Visualizing Unequal State Tax Burdens Across America
What percentage of your income goes into Uncle Sam’s pocket?
Your answer will vary depending on how much you earn. Data shows that low and middle-income families pay a much greater share of their income towards state and local taxes than wealthy families.
Today’s visualization uses data from the Institute on Taxation and Economic Policy (ITEP) to map the effective tax rates—or taxes paid as a share of family income—across income groups at the state and local level.
Crunching the Numbers
The data reflects the effect of tax changes enacted through September 10, 2018, using 2015 income levels (the latest year for available, detailed income data). Both single and married tax filers are included, while elderly taxpayers, dependent filers, and those with negative incomes are excluded.
The report includes the state and local taxes for all 50 states and the District of Columbia. Taxes are broken into 3 broad groups:
- Consumption taxes – general sales taxes and specialized excise taxes
- Property taxes – including taxes on homes, businesses, and motor vehicles
- Income taxes – paid by individuals and businesses
Federal taxes are not considered.
Editor’s note: It’s worth noting that federal personal income tax has progressive rates, with the lowest earning bracket at 10% and the highest earning bracket at 37% in 2019. At a national level, property taxes are not charged and there is a very low reliance on excise taxes—both of which tend to be regressive as outlined below.
The report includes both taxable and tax-exempt income such as worker’s compensation benefits. It also includes estimates for the amount of unreported income.
Which States Have the Most Unequal Tax Burdens?
Across the U.S., there is a wide disparity in how taxes affect different income groups. Here’s how it all breaks down, ranked in order of tax system inequality*:
Total State and Local Taxes As a Share of Income
By State and Income Group
|RANK||STATE||LOWEST 20%||MIDDLE 60%||TOP 1%|
|50||District of Columbia||6.3%||9.8%||9.5%|
* The ITEP Tax Inequality Index measures the effects of each state’s tax structure on income inequality. In states that rank high for inequality, incomes are less equal after state and local taxes are applied than before. On the flip side, states with the most equality are those where incomes are at least somewhat more equal after state and local taxes are levied than before.
Washington has the most unequal tax burdens. Proportional to their income, Washington taxpayers in the bottom 20% pay almost 6x more than those in the top 1%.
At the other end of the scale, California has the most equal tax system. As a share of their income, the state’s poorest families pay only 0.84x what the wealthiest families pay.
Overall, however, the vast majority of tax systems are regressive.
On average, the lowest 20% of income earners pay 1.54x more of their income in taxes compared to the top 1%.
The Main Causes
Two main factors drive a tax system’s (lack of) equality: how the state designs each tax, and the state’s reliance on different tax sources.
To better explain how this works, let’s take a closer look at each type of tax.
Sales & Excise Taxes
These taxes apply only to spent income, and exempt saved income. Since families with a higher household income are able to save a much larger percentage of their income, and the poorest families can barely save at all, the tax is regressive by nature.
The particular types of items that are taxed affect fairness as well. Quite a few states include food in their sales tax base, and low-income families spend the majority of their income on groceries and other necessities.
Not only that, excise taxes are levied on a small subset of goods that typically have a practical per-person maximum. For example, one person can only use so much fuel. As a wealthy family’s income increases, they generally do not continue to increase their spending on these goods.
States rely on these taxes more than any other tax source, which only exacerbates the problem.
For the average household, the home makes up the majority of their total wealth—meaning most of their wealth is taxed. However, the wealth composition of richer families skews much more heavily towards stock portfolios, business equity, and other assets, which are exempt from property taxes.
While these types of assets are subject to taxes like capital gains and dividends, the distinction is that these taxes are levied only on earned gains. In contrast, property taxes are owed simply as a result of owning the asset.
What about those who don’t own homes? Landlords generally pass on the cost of property tax to renters in the form of higher rent. Since rent comprises a much higher share of expenses for poorer families, this makes property tax even more inequitable.
State income taxes are typically progressive. This means effective tax rates go up as income goes up. Here’s how the U.S. averages break down:
- Low-income families: 0.04%
- Middle-income families: 2.1%
- Top 1%: 4.6%
However, certain policy choices can turn this on its head. Some states have a flat rate for all income levels, a lack of deductions and credits for low-income taxpayers, or tax loopholes that can be beneficial for wealthier income groups.
Nine states charge no income tax at all, garnering reputations as “low tax” states—but this is true only for high-income families. In order to make up for the lost revenue, states rely more heavily on tax sources that disproportionately affect the lowest earners.
Evidently, states with personal income taxes have more equitable effective tax burdens.
Tackling Systemic Issues
Regressive state tax systems negatively impact the after-tax income of low and middle-income families. This means they have less to spend on daily expenses, or to save for the future.
Not only that, because wealthier families aren’t contributing a proportional share of tax dollars, state revenues grow more slowly.
For states looking to create a more equitable tax system, states with progressive systems offer some guidance:
- Graduated income tax rates
- Additional tax over a high-income threshold (e.g $1 million)
- Limits on tax breaks for upper-income taxpayers
- Targeted low-income tax credits
- Lower reliance on regressive consumption taxes
By implementing such policies, governments may see more tax equality—and more tax dollars for programs and services.
Hat tip to reddit user prikhodkop, whose visualization introduced us to this data.
Ranked: The Best and Worst Pension Plans, by Country
As the global population ages, pension reform is more important than ever. Here’s a breakdown of how key countries rank in terms of pension plans.
Ranked: Countries with the Best and Worst Pension Plans
The global population is aging—by 2050, one in six people will be over the age of 65.
As our aging population nears retirement and gets closer to cashing in their pensions, countries need to ensure their pension systems can withstand the extra strain.
This graphic uses data from the Melbourne Mercer Global Pension Index (MMGPI) to showcase which countries are best equipped to support their older citizens, and which ones aren’t.
Each country’s pension system has been shaped by its own economic and historical context. This makes it difficult to draw precise comparisons between countries—yet there are certain universal elements that typically lead to adequate and stable support for older citizens.
MMGPI organized these universal elements into three sub-indexes:
- Adequacy: The base-level of income, as well as the design of a region’s private pension system.
- Sustainability: The state pension age, the level of advanced funding from government, and the level of government debt.
- Integrity: Regulations and governance put in place to protect plan members.
These three measures were used to rank the pension system of 37 different countries, representing over 63% of the world’s population.
Here’s how each country ranked:
The Importance of Sustainability
While all three sub-indexes are important to consider when ranking a country’s pension system, sustainability is particularly significant in the modern context. This is because our global population is increasingly skewing older, meaning an influx of people will soon be cashing in their retirement funds. As a consequence, countries need to ensure their pension systems are sustainable over the long-term.
There are several factors that affect a pension system’s sustainability, including a region’s private pension system, the state pension age, and the balance between workers and retirees.
The country with the most sustainable pension system is Denmark. Not only does the country have a strong basic pension plan—it also has a mandatory occupational scheme, which means employers are obligated by law to provide pension plans for their employees.
Adequacy versus Sustainability
Several countries scored high on adequacy but ranked low when it came to sustainability. Here’s a comparison of both measures, and how each country scored:
Ireland took first place for adequacy, but scored relatively low on the sustainability front at 27th place. This can be partly explained by Ireland’s low level of occupational coverage. The country also has a rapidly aging population, which skews the ratio of workers to retirees. By 2050, Ireland’s worker to retiree ratio is estimated to go from 5:1 to 2:1.
Similar to Ireland, Spain ranks high in adequacy but places extremely low in sustainability.
There are several possible explanations for this—while occupational pension schemes exist, they are optional and participation is low. Spain also has a low fertility rate, which means their worker-to-retiree ratio is expected to decrease.
Steps Towards a Better System
All countries have room for improvement—even the highest-ranking ones. Some general recommendations from MMGPI on how to build a better pension system include:
- Increasing the age of retirement: Helps maintain a more balanced worker-to-retiree ratio.
- Enforcing mandatory occupational schemes: Makes employers obligated to provide pension plans for their employees.
- Limiting access to benefits: Prevents people from dipping into their savings preemptively, thus preserving funds until retirement.
- Establishing strong pension assets to fund future liabilities: Ideally, these assets are more than 100% of a country’s GDP.
Pension systems across the globe are under an increasing amount of pressure. It’s time for countries to take a hard look at their pension systems to make sure they’re ready to support their aging population.
How COVID-19 Has Impacted Black-White Financial Inequality
COVID-19 has worsened Black-White financial inequality, with Black Americans more likely to see negative impacts to their job and income.
How COVID-19 Impacted Black-White Financial Inequality
COVID-19 has disrupted everything from economic markets to personal finances, but not everyone feels its effects equally. When compared with White Americans, Black Americans’ financial situations have been disproportionately affected by the pandemic.
In this infographic from McKinsey & Co., we outline the financial vulnerabilities of Black Americans, their increased usage of financial services since the onset of the pandemic, and their lower satisfaction levels with those services.
Financial Vulnerabilities of Black Americans
Compared to White Americans, more Black Americans say their job and income have been negatively impacted by COVID-19.
|My job has been negatively impacted by COVID-19||My income has been negatively impacted by COVID-19|
Looking forward, Black Americans also report greater job security concerns and have less savings to protect themselves financially. In the event of a job loss, 57% of Black Americans report their savings would last four months or less, compared with 44% of White Americans.
With less of a cash buffer on hand, Black consumers are also more likely to have missed a recent bill payment.
|Skipped at least 1 payment||Partially paid at least 1 bill||Paid in full|
This includes being unable to pay for basic items such as utilities, telephone and internet, and mortgage payments.
How do they begin to manage these challenges?
Use of Financial Services
Black Americans increased their use of financial services more than White Americans.
Banking activities in the past two weeks, per March-June 2020 surveys
|Withdrew cash||Deposited cash||Deposited checks||Contacted bank for service on account||Opened new accounts||Received advice on digital tool usage|
For example, Black Americans were about twice as likely to request account service, open an account, or receive advice on digital tools. In addition, Black families were more likely to leverage a fintech platform and have been more active in opening fintech accounts since the start of the COVID-19 crisis.
However, as Black Americans seek out more financial help, some are not happy with the service they receive.
Satisfaction with Financial Services
Overall, Black families are less satisfied than White families across all types of financial activities. These differences were most pronounced for digital tool advice, where 38% of Black Americans were dissatisfied or very dissatisfied, compared with just 12% of White Americans.
Even though Black people were less satisfied with banking services, they were more likely to say that bank performance was above their expectations. This may suggest that expectations are lower for Black families than they are for White families.
Black Americans were also much less likely to trust their financial advisor.
|Do not trust/losing trust||Indifferent||Gaining trust/trust|
From March-June 2020, the percentage of Black people distrusting their advisors rose from 12% to 32%. Over the same time period, White people’s distrust of financial advisors remained stable at 10%.
A notable exception: White and Black Americans were both satisfied with fintech providers. Only 5% of White Americans and 8% of Black Americans expressed some level of dissatisfaction with fintech companies.
Time to Examine the Financial System?
COVID-19 has perpetuated Black-White financial inequality. Data shows that Black families are more likely to be financially vulnerable, and increase their use of financial services during the COVID-19 crisis. However, they are less likely to feel satisfied with these services.
Financial institutions can urgently review their remote and in-person customer service procedures to ensure the needs of all families are being met.
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