News Release From ITEP, January 14th, 2015 (See response from Tax Foundation at bottom of page)
A new study by the Institute on Taxation and Economic Policy (ITEP) reveals that state tax systems are indirectly contributing to growing income inequality by taxing low- and middle-income households at significantly higher rates than wealthy taxpayers.
The 5th edition of ITEP’s Who Pays finds that middle- and low-income people in all 50 states pay substantially more of their income in state and local taxes than wealthy individuals and families. The disparity is most stark between the lowest-income households and the top 1 percent of households. On average, the poorest 20 percent of taxpayers nationwide pay more than double the effective tax rate paid by the richest 1 percent of households (10.9 percent v. 5.4 percent). ITEP’s analysis factors in all major state and local taxes, including personal and corporate income taxes, property taxes, sales and other excise taxes....
EDITOR'S NOTE: Hawaii's Effective 13.4% rate of taxation of the lowest 20% of earners is second only to Washington State.
ITEP Tax Inequality Index
According to ITEP’s Tax Inequality Index, Hawaii has the 15th most unfair state and local tax system in the country. States with regressive tax structures have negative tax inequality indexes, meaning that incomes are less equal in those states after state and local taxes than before
LINK: Hawaii State & Local Taxes in 2015
Hawaii Tax Code Features
Progressive Features
- Graduated personal income tax structure
- Limits itemized deductions for upper-income taxpayers
- Personal exemption phases out for upper-income taxpayers
- Provides refundable income tax credits to reduce impact of sales, excise, and property taxes
- Requires the use of combined reporting for the corporate income tax
Regressive Features
- Provides preferential income tax rates for income from capital gains
- Comparatively high reliance on sales and excise taxes
- State and local sales tax bases include groceries
- Provides a partial income tax deduction for state income taxes paid
- Fails to provide a refundable Earned Income Tax Credit (EITC)
- Comparatively high cigarette tax rate
Tax Changes Enacted in 2013 & 2014
- No significant developments
LINKS:
- SA: A report also ranks the state 15th in most unfair tax systems
- PBN: Hawaii second-worst state in taxing the poor, study says
- Forbes: State With World's Richest Man Has Most Regressive Taxes (But Don't Blame Bill Gates)
- Full Report
- Tax Inequality Index--Hawaii 15th
- Executive Summary -- "The 10 states with the highest taxes on the poor are Arizona, Arkansas, Florida, Hawaii, Illinois, Indiana, Pennsylvania, Rhode Island, Texas, and Washington."
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Tax Foundation Challenges 'Who Pays' Report
by Joseph Henchman, The Tax Foundation, January 16, 2015
This week, the Institute on Taxation and Economic Policy (ITEP) released their fifth edition of Who Pays. While the report purports to measure the regressivity of state tax systems by looking at effective tax rates by income groups, the report surprisingly concludes that all states are regressive.
My colleagues Liz Malm and Kyle Pomerleau looked closely at some of the flaws ofWho Pays and offer their comments in a new piece we released today. Key findings:
- The study isn’t actually focused on the distribution of taxes by income group; instead, it’s focused on how well state and local tax systems redistribute income. If the report was really about “measuring the state and local taxes . . . paid by different income groups,” ITEP would rank states by effective tax rates of the poorest residents. Instead, states are ranked based on a complex formula that compares various measures of pre- and after-tax income for various income groups.
- The report -- supposedly a study of state taxes -- includes the most regressive feature of the federal income tax, and leaves out all other features of the highly progressive federal income tax. Including the federal offset makes effective tax rates look more regressive than they actually are.
- ITEP assumes that business property taxes are partly passed on by business owners to renters and that some are exported across state lines. However, the same logic should also apply to several other tax types. Corporate income and sales taxes are partially exported, because a portion of them are paid by businesses. ITEP does not assume tax exporting for any tax other than property taxes.
- ITEP does not include taxes such as severance taxes, business license taxes, and other types of business taxes (such as gross receipts taxes and modified gross receipts taxes) in its analysis. This is problematic, because in some states, these taxes make up a significant share of the state budget and significantly alter the over distributional impact of a state’s tax system.
- ITEP cites a new S&P report that likely overstates the connection between inequality and state tax revenue growth.
- ITEP’s idea tax system (no sales tax, very progressive income tax with lots of taxation of capital gains, and heavy reliance on individual income taxes) would lead to volatile tax systems that dampen economic growth.
Read our full report, Comments on Who Pays, here.
Overall, fairness is a subjective term and largely depends on how you define it. Whatever ITEP's definiton of fairness and attempt to measure it, there are methodological concerns with the way ITEP presents data that should be addressed, and should be kept in mind when discussing the Who Pays study.