Latest IRS Data Reveal Fundamental Mismatches in the States

Source: Institute on Taxation and Economic Policy, August 2008

Most Unequal States Either Don’t Have a Personal Income Tax or Have One in Need of Improvement

Data released late last week by the Internal Revenue Service (IRS) indicate that 10 states have greater concentrations of reported income among their very wealthiest residents than the country as a whole. Unfortunately, the tax systems in those ten states generally ignore that very important reality. Of those ten states:
– four lack a broad-based personal income tax;
– three either impose a single, flat rate personal income tax or have a rate structure that all but functions in that manner; and
– three use a graduated rate structure, but two have cut income taxes for their most affluent residents substantially over the past two decades and are now struggling to close multi-billion dollar budget gaps.

The failure to use sufficiently progressive personal income taxes — or to levy any personal income tax at all — results in an overall tax system that is unsustainable, inadequate, and unfair over the long-run. Indeed, of these ten states, over half face severe or chronic budget shortfalls. Reforms to improve the personal income tax — or simply to institute one — should be on the agenda in each of these states.

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