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You'll Never Guess Which State Has the Nation's Most Unfair Taxes

Jan 14, 2015

When you think of states that hurt the poor and benefit the rich, ultra-progressive Washington state probably doesn't spring to mind. And yet, according to a new analysis, Washington's tax system is the most regressive in the nation, placing a disproportionate burden on those with the lowest incomes.

The study, published by the nonpartisan Institute on Taxation and Economic Policy, finds the poorest 20% of Washington's population pay almost 17% of their income in taxes, while the richest 1% pay just 2.4% of their earnings. The middle 60% of earners are taxed slightly more than 10% of their income.

While Washington's regressive tax structure might seem surprising, it shouldn't be. The institute observes that virtually every state in the union has a tax system that takes "a much greater share of income from low- and middle-income families than from wealthy families," a policy the report describes as "fundamentally unfair."

How some tax systems burden the poor

The most well-known tax to most Americans is probably the federal government's progressive income tax, the "progressive" part meaning it takes a higher percentage from rich than the poor.

However, states actually gain a large portion of their revenues through regressive taxes, meaning those that disproportionately impact people with low income.

Any tax that asks everyone to pay the same amount—sales tax, for example—is regressive, because by taking "equally" from everyone, it takes a higher percentage of a poor person's income than takes from a richer individual.

Here's ITEP's list of the 10 states that take the biggest tax bite from the least affluent residents:

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States in the report's "Terrible Ten," such as Washington, rely heavily on sales tax and excise taxes (taxes on specific products, like gasoline or cigarettes) and less on taxes that rise based on income.

Similarly, the institute's report also reveals that highly regressive states also don't levy a personal income tax (in the case of Washington, Florida, South Dakota, and Texas), meaning the state must raise more money through regressive consumption and property taxes.

Even states that do tax personal income sometimes do so in a non-progressive fashion. Pennsylvania has an income tax, but applies the same 3.07% rate to everyone. That might seem fair, but $614 means a lot more to a person making $20,000 than $3,070 does to someone making $100,000, even though both amounts are 3.07% of their respective salaries.

Other states on the list do have a progressive rate structure but have so few tax brackets that the outcome is effectively a flat tax. Kansas, for instance, has only two tax brackets, and married couples making $30,000 or more are taxed at the highest rate.

In either case, the the state generally must rely on other regressive taxes to make up for not taxing wealthier individuals a higher proportion of their income.

How to build a fairer system

States with the fairest tax structures follow a completely different path. Oregon, ranked as one of the least regressive states, relies heavily on a very progressive income tax. That allows it lower its dependence on regressive consumption taxes and eliminate sales tax entirely.

These states also have earned income tax credits (EITCs)—essentially tax refunds targeted toward low-income working families that can give certain households a reduced tax burden or, in some cases, a negative tax bill, meaning the government gives them money. The report describes these credits as offsetting the regressive taxes and helping poor families afford necessities.

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Inconsistent improvement

While some states have made their tax systems more fairer in the past year, many have taken a step back. Since 2013, Delaware and Minnesota have increased income tax rates for high earners, while Colorado, Iowa, and others have beefed up their earned income tax credits. At the same time, multiple states have become less progressive by increasing sales tax or implementing a flat income tax rate.

"The bleak reality," the report concludes," is that even among the 25 states and the District of Columbia that have taken steps to reduce the working poor’s tax share by enacting state EITCs, most still require their poorest taxpayers to pay a higher effective tax rate than any other income group."

Read next: How Obamacare Could Make Tax Filing Trickier This Year

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