When evaluating the tax structure, don’t forget about federal taxes and state spending

By: Emily Makings
11:27 am
October 26, 2018

Last week the Institute on Taxation and Economic Policy (ITEP) released a new version of “Who Pays: A Distributional Analysis of the Tax Systems in All 50 States.” As in the 2015 version, ITEP says that Washington has the country’s most regressive state and local tax system. Opportunity Washington writes about it here.

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. In addition, as Liz Farmer points out in Governing Magazine, ITEP ignores the impact of spending choices:

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.

(For more on the features of a good tax system, see our 2012 brief, Five Keys to Evaluating a Tax System.)

Categories: Categories , Tax Policy.