Understanding the “Who Pays?” Study by ITEP: A Comprehensive Overview of State and Local Tax Fairness
The Who Pays? report, released by the Institute on Taxation and Economic Policy (ITEP), is a nationally respected study that closely examines how state and local tax systems impact families across different income levels. In its 7th edition, published in January 2024, the report provides valuable insights into tax fairness, regressivity, and the burden various tax structures place on American households.
Unlike many other tax-related analyses, the Who Pays? study takes a holistic approach—evaluating not just income taxes but also sales taxes, property taxes, excise taxes, and other forms of taxation. This broader perspective enables a clearer understanding of how the tax code operates across different states and for different income brackets.
Key Findings: A Closer Look at California
California is often labeled as a “high-tax” state, especially for wealthier residents. However, the Who Pays? study offers a more balanced and data-driven view. For families in the bottom 80% of the income scale, California’s overall tax burden is nearly equal to the national average. This contradicts the popular assumption that Californians across all income levels face higher tax rates.
Interestingly, families in the bottom 40% of income earners actually face a lower tax burden in California than in states like Texas and Florida, which are often considered “low-tax” due to their lack of state income taxes. These findings suggest that progressive tax systems, like California’s, can be less burdensome for modest-income families.
Tax Equity: Wealthy Californians vs. Low-Income Families in Other States
Another notable insight is that wealthy individuals in California—despite paying higher absolute tax amounts—often pay a lower percentage of their income in taxes than low-income families in other states. The study identifies at least 16 states where low-income households pay a higher effective tax rate than California’s wealthiest residents.
This is largely because many of these states rely heavily on sales and excise taxes, which tend to affect lower-income households more. Unlike income taxes, these taxes do not scale with earnings, leading to a higher proportional burden on those with limited financial means.
Regressive Tax Systems in the U.S.
The report highlights how the majority of U.S. states follow a regressive tax model. This means that low- and middle-income families pay a larger share of their income in taxes than high-income households. This is mainly due to an overreliance on:
- Sales taxes (on goods and services)
- Excise taxes (like gasoline and alcohol taxes)
- Flat-rate property taxes
These taxes do not account for a family’s ability to pay. Since lower-income households spend a greater proportion of their income on consumption, they bear a heavier tax burden.
How California Compares
In contrast, California’s progressive income tax system helps balance the overall burden. While higher earners do pay more in absolute terms, lower-income Californians are protected from excessive taxation through various tax credits and income-based tax policies.
This design contrasts sharply with states that don’t levy an income tax but depend heavily on consumption taxes—often leading to higher effective tax rates for working-class families.
Sales Taxes: A Critical Component
The Who Pays? study also provides a state-by-state comparison of combined state and local sales tax rates. It finds that states like:
- Tennessee
- Arkansas
- Alabama
- Louisiana
- Washington
…have the highest combined sales tax rates, often exceeding 9%. These taxes impact everyday purchases, making them especially regressive.
By contrast, Alaska, Delaware, Montana, New Hampshire, and Oregon have no statewide sales taxes, helping reduce the financial strain on low-income households. Alaska, in particular, stands out for having the lowest average combined sales tax burden (1.82%).
Methodology: A Data-Driven Approach
ITEP’s 7th edition uses the most recent U.S. Census data to map tax burdens across ZIP codes. This allows for a more accurate and localized understanding of tax impacts. By analyzing tax rates based on population distribution and geographic variation, the study ensures a high level of reliability and precision.
While this update changes how data is weighted compared to earlier editions, the overall patterns and conclusions remain largely consistent.
Broader Implications for Policy
This study serves as a valuable tool for policymakers, researchers, and advocates. It demonstrates that state tax structures matter significantly when evaluating economic fairness. While no tax system is perfect, some are clearly more equitable than others.
Key takeaways include:
- Progressive tax systems, like California’s, can provide greater fairness.
- Regressive systems, especially those relying heavily on sales taxes, exacerbate income inequality.
- Low-income households often bear the heaviest proportional tax burdens in states perceived as “low-tax.”
Conclusion: Why This Study Matters
The Who Pays? report highlights the need for equitable tax reform. It challenges outdated perceptions and provides a fact-based framework to evaluate how taxes affect families at every income level.
States that aim to reduce poverty, support working families, and invest in public infrastructure should carefully consider the findings. A more progressive tax system may not only be fairer—it can also foster a stronger and more resilient economy.