New Report Puts Pa. Among 'Terrible 10' Most Regressive Tax States

November 18, 2009

Working families in Pennsylvania pay a far higher share of their income in state and local taxes than their wealthiest counterparts, according to a new study by the Institute on Taxation & Economic Policy (ITEP).
 
In 2007, middle-class earners paid nearly double the share of their income in taxes than the very wealthiest Pennsylvanians. For minimum-wage earners, the share of family income spent on taxes was even larger.
 
The study, Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, examined state and local taxes in all 50 states. It ranked Pennsylvania's tax system as the ninth most regressive in the nation, meaning taxes fall disproportionately on middle-class, working and poor families to the advantage of the richest taxpayers.

Some of the key findings are:

• Pennsylvania families earning less than $19,000 - the poorest fifth of Pennsylvania taxpayers - pay 11.3% of their income in Pennsylvania state and local taxes.
• Middle-income Pennsylvania taxpayers - those earning between $35,000 and $56,000 - pay 9.6% of their income in Pennsylvania state and local taxes.
• The richest Pennsylvania taxpayers - with average incomes of $1,369,600 - pay only 5% of their income in Pennsylvania state and local taxes.
• After accounting for federal deduction offsets, the discrepancy is even starker: the poorest fifth pay 11.2% of their income in state and local taxes, middle-income families pay 9.1%, and the richest Pennsylvanians pay 3.9%.
• Washington, Florida, South Dakota, Tennessee, Texas, Illinois, Arizona, Nevada, Pennsylvania, and Alabama were named as the 10 Most Regressive Tax States. Pennsylvania ranked ninth.

View more Pennsylvania findings here

View the full report at ITEP's web site

This study debunks the myth that the poorest families don't pay taxes. While some low-income families qualify for state personal income tax forgiveness, these families are still paying large shares of their earnings in sales, local income and property taxes.

The state's flat income tax contributes to Pennsylvania's highly regressive tax ranking.  Without a graduated tax rate, which increases for more affluent earners, Pennsylvania's income tax does little to offset more regressive sales and property taxes.
 
Pennsylvania could make the tax system more fair by amending the state Constitution to create a graduated personal income tax. Even without a constitutional change, Pennsylvania could set a higher income tax rate on investment income, which goes primarily to wealthy Pennsylvanians, without raising the rate on wage earners.

Pennsylvania could also make the tax system more fair by closing corporate tax loopholes that allow multi-state businesses to avoid paying state taxes. Companies use those loopholes to shift income out of Pennsylvania to mailbox subsidiaries in no-tax states like Delaware.
 
Of the 41 states and the District of Columbia that have personal income taxes, Pennsylvania has the second lowest top rate. The commonwealth could increase the effective tax rate on the wealthiest with little impact. Between 2001 and 2007, the top 1% of Pennsylvania earners captured 56% of all growth in personal income. Additionally, studies in New Jersey and California, states with higher income tax rates than Pennsylvania, found that tax rates have not driven residents out of those states.
 
Wealthy taxpayers benefit greatly from tax laws that allow them to write off property and income taxes from their federal income taxes. This is, at best, a modest benefit for middle-class families and no benefit to very low-income earners.

Founded in 1980, the Institute on Taxation and Economic Policy (ITEP) is a non-profit, non-partisan research organization, based in Washington, DC, that focuses on federal and state tax policy. ITEP's mission is to inform policymakers and the public of the effects of current and proposed tax policies on tax fairness, government budgets, and sound economic policy. ITEP's full body of research is available at www.itepnet.org.