Wednesday, May 25, 2011
At the core of the budget crises facing states are regressive state tax structures (comprised of the major state and local taxes) that are unfair, unsound, and unsustainable by design. Fortunately, there is a sensible solution: inverting the state’s current tax structure.
The inversion exercise takes a state’s current distribution of state and local taxes by income quintile (lowest 20%, second 20%, middle 20%, fourth 20%, top 20%) and flips it at the 50th percentile mark, thereby making a regressive structure progressive. This resulting progressive tax structure has major benefits to states.
To achieve the inverted structure, states must establish, or significantly improve upon, the graduated personal income tax—the backbone of any progressive tax structure. Concurrently, states and localities must significantly reduce their reliance on regressive sales, excise, and property taxes, which fall heavily on low- and middle-income families.
- It raises significant revenue. If every state inverted its tax structure, states would raise a combined $490 billion, wiping out deficits with cash to spare to invest in economy-enhancing activities.
- It is unmatched in its economic efficiency, which encourages steady and strong economic activity and widespread prosperity over time.
- It provides commonsense equity, with wealthy families contributing a greater share of their income in taxes than low- and middle-income families.