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The Low-Tax States Are Actually High-Tax States for Some People

One of the most important things governments do is levy taxes to pay for services. Tax policy is frequently an election issue, with some politicians, generally Republicans, promising to lower taxes. But it is not generally recognized that politicians who fight for low taxes aren't really fighting for low taxes. Don't understand? OK, answer this question: Which is the lower tax state, Florida or California?

The answer is tricky. It depends on how much you make. If you are making $5 million/year, Florida is the low-tax state, but if you are making $50,000/year, California is the low-tax state. Here's the rub: So-called "low-tax states" have a low top marginal income tax rate, or no state income tax at all, so people with high incomes are not taxed on their income. But running a state still costs a lot of money. Low-tax states get their money from regressive taxes, like sales taxes and excise taxes. These are taxes that hit poor and middle-income people hard. In one study, as a percentage of their income, poor families paid seven times as much as wealthy families in "low-tax states."

The states with the highest sales tax rates are Alabama, Arkansas, Louisiana, Oklahoma, and Tennessee. These states also have low or no state income tax. For these five states, the top rate for state income taxes are 5.0%, 4.7%, 4.25%, 4.75%, and 0%, respectively. By way of contrast, in California the top rate is 12% and in New York it is 10.9%. So the way the "low-tax" states get their money is by taxing lower-income people who spend a large fraction of their income on goods and services. Someone making $5 million most likely spends a tiny fraction of his or her income on items subject to sales tax. Seven states have no state income tax at all. These are Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, and Wyoming. New Hampshire has a flat 4% tax on interest and dividends, and Washington has a 7% tax on long-term capital gains over $250,000. So when politicians say that they are for lower taxes, it is wise to check the footnote about which taxes they want to lower. It is almost always the income tax, not sales and excise taxes. (V)

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