Tax Inequality Index

Source: Institute on Taxation & Economic Policy (ITEP), 2015

The ITEP Tax Inequality Index (PDF) measures the effects of each state’s tax system on income inequality. Essen­tially, it answers the following question: Are incomes more or less equal after state taxes than before taxes? For each state, the index compares incomes by income group before and after state and local taxes (count­ing the tax savings from deducting state and local taxes on federal tax returns).

The index for each state equals one minus the average of the following ratios: 1) the after-tax income of the richest one percent as a share of pretax income over the after-tax income of the poorest 20 percent as a share of pretax income; 2) the after-tax income of the richest one percent as a share of pretax income over the after-tax income of the middle 60 percent as a share of pretax income; and 3) the after-tax income of the best-off 20 percent as a share of pretax income over the after-tax income of the poorest 40 percent as a share of pretax income, half-weighted.

States with regressive tax structures have negative tax inequality indexes, meaning that incomes are less equal in those states after state and local taxes than before. States with progressive tax structures have posi­tive tax inequality indexes; incomes are more equal after state and local taxes than before…