Tax “Fairness” — Where Does Maryland Rank?

Maryland has the tenth most equitable tax structure in the nation, according to the Institute on Taxation and Economic Policy’s (ITEP) annual study of individual state’s tax policies, which measures the impact of each state’s tax system on income inequality.

Source: ITEP: Who Pays? 6th Edition

To rank states (and the District of Columbia) on tax fairness, the authors developed a Tax Inequality Index, based on comparisons of pre- and post-tax incomes by income group. Less equal — or regressive — systems, according to the report, widens the income gap after accounting for taxes and credits. A more equitable, or progressive, system narrows that gap.

Source: ITEP: Who Pays? 6th Edition

The analysis includes sales taxes, excise taxes, user fees, and income taxes. In fact, tax structures in states which boast low-income taxes are often the most likely to shift the fiscal burden to lower-income residents, according to ITEP.

Note: Now that the state and local tax deduction is capped at $10,000 under the new federal tax law, ITEP removed the “federal offset” from its methodology.

Forty-five states — including Maryland — worsen income inequality by making incomes more unequal after collecting state and local taxes, according to the analysis. Five states and the District of Columbia narrow the gap between lower- and middle- income taxpayers and upper-income taxpayers, making income slightly more equitable after collecting state and local taxes.

Source: ITEP: Who Pays? 6th Edition

When accounting for income, ITEP found the national average effective state and local tax rate is 11.4 percent for the poorest 20 percent, 9.9 percent for the middle 20 percent, and 7.4 percent for the richest 1 percent.

According to the study, Washington state is the least equitable in the nation, with the largest disparity between effective rates for low-income people and rates for wealthier people. Rounding out the top 10 are Texas, Florida, South Dakota, Nevada, Tennessee, Pennsylvania, Illinois, Oklahoma, and Wyoming.

The most equitable states in the nation — the ones with tax systems in which top earners pay more — are California, Delaware, Maine, Maryland, Minnesota, Montana, New Jersey, New York, Oregon, and Vermont, according to the analysis.

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Source: ITEP: Who Pays? 6th Edition – Click here to Access the Interactive Map

According to the report:

The main finding of this report is that the vast majority of state and local tax systems are fundamentally unfair. An overreliance on consumption taxes and the absence of a progressive personal income tax in many states neutralizes whatever benefits the working poor receive from refundable low-income tax credits. The bleak reality is that even among the growing group of states 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.

It should be noted that, according to The Tax Foundation, this report is overwhelmingly a measure of the progressivity of the individual income tax, and not of the tax code as a whole.

The ITEP study looks at income, sales and excise, and property taxes. It omits a range of taxes which tend to be highly progressive (that is, falling more heavily on higher-income individuals), like inheritance and estate taxes, real estate transfer taxes, leasehold taxes, and insurance premium taxes. It is difficult to make claims about the distributional impact of state and local taxes when important–often highly progressive–sources of tax revenue are excluded from the analysis.

Useful Links

Who Pays? A Distributional Analysis of the Tax Systems in All 50 States

Appendix A – Who Pays Summary (PDF)

Appendix B – ITEP Tax Inequality Index and Additional Data (PDF)

Appendix C – State Reliance on Non-Tax Revenue (PDF)