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1:22 PM Tue, Nov. 20th

Column: State taxes needn't be upside-down

Three points on state taxes: 1. Other sources confirm that state taxes are upside-down. 2. They don't have to be that way. 3. Some new developments add to the urgency.

This is the second piece on a topic I'll be writing more about between now and next legislative session when taxes are likely to be revised. The first installment, on April 11, described how state taxes are upside-down. That is, because of the way sales taxes works, low-income people end up paying a bigger share of their income in total state and local taxes than do people in the middle. Likewise, people in the middle pay a bigger share of their income than do people at the top. A lot more. The top pays around 4 percent of their income, the middle about 9 percent, and lower wage earners pay about 12 percent. See that previous column for the full explanation.

The best study of this was done by the Institute on Taxation and Economic Policy, which I cited in the first piece. This is hardly the only source, though.

In 2003, the state of Arizona did a similar study. While initiated by state government, it was a "citizens commission" with an impressive list of members. A mix of representatives of the public and small business, along with chief officers from some of the major corporations in the state and some of the biggest accounting and legal firms, university economists, an ex-state House majority whip, major real estate developers, and a national bank president.

They found almost exactly the same thing. It's gotten a little worse since.

I wanted to get another view on whether all of this data was pretty sound, so I asked David Berman, Senior Research Fellow at the Morrison Institute for Public Policy at ASU. He's had a long and deep career in studies of government and budgets, mostly focusing on Arizona and the West but sometimes at the national level for the Brookings Institute and others. He confirmed that, "state and local taxes are on the whole regressive," and it is that way, "largely because of reliance on sales tax." He provided leads on still other sources of similar data.

The second point is that it doesn't have to be this way. That's something else that Mr. Berman confirmed, that it varies a lot by state. All states have regressive, or upside-down, taxes, but a few are much less so. Delaware, New York and Vermont do pretty well. They rely less on sales tax, and their income tax has more and higher brackets. There are pluses and minuses in those policies, which I'll get into in other columns, but a state's taxes don't have to be upside-down.

Note that even in these states that do better, taxes are still upside-down, but less so. And none gets taxes right for the middle. The middle always pays a bigger portion of their income than does the top.

Arizona is one of the most upside-down, and puts nearly the biggest burden on those with low incomes. Mr. Berman confirmed this too, pointing out that here, among policy choices, "the emphasis has been on the most regressive."

The third item is new developments regarding state taxes. This issue is important because tax policies are likely to get revised next legislative session and if the legislature stays with the course it has been on for years, and if citizens don't alter their course, they are only going to make taxes even more upside-down. I mentioned last time a commission the legislature enacted to study taxes, which in its original language was to look into eliminating income tax among other changes - something that would make taxes much more upside-down. Now the governor has created her own task force to look just at sales tax. Which is good; there are aspects that need improving. But if it results in more sales tax, it's just going to make overall state taxes more upside-down.

Also, the Legislature just did some more tax cutting, which would be nice if it didn't mean important services will need to be cut, or other taxes will need to rise. One cut was to reduce capital gains taxes by 25 percent, which is a cut that goes mostly to the high end; especially the very high end. Sooner or later that will have to be compensated for. Since they're inclined to cut the high end, and the low end has no money, if you're in the middle ... you know those carnival games where someone sits over a tank of water and there's a target to throw a ball at to soak them?

The principle is simple: No one should pay a higher portion of their income than those above them.

Tom Cantlon is a longtime local resident, business owner and writer. Contact him at TomCantlon@TomCantlon.com.