4. South Dakota
> ITEP index score: -8.4%
> Effective tax rate lowest 20%: 11.3% (12th highest)
> Effective tax rate top 1%: 1.8% (3rd lowest)
> 2013 Gini coefficient (pre-tax): 0.44 (7th lowest)
With an effective tax rate of 1.8%, South Dakota’s wealthiest residents paid less in state and local taxes as a share of their income than their peers in nearly every other state. The poorest 20% of families, on the other hand, paid among the higher effective tax rates. The difference is due in large part to the complete lack of an income or corporate tax in the state. While even states with regressive tax systems often exclude groceries from the sales tax, this is not the case in South Dakota. In fact, the state relies on consumption taxes as an important revenue source. Sales and excise taxes accounted for 35.6% of the state’s tax revenue, higher than the contribution in all but four other states. Unlike many other state tax systems identified as regressive, income inequality in South Dakota — measured before taxes — was not nearly as prevalent compared to most states in 2013.
> ITEP index score: -8.5%
> Effective tax rate lowest 20%: 12.5% (5th highest)
> Effective tax rate top 1%: 2.9% (8th lowest)
> 2013 Gini coefficient (pre-tax): 0.48 (9th highest)
Texas is one of a handful of states levying no income tax. While the state collects a gross receipts tax — which is a tax on business transactions — it does not collect a tax on any corporate profits. As is common in states with abundant natural resources, the oil and gas industry in Texas stimulates the economy and helps the state raise revenues from other sources. Yet, this may not be enough, as the state relies heavily on sales and excise taxes. These consumption taxes accounted for nearly 32% of the state’s revenue, the ninth highest nationwide in fiscal 2012. The state also does not provide low-income residents with any tax credits, which help offset sales, excise and property taxes in other states. Partly as a result, the poorest 20% of Texas families paid an effective state and local tax rate of 12.5%, higher than in all but a handful of states, while the wealthiest 1% of families paid less than 3%, one of the lowest rates.
> ITEP index score: -9.5%
> Effective tax rate lowest 20%: 12.9% (4th highest)
> Effective tax rate top 1%: 1.9% (4th lowest)
> 2013 Gini coefficient (pre-tax): 0.48 (5th highest)
As in other states ITEP identified as having state and local tax systems that exacerbate income inequality, the lack of a personal income tax in Florida disproportionately benefits the wealthiest residents of the state. The lack of income tax also means the state relies more heavily on sales taxes for its revenues. In fiscal 2012, sales and excise taxes accounted for 30.8% of the state’s revenue, the 10th highest such share, and well above the average national rate of 23.7%. The wealthiest 1% of Florida families paid an effective tax rate of less than 2%, nearly the lowest rate in that income group.
> ITEP index score: -12.6%
> Effective tax rate lowest 20%: 16.8% (the highest)
> Effective tax rate top 1%: 2.4% (5th lowest)
> 2013 Gini coefficient (pre-tax): 0.46 (19th lowest)
Washington’s score of -12.6% was the worst in the nation. The poorest 20% of families paid nearly 17% of their income in state and local taxes, the highest such rate nationwide. With the wealthiest 1% of state households paying just 2.4% — nearly the lowest such rate — Washington’s tax system helped widen the income gap more than any other state. Washington’s poorest residents paid nearly seven times what the wealthiest 1% paid as a share of income, one of the highest such ratios nationwide. While Washington’s tax code is considered by many to be among the nation’s most unfair, residents are better-off financially than in many other states. A typical household earned $58,405 in 2013, one of the higher household median incomes. And while 15.8% of Americans lived in poverty that year, 14.1% did in Washington.
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