Thursday, November 18, 2021
Francine Lipman (UNLV; Google Scholar), State and Local Tax Takeaways Redux, 101 Tax Notes State 683 (2021):
On average, current household incomes are less equal after state and local taxes are imposed than before. Wealthy families pay a significantly lower percentage of their income in state and local taxes on average than low- and middle- income households. Regressive state and local taxes not only erase the progress of federal tax policies that redistribute income, but in some cases they reverse progressivity — causing the most vulnerable families to pay a higher percentage of their income in aggregate taxes than affluent households.
Given historic, pervasive systemic and institutional racism, communities of color are more likely to suffer lower levels of income and wealth and thereby pay a higher average effective tax rate than white households. For example, Black and Latino taxpayers in Tennessee — which raises most of its revenue with an extraordinarily high general sales tax that even includes groceries — pay an average of an additional 1 percent of their income in state and local taxes than white taxpayers. These figures, like most statistics available to date, are from the pre-pandemic period. Nevertheless, like the Great Recession, the pandemic exacerbated income and wealth inequality — pushing about 8 million individuals, including 2.5 million children, into poverty while the affluent increased their wealth by close to $1 trillion.
As a result of the pandemic, a record number of children and families have suffered hunger, housing insecurity, financial vulnerability, and unrelenting physical and mental stress and strain. Communities of color have been hit by the greatest percentages of unemployment and poverty in an economic landscape with devastating records. As the Biden administration commits to “building back better,” states and localities — having ridden a roller coaster of challenges — are once again responding to unprecedented fiscal needs. The challenges of the last 20 months are too numerous to list, but tax professionals also have experienced parallel highs and lows while trying to keep health, well-being, families, bank accounts, and businesses steady and stable during this period of unparalleled uncertainty.
At the end of this article, the book chapter, “State and Local Tax Takeaways,” which was first published in 2019 is republished. While many things across America have changed since Holes in the Safety Net: Federalism and Poverty (Cambridge University Press, 2019) hit bookshelves, this article updates some notable state and local tax system transformations.