why is state and local taxation so backwards in the United States? Some state constitutions prohibit progressive forms of taxation, like income taxes. And many that do have income taxes don’t allow municipalities to extend them onto the local level—forcing municipalities to fund school, transportation, and fire departments with taxes and fees that disproportionately impact the working poor and people of color.
The result is that, on average, local and state tax rates on the poorest 20 percent of taxpayers are 50 percent higher than they are for the richest 1 percent, according to the Institute on Taxation and Economic Policy analysis.
In a whopping forty-five states, the poor are taxed at higher rates than the wealthy.
The Institute identifies state and local government over-reliance on regressive sales and property taxes—both of which fail to capture numerous forms of wealth, including income. According to Dylan Grundman, the institute’s senior policy analyst, the poorest 20 percent of taxpayers pay 63 percent of their taxes through sales and excise taxes.
The institute identified a whopping forty-five states where the poor are taxed at higher rates than the wealthy. Washington State, which prohibits local and state income taxes, is the most regressive, followed by Texas, Florida, South Dakota, Nevada, Tennessee, Pennsylvania, Illinois, Oklahoma, and Wyoming.
Only the District of Columbia and five states—California, Vermont, Delaware, Minnesota and New Jersey—“somewhat narrow the gap” in income inequality through tax policy. But not one state, according to the Institute, offers a “robustly progressive” tax system.
Efforts to tax the rich have had mixed results, but newly won Democratic “trifectas” in Colorado, Illinois, Maine, Nevada, New Mexico, and New York, may provide new opportunities to push for progressive taxation on the state level. (The aforementioned states have the 35th, 8th, 45th, 5th, 19th and 44th most regressive tax systems in the nation, respectively.)
Democrats also won control of the Connecticut Senate, Minnesota House, New Hampshire Senate and House, and flipped seven gubernatorial seats in Illinois, Kansas, Maine, Michigan, Nevada, New Mexico, and Wisconsin.
The Center on Budget and Policy Priorities report, “Advancing Racial Equity With State Tax Policy,” traces the racist origins of many state fiscal policies and calls on states to reverse them. Among the examples are Alabama laws that halted wealth distribution to African American communities following emancipation, and the racist origins of a 1932 Mississippi retail sales tax.
Local governments have an important role to play in revising tax policy too.
Previously, much of the Mississippi’s revenue had been collected via property taxes, but as African Americans gained suffrage, policymakers levied a reactionary sales tax onto the poor and African Americans who often had little else to tax. Then-Governor Martin Conner said the new policy would “decrease the tax burden by broadening the tax base” and give those who were otherwise not paying taxes “an opportunity to share in the responsibility of maintaining the government of the state in which they live.”
The regressive, racist Mississippi sales tax subsequently metastasized to other states, producing today’s modern era of regressive state and local sales taxes and excise taxes that are passed onto consumers.
But calls to reverse racist and regressive state tax systems are growing. The group Arkansas Advocates for Children and Families is arguing for a repeal of a Jim Crow-era state constitutional amendment in that state that requires legislative supermajorities to alter personal and corporate income tax policy. The Oregon Center for Public Policy wants to undo the legacy of the state’s 1862 tax on people of color. And elsewhere groups are pushing for the expansion of state earned income tax credits for working people.
Local governments have an important role to play in revising tax policy too. But municipalities often raise revenues through politically safe strategies such as ticketing, court fees, debt collection and sales or excise taxes, all of which fall most heavily on the poor. But it’s not always their fault.
“Revenue options that are open to local jurisdictions are totally determined by the state government they are within,” Grundman told me. As a result, he says, local taxing powers “essentially only consist of regressive and problematic revenue sources and leave out corporate and income taxes.”
One quick reform would be to allow municipalities to piggyback on state income taxes through local income “surtaxes,” or by following the lead of Maryland, which allows for municipal earned income tax credits.
Other new municipal-level mechanisms for capturing wealth at the local level include San Francisco’s Proposition C, which creates an average 0.5 percent tax on corporate revenues above $50 million. Passed in November 2018, it will raise an estimated $300 million annually for housing the homeless, shelters, homeless prevention programs, and mental health and substance abuse services.
In Mountain View, California, where Google employs more than 23,000 people, Measure P was passed in November 2018. It increases the city’s annual business license fee from $30 to $75, and adds a per-employee fee starting at $5 per employee for small businesses ramping up to $150 per employee for businesses that employ over 5,000 people. More than half of the modest $6 million the measure will raise per year will come from Google.
In Oregon, a “Portland Clean Energy Community Benefits Fund” creates a 1 percent tax on in-city revenue on businesses that make more than $500,000 in Portland sales (and $1 billion nationally). The policy will annually raise an estimated $30 million for energy efficiency upgrades, job training, home weatherization, rooftop solar infrastructure, local food production and “future innovation.” Low income and communities of color will be given priority access to funds and benefits from the programs.
All of these local reforms took place within the constraints of existing state tax policy. Meaningful state-level reform to address racial and economic inequality in tax policy is essential and should also include expanding municipal powers to tax wealth locally. Because taxing the rich must be an all-hands-on-deck effort—from City Hall to Congress.