A look at how federal taxes and state spending offset “regressive” tax structures

Washington has again been cited – we think inaccurately – by the Institute on Taxation and Economic Policy has having the nation’s most regressive tax structure. The Washington Research Council, which did a thorough evaluation of an earlier ITEP report that reached the same conclusion, provides additional perspective.

This summer we wrote about the 2015 ITEP report. Overall, “The report contains a number of well-documented flaws that lead it to overstate the tax burden on low-income households nationally and, to an even greater extent, in Washington.” Our paper includes an in-depth accounting of those flaws. (We are still reviewing the details of the 2018 version.)

Aside from measurement problems, we noted that ITEP focuses solely on state and local taxes, ignoring the role of the highly progressive federal income tax. Indeed, “When federal taxes are factored into the analysis, the combined federal, state and local tax burden in every state is progressive.”

By ignoring the progressive impact of federal taxation, ITEP’s analysis doesn’t provide the full picture of the tax burden on Washington residents.

The WRC also links to a Governing magazine article on the ITEP report, citing both measurement issues and ITEP’s failure to examine spending.

ITEP’s analysis, however, has been criticized for not considering how states spend the tax revenue they receive and whether that may help lessen inequality. In 2014, the nonprofit Federal Funds Information for States (FFIS) warned that fairness is just one feature of a good tax system. Others are adequacy, simplicity, transparency and ease of administration. For example, FFIS pointed out that while Washington ranks poorly in tax fairness, it puts more of its revenues toward programs that support low-income families.

“Sometimes the policies that satisfy one feature run contrary to another, making it important that a system be evaluated in its entirety rather than in a piecemeal fashion,” the group said. (Emphasis added.)

The ITEP response, from the article:

But ITEP’s Wiehe noted at the report’s release this week that, in general, many of the most regressive states have a smaller-government ideology and therefore fewer social services. For instance, six of the 10 have opted not to make more low-income people eligible for Medicaid, the government-run health insurance program for the poor.

Note that Washington is not among the six. And the state is not normally reckoned among those with a “smaller-government ideology.” It is, however, a state with voters that have repeatedly rejected a progressive personal income tax, the common feature among states dinged by ITEP. 

The tax debate in Washington will, of course, continue regardless of how the state Supreme Court rules on Seattle’s municipal income tax (which other cities appear to be eyeing). Good information on fiscal policy – including how state, local and federal taxes work together to create an overall progressive tax structure – can only enhance the debate.