As state lawmakers prepare to write the next state budget, one that – at least initially – is likely to contain proposals for new and increased taxes, we see the reemergence of old myths. It’s one of those occasions where good people seem to revel in bad news. That’s right, we’re talking about the old shibboleth that Washington has the nation’s most “upside down” tax structure, one that imposes an extremely heavy burden on low-income taxpayers while letting high-income earners off the hook.
As the Washington Research Council effectively demonstrated, it’s more complicated than that. And, as the facts become more clear, the complicated and accurate analysis tells a more nuanced narrative,. As the WRC summarizes,
Charges that Washington has the nation’s most regressive state and local tax structurestem from a 2015 report by the Institute on Taxation and Economic Policy (ITEP). The ITEP analysis contains a number of methodological flaws that lead it to overstate the tax burden on low-income households nationally and, to an even greater extent, in Washington. In particular, our critique of the ITEP report identifies two major errors:
1. ITEP overestimates consumption spending by lower-income taxpayers relative to income, leading to an overstatement of the taxes they pay.
2. The ITEP treatment of Washington’s business and occupation tax causes it tooverestimate the degree to which the tax is shifted onto lower-income taxpayers. Their treatment of personal and corporate income taxes levied in other states shifts relatively less of the burden to lower-income taxpayers.
We also point to a key principle of fiscal federalism (a theory allocating responsibilities among the three levels of government), which holds that redistributive tax policies are best enacted at the national level. Adding this dimension to the analysis leads to our third finding:
3. All state and local tax structures are regressive. But when the steeply progressive federal income tax system is considered, the overall federal-state-local tax burden is progressive in Washington and every other state, and the differences among thestates represent smaller proportions of households’ tax burdens.
Yet, recently KUOW reported that “Washington ranks as the worst state for low-income earners to live, and it’s notably worse than any other state.” And The News Tribune writes, “Washington’s taxes make it the worst state to be poor.“
KUOW also wrote that Washington’s tax structure failed to bring in enough money, claiming,
The regressive structure also means Washington taxes are low compared to other states, on average. States that tax people based on income bring in higher revenues.
WRC analyst Emily Makings responded to the news in a blog post. With respect to the inadequate revenue argument, she writes,
This is just not the case. As we showed in a recent report, Washington’s state and local taxes per capita were $5,050 in 2016. This was higher than the national average of $4,946 and Washington ranked 17th in the nation. Further, Washington’s state and local tax growth from 2015 to 2016 was the highest in the country. (2016 is the most recent data available.)
That’s not an argument. It’s a fact. We recommend the WRC’s report.
And, with respect to the regressively claim, Makings doesn’t reprise the detailed analysis from the WRC’s earlier report, but she does point out.
Additionally, the KUOW story stated, “Washington ranks as the worst state for low-income earners to live.” The rest of the story makes clear that they are talking about our tax structure, based on a report on state tax systems from the Institute on Taxation and Economic Policy (we have some issues with the report’s methodology, as we outlined in this paper). But that report doesn’t support the blanket statement that Washington is “the worst state for low-income earners to live.”
While low-income earners face significant challenges no matter where they live, the analysis ignores the impact of federal and state spending on programs that benefit low-income earners.
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.)
In a New York Times op-ed, Monica Prasad, a professor of sociology and a faculty fellow in the Institute for Policy Research at Northwestern University, points out that European nations often cited for their “progressive” tax policies let spending programs carry much of the weight. Taxes there are high, she notes, but high on everyone.
The countries that have been most successful at reducing poverty and inequality have not done it by taxing the wealthy and giving to the poor.
Take Sweden, a country often cited by progressives for its extensive social programs. Sweden has very low poverty and inequality, and economic mobility is significantly higher than it is in the United States; a poor Swede is much more likely to become middle class than a poor American is.
We can learn from Sweden, but the lesson is not what many people think. Rich Swedes do get taxed at high rates, but so does everyone else: The average American worker’s total tax burden is 31.7 percent of earnings, compared with 42.9 percent for the average Swede. The Swedes actually tax corporations less: 19.8 percent, compared with 34.2 percent in the United States in 2017, the last year for which we have comparative data — and yes, that’s after all the loopholes and deductions have been accounted for. The American rate will be lower after the 2017 tax bill, but it’s still unlikely to be as low as Sweden’s.
Back to expenditures,
On the spending side, Sweden does not target much of its spending specifically to the poor. Tax revenue is spent on universal programs, like health care, which benefit most those who live longest; free college tuition takes from those who do not go to college and gives to those who do. Many aspects of welfare state spending in Sweden — as in other European countries — are linked to income, so that the more you earn, the more you receive in benefits. This is enormously effective, because it gives an incentive to Swedes to work hard and earn more.
Sensible incentives? Discuss.