Originally Published: August 23, 2011 9:57 p.m.
Over the next year, tax laws will likely change, nationally and in the state. As that occurs, we need to have firmly in mind that, for state taxes, low- and middle-earners pay much more of their income in taxes.
Generally, when taxes are discussed, it is about income tax. That is no more accurate than asking a real estate agent what utilities will be for a house, and they say electricity will be $100 a month, but neglect to say gas and sewer and water will be another $200.
Just so, in Arizona, the low-end earners pay 12.5 percent of their income. You would think the middle and top must pay as much or more, right? Nope. The middle pays 9.1 percent, and the top just 4.6. I know, that's backwards from what you keep hearing. Why do you think people keep repeating those federal income tax numbers? It's the piece of the whole picture they want to focus on - the "electricity bill." The whole picture includes these state taxes, and payroll taxes, both of which are heavier on the low end.
Why are those numbers upside-down? Especially when we have higher tax rates on higher earners? Well, that's not really an accurate statement. We have higher income tax rates, but there are other taxes. Sales tax inherently has a higher rate on lower incomes. Again, why? Sales tax seems intuitively flat? Because it taxes what is spent. If you're in the high end and make $10 million and spend only $1 million, the other $9 million are sales-tax-free. Yes, we want to encourage investment, but we also want to encourage work, and keep people off of food stamps, don't we? With the crash, we have people with deeper debt or a smaller nest egg each month - negative income. Yet they still pay around 8 percent tax. Sales tax.
Sales taxes are good for taxing visitors. To offset that, you have to have more and higher rates on income on the top-end, and a refundable credit or negative income tax on the low end. It's not a giveaway. They've paid heavier in sales taxes. This just refunds part of it, so the total burden isn't heavier on them. Some states like New York and Vermont do that. But that just gets to about level. Judging by the overwhelming support in polls, people still uphold the long established idea of higher rates on higher incomes.
The reason having this picture clear is so important is the upcoming tax talks. Whether federal or state, they almost always focus on income taxes. The push is usually to make them flatter because that is presented as fair. But with the upside-down effect of sales taxes, it is the graduated income tax that is the only thing that partly corrects it. If we flatten state income tax, then those numbers above, about the low, middle, and top, will get worse.
Arizona is one of the worst offenders, but all states have regressive taxes. Additionally, most of the payroll tax doesn't apply to income over about $100,000, so very high incomes pay little of that. The federal income tax is the only other thing correcting some of that. Combine them all - federal taxes and average state and local taxes - and it is still a little upside-down. We do not have higher rates for highest earners. And that's calculating average state taxes. With an especially out-of-kilter state like ours, the picture is worse. The constant refrain that we have something like half the people paying no taxes is completely wrong.
I know, state and federal taxes are two different things, but the pocketbook of the wage-earner is one thing. The talk will be about income taxes, the "electricity bill." But flatten federal income taxes and the portion of total taxes that now falls unduly on the middle and low end will grow worse.
There are lots of ideas for how to fix all of this. Be very careful in evaluating them. I'll cover some in future columns. When looking at proposals consider this: In the total picture, do we end up with higher rates on higher earners? Or upside-down, and you holding the bag?
Some people want a firm commitment that tax changes won't result in any more taxes being raised. There should be an equal commitment that the bottom and middle should not pay a fraction of a percent more than what the top pays, and should pay less.
Tom Cantlon is a longtime local resident, business owner and writer. Contact him at TomCantlon@TomCantlon.com.