How the Fairness of State Tax Codes Affects Public Education

Our guest author is Carl Davis, Research Director at the Institute on Taxation and Economic Policy. He was the project lead on the newest edition of ITEP’s Who Pays? report, which provides the only comprehensive measure of the progressivity, or regressivity, of state tax systems.

The vast majority of state and local tax systems are regressive, or upside-down, with the wealthy paying a far lower share of their income in taxes than low-and middle-income families. That is the topline finding of the latest edition of our flagship Who Pays? report, which measures the impact that state tax systems are having on families at every income level. Its findings go a long way toward explaining why so many states are failing to raise the amount of revenue needed to provide full and robust support for our public schools.

As we explain in the report, states with more progressive tax systems also raise more revenue on average. States with regressive tax codes, on the other hand, typically raise less. The reason for this is simple. High-income families receive a huge share of overall income, so when states choose to tax that huge amount of income at lower rates than what everyone else pays, they’re inevitably going to struggle to raise adequate revenue overall.

Here are some of the other important takeaways in this 7th edition of Who Pays?:

• Tax systems in 44 states exacerbate inequality by making incomes more unequal after collecting state and local taxes. This is often the result of weak or nonexistent personal income taxes, often paired with a heavy reliance on more regressive taxes like sales and excise taxes. 
• Tax systems in six states plus D.C. reduce inequality by having graduated income taxes that raise more from millionaires and multi-millionaires, by adequately taxing corporations, and by having strong refundable credits to help low-wage workers and families with kids.
• On average, the lowest-income 20 percent of taxpayers face a state and local tax rate nearly 60 percent higher than the top 1 percent of households. The nationwide average effective state and local tax rate is 11.3 percent for the lowest-income 20 percent of individuals and families, 10.5 percent for the middle 20 percent, and 7.2 percent for the top 1 percent.
• In all, 41 states tax the top 1 percent less than every other income group. Similarly, 42 tax the top 1 percent less than the bottom 20 percent, and 46 tax the top 1 percent less than the middle 20 percent.
• Most (34) states tax their poorest residents at a higher rate than any other group.
• The 10 most regressive states are (in order of most to least regressive): Florida, Washington, Tennessee, Pennsylvania, Nevada, South Dakota, Texas, Illinois, Arkansas, Louisiana. 
• The 10 least regressive jurisdictions are (starting with least): D.C., Minnesota, Vermont, New York, California, New Jersey, Maine, Massachusetts, New Mexico, Oregon. (The first seven of these have tax systems that are not regressive and therefore do not worsen inequality.)

A mix of recent policy changes have worsened or improved state and local tax systems. They’ve also had huge effects on overall revenue collections and the funding available for public schools. This edition of Who Pays? includes 34 alternative analyses that show what the distribution of some states’ taxes would look like if certain policy changes had not been made, as well as what they would look like today if future planned changes had already taken effect.

Some of these changes are dramatically reshaping the landscape of state tax law—and having a significant impact on education funding.

For instance, Arizona voters in 2020 approved an income tax increase on high-income earners to fund teacher pay raises. But in the aftermath of that victory, Arizona officials worked quickly to subvert the will of the people, and to replace that voter-approved tax increase with income tax cuts for the wealthy instead. The result was an immense loss of revenue for public schools and a sharp drop in Arizona’s level of tax equity: from 27th to 13th most regressive in the country.

On the other side of the coin, Massachusetts rose to 8th least regressive from 18th, thanks mostly to voters’ approval of a 2022 ballot measure raising taxes on extremely high-income households. That income tax increase, known as the Fair Share Amendment, is expected to raise more than $2 billion in revenue each year for public education and transportation infrastructure.

Also of note are Minnesota and D.C., which captured the best two spots in our rankings of tax progressivity. D.C. did so by raising income tax rates on top incomes and strengthening their Earned Income Tax Credit for low-wage workers. Minnesota opted to enact more robust taxes on corporations and capital gains, and a substantial Child Tax Credit.  

The findings in Who Pays? clearly show that there is a lot of room for improvement in state tax policy. State lawmakers have many options to fund public services more equitably. The analysis also confirms that the policy choices lawmakers make each year have profound consequences for families’ lives, due to their impact on the fairness of the tax code and the ability to raise enough revenue to adequately fund critical public services like schools, health care, transportation infrastructure, and more.