Author: tarek

New IRS data released this month reveal that the nation’s 400 richest people paid their second-lowest average tax rate in the past quarter century.

These tax filers paid just 16.7 percent of their adjusted gross income (AGI) in federal income taxes in 2012, the latest year data are available. This means the nation’s wealthiest paid, on average, less than half the top statutory federal income tax rate of 35 percent that was in effect in that year. Since the IRS began tabulating these data in 1992, the only other year the wealthiest paid a lower tax rate was in 2007.

How the very richest paid such a low rate is no mystery. These individuals derived about 70 percent of their income from capital gains and dividends, which in 2012 were taxed at just 15 percent, a fraction of the top statutory rate to which those who get their income from working a 9 to 5 are subject.

Fortunately, tax changes enacted at the end of 2012 as part of the “fiscal cliff” deal, and as part of the legislation enabling the Affordable Care Act, increased top income tax rates on both wages and capital gains starting in 2013, so it’s likely that effective tax rates on the top 400 taxpayers will increase in 2013 to reflect this.

But federal income tax rules still allow a gigantic tax preference for capital gains relative to salaries and wages. The top tax rate on capital gains is now 23.8 percent, well below the 39.6 percent top tax rate now applicable to wages. This means that the best-off Americans still can reduce their effective tax rates well below those facing many middle-income Americans going forward.

For this reason, it makes perfect sense that President Obama’s new budget proposal would scale back tax breaks for capital gains. During his State of the Union address, the president proposed increasing the top capital gains rate to 28 percent for wealthy investors, restoring the rate to where it was through the Bush I Administration and until 1997. But even if Obama’s proposal is enacted, the best-off Americans would still enjoy a double-digit tax break on their capital gains.

Of course hackneyed talking points prevailed among anti-tax proponents after the president announced his proposal: Stifling investment, slowing economic growth, etcetera, etcetera. The fact is these doomsday scenarios have not proven to be true in the wake of previous tax increases, and we should be debating tax policy within the broader context of how to raise enough revenue to fund the nation’s priorities.

As much as some would like to delink tax policy from, say, the condition of roads and bridges or the quality of our public health system, schools, and the quality of public safety services, it’s all intertwined.  And make no mistake, the tax breaks available to just 400 of the best-off Americans absolutely make a difference in our ability to provide these important services. Astonishingly, these 400 individuals enjoyed almost 12 percent of all capital gains income nationwide in 2012—meaning that roughly one in every nine dollars of capital gains tax breaks went to these 400 individuals in that year.

Most Americans no longer need to be reminded that wealth has been concentrating more and more at the top, or that ordinary working people have been economically standing still. But the IRS’s data on the top 400 taxpayers has not lost its capacity to shock, and remains an important reminder that our political institutions, and especially our tax laws, often act to make inequality worse, not better.

Each year U.S. multinational corporations avoid an astounding $90 billion in corporate income taxes by booking their profits on paper through international tax havens. At a time of growing inequality and budget austerity, it is outrageous that we allow the world’s richest companies to get away with not paying their fair share in taxes.

What can be done to combat this flagrant abuse of our tax system? One new approach would be the passage of Sen. Sheldon Whitehouse (D-RI) and Rep. Lloyd Doggett’s (D-TX) Stop Tax Haven Abuse Act, recently reintroduced legislation that would significantly curb rampant tax avoidance by many multinational corporations. Tightening offshore tax rules and enforcement as the act proposes could generate an estimated $278 billion over the next decade in much-needed revenue.

While the Stop Haven Abuse Act would significantly improve our international tax system, it does not go quite as far as proposals that would “end deferral” of taxes on foreign profits, which would end international income shifting by corporations full stop by ensuring that U.S. companies pay the same tax rate at the same time on their foreign and domestic profits.

In previous Congresses, the Stop Haven Abuse Act has been very closely associated with tax fairness champion Sen. Carl Levin, who retired at the end of the last Congress. While the new legislation is largely the same as the previous bill of the same name, the latest version includes significant new provisions to curb corporate inversions (which have also been proposed separately as part of the Stop Corporation Inversions Act) and earnings stripping.

The key provisions of the Stop Tax Haven Abuse Act include:

• The act would take aim at corporate inversions by treating the corporation resulting from the merger of a U.S and foreign company as a domestic corporation if shareholders of the original U.S. corporation own more than 50 percent (rather than 20 percent under current rules) of the new company or if the company continues to be managed and controlled in the United States and engaged in significant domestic business activities (meaning it employs more than 25 percent of its workforce in the United States).
• The act would disallow the interest deduction for U.S. subsidiaries that have been loaded up with a disproportionate amount of the debt of the entire multinational corporation. This provision would curb so-called “earnings stripping,” a practice in which a U.S. subsidiary borrows from and makes large interest payments to a foreign subsidiary of the same corporation in order to wipeout U.S. income for tax purposes.

• The act would require multinational corporations to report their employees, sales, finances, tax obligations and tax payments on a country-by-country basis as part of their Securities and Exchange Commission (SEC) filings. Such disclosures would provide crucial insights into how companies are gaming the international tax system and would provide more transparency to investors generally.

• The act would deny companies the ability to deduct the expenses of earning foreign income from their U.S. taxable profits until those foreign profits are subject to U.S. tax.

• The act would limit the ability of corporations to apply excess foreign tax credits from high tax jurisdictions to offset taxes in tax haven jurisdictions.

• The act would repeal the “check-the-box” rule and the “CFC look-through rules” that allow companies to shift profits to tax havens by letting them tell foreign countries that their profits are earned in a tax haven, while telling the United States that the tax-haven subsidiaries do not exist.

Some North Carolina lawmakers may push to eliminate the state’s capital gains tax under the guise of promoting economic growth, according to a recent report by the North Carolina Budget and Tax Center. The tax is levied on income from the sale of stocks, artwork, vacation homes, and other fancy items – so this isn’t a middle class tax cut we’re talking about. ITEP crunched the numbers for the report and found that eliminating taxes on capital gains would reduce state revenue by $520 million, and 60 percent of the benefits would accrue to taxpayers making $1 million or more – just one percent of North Carolina’s taxpayer base. The idea is even more appalling when you consider that all income growth in the state between 2009 and 2012 went to these same earners, according to the Economic Policy Institute.

Leaders of both parties unveiled tax cut plans last week in Minnesota, but the beneficiaries of these plans would differ greatly. Gov. Mark Dayton wants to introduce a tax credit for child care expenses that would expand an already existing program to cover families making up to $124,000 a year. Under the plan, which would cost $100 million over two years, the maximum credit would be $2,100, and the governor predicts that the typical family would receive a credit of $481. Meanwhile, state Sen. David Senjem has sponsored a bill to phase out Minnesota’s tax on some Social Security benefits over the next decade.   The lion’s share of this tax cut would go to better-off elderly taxpayers, since social security is already fully exempt from Minnesota tax for seniors with income below $25,000 ($32,000 for married couples) and partially exempt for all seniors. His plan would cost $127 million over two years..

Mississippi Gov. Phil Bryant pledged to consider any tax cut proposal that reaches his desk in last week’s state of the state address, saying “In short, put a tax cut on my desk, and I will sign it.” The governor has proposed a nonrefundable earned income tax credit for working families with income limits that match the federal EITC.. The governor claims the credit would give Mississippians a tax break of $100-400 a year, would cost $79 million, and would only be available in years where revenue growth is sufficient and the state’s rainy day fund is full. An ITEP analysis found that the governor’s nonrefundable EITC proposal would give a tax break to only 9 percent of the poorest Mississippians, but a refundable credit would reach 45 percent of low-income people. Not everyone in the state is enthused by the governor’s plan; one legislator called the cuts “political hogwash” and blasted the governor for not investing more in infrastructure. The Sun Herald criticized the governor for unfounded optimism in his speech, writing “At the risk of reveling in the bad, as Bryant put it, we believe no honest State of the State at this point in its history should sugarcoat this state’s miserable rankings in the education of its children, the health of its residents and the income level of its work force.”

State of the State Addresses This Week:
Hawaii Gov. David Ige (watch here)
Montana Gov. Steve Bullock (Wednesday)
Utah Gov. Gary Herbert (Wednesday)

Governors’ Budgets Released This Week
Arkansas Gov. Asa Hutchinson (Tuesday)
Minnesota Gov. Mark Dayton (Tuesday)
Wisconsin Gov. Scott Walker (Tuesday)
Massachusetts Gov. Charlie Baker (Wednesday)

Little did Kansas voters know that in reelecting Sam Brownback they were actually voting for a vengeful old sea captain obsessed with one issue above all others – eliminating the state’s personal income tax.

How else to explain the governor’s insistence on continuing his ruinous path, despite the dictates of reality and reason? His zeal for cutting the personal income tax will cost Kansas $5 billion in lost revenue over the next seven years. The governor’s recent budget proposes cutting K-12 operational spending by $127.4 million this year alone, to say nothing of the draconian cuts he implemented over his first term. Per-pupil spending in the state is $861 less than it was in 2008, according to a recent study from the Center on Budget and Policy Priorities. The governor has already been forced to reduce spending by  4 percent across the board for state agencies this year (on top of other cuts), and he has raided the highway fund to the tune of $421 million. The reserve fund is almost empty. The state’s credit is in tatters.

Brownback has been forced to delay further income tax cuts planned for this year. He has also been forced to raise taxes, though not the ones you would think: his budget proposal would increase the excise tax on cigarettes by nearly 300 percent, from $0.79 to $2.29 per pack, and taxes on liquor would rise from 8 percent to 12 percent. As former Kansas Gov. Kathleen Sebelius said recently, “I’m not sure there’s enough smokers and drinkers in Kansas to balance these enormous cuts.” Furthermore, the governor’s regressive tax hikes would increase the burden on the same Kansans hurt the most by his economic stewardship.

The governor’s plan has succeeded in uniting state lawmakers in opposition. “These changes to tax policy proposed by Governor Brownback do nothing to address the systematic problem created by his irresponsible tax polices and fiscal mismanagement,” House Minority Leader Tom Borroughs complained. Sen. Laura Kelly groused that “People are being asked to take politically difficult votes on proposals that don’t solve the problem.”

Faced with this reality, Brownback and his first mate, supply-side Svengali and economist-for-hire Art Laffer, have resorted to the time-honored strategy of obfuscation. When a reporter pointed out that the governor’s plan to delay income taxes was a copy of his opponent’s plan from the gubernatorial election – a proposal that Brownback’s campaign derided as “appalling” – Brownback’s revenue secretary testily responded that, while Davis’s plan would have halted tax cuts forever, the governor’s proposal would still allow for tax cuts to go forward if growth in state tax receipts exceeded 103 percent of tax receipts in the previous fiscal year. Since the state is forecasting budget deficits through 2019, this is disingenuous at best.     

The governor’s budget director has tried to claim that the governor has not cut spending at all. “I know many people have different words for efficiencies. I do not believe these to be cuts,” he said, referring to the $1.38 billion in spending reductions in the governor’s proposed budget. Somehow I don’t think the kids in overcrowed classrooms and pensioners uncertain about their retirement plans would agree.

Laffer, in a recent interview, said that while he was not surprised by the state’s yawning deficits, he was at a loss as to why they occurred – this, despite a PhD in economics from Stanford University. He does feel bad, however – not for the Kansans hurt by budget cuts, but for Brownback. “I feel sorry for the governor,” he lamented, “but he did the right thing.”

Brownback, confronted with terrible revenue projections soon after his reelection, denied having any advanced knowledge that things were so bad. “I knew what the public knew,” he claimed, which is quite a troubling admission.

And let’s not forget Orwellian attempts to distort reality with misleading information. For example, the graph below looks great for Kansas job growth, until you look at the y-axis and see the state has added about 60,000 jobs in the last four years, trailing job growth in neighboring Missouri, Iowa, Oklahoma and Colorado. 

In his state of the state speech, Gov. Brownback vowed to continue the “march toward zero,” referring to his quest to eliminate state income taxes. But maybe the march is toward zero money for crucial state services, zero new jobs created through his austerity economy, and zero prospects for Kansas schoolchildren.

A wise public servant would acknowledge his error and reverse the policies that have led to so much economic harm. But Sam Brownback has become a 19th century salty dog chasing the white whale of eliminating his state’s income tax. No matter that he has lost his leg and thousands of kids have lost their shot at a decent future. He and Art Laffer, say “Damn the torpedoes, full speed ahead.” 

Although it significantly cut income taxes over each of the last three legislative sessions, the North Dakota Legislative Assembly heard the first of 30 bills this week aimed at income tax cuts, One proposal would reduce all personal income tax rates to zero and collapse the state’s current five income brackets to one. The governor’s income tax plan would reduce personal income tax rates by 10 percent and corporate income tax rates by 4.8 percent across the board. Another proposal currently before Senate would reduce the income tax rate on the bottom income bracket from 1.22 percent to 0 percent, eliminating the tax liability for 170,000 North Dakotans. The tax cut would cost $151 million a year and expire after two years. Sponsors of the bill argue that the tax cut would provide relief to renters, who have seen rents skyrocket as a result of the oil boom. Other legislators have suggested a more targeted approach, through an income tax credit for renters. 

South Carolina Gov. Nikki Haley endorsed an increase in the state’s gas tax in her state of the state Wednesday. Previously, the governor pledged to veto any increase in the state’s gas tax, which has not changed since 1987. The catch (and there’s always a catch) is that Haley will not support a gas tax increase without an income tax cut for top earners (from 7 to 5 percent).  Hiking gas taxes while cutting the top income tax rate would result in a tax shift from well-off South Carolinians to middle income and working families. State legislators had varied reactions to the governor’s plan; while Republicans were enthusiastic, Democrats pointed out that the plan would result in a net revenue loss of $117 million.

A state Senate committee approved Arkansas Gov. Asa Hutchinson’s tax plan Wednesday  with an amendment that would eliminate a planned capital gains tax cut. The amendment, offered by Sen. Bill Sample, would reverse a measure passed in 2013 to increase the exemption on capital gains from 30 percent to 50 percent and eliminate the tax on capital gains above $10 million. The amendment reduces the total cost of the governor’s tax plan to $93.4 million, according to the state’s Department of Finance and Administration. Local political prognosticators have noted the unorthodox nature of a Republican governor and legislature introducing a bill with tax increases.

Michigan Governor Rick Snyder signed a package of bills last week related to a ballot question that voters will decide on in May.  If approved, the package will generate $1.2 billion per year for roads and $300 million per year for schools by raising sales taxes, gas taxes, and vehicle registration fees.  In sharp contrast to Governor Haley’s proposal for South Carolina (described above), this package includes an income tax cut targeted toward low-income taxpayers, rather than the wealthy.  If approved, the state’s Earned Income Tax Credit (EITC) would rise to equal 20 percent of the federal credit.

Following Up:

Montana – Debate over tax cut measures continues in the legislature, and Gov. Steve Bullock’s budget director opposed the measures in committee hearings, saying they would endanger the state’s surplus. The Montana Budget and Policy Center, citing ITEP numbers, said that the top 1 percent of Montana taxpayers would see a tax cut of $2,200, while low-income Montanans would see a cut of just $12.

New Hampshire – Gov. Maggie Hassan has announced she opposes  proposed corporate tax cuts, saying that the bills currently before the state senate would create a significant budget hole. It is uncertain if Hassan will veto the bills should they reach her desk.

New York – In a stunning turn of events, state assembly speaker and Cuomo ally Sheldon Silver was arrested this morning on corruption charges. The charges stem from investigations related to the Moreland Commission, which the governor shut down prematurely last year amid controversy. Needless to say, this development will have an impact on Gov. Cuomo’s legislative agenda.

Since the start of the year, House Democratic leadership and President Barack Obama have proposed bold new tax plans based on the central idea that wealthy investors are not paying their fair share in taxes.

For their part, House Democratic leaders have proposed to finance a substantial portion of their $1.2 trillion middle-class tax-cut plan by imposing a financial transactions tax (FTT) at an unspecified rate. Obama has proposed to curb preferential treatment of capital gains and to impose a fee on large banks, to raise about $320 billion over 10 years. While both proposals would primarily hit wealthy investors, Obama’s proposal is better targeted and does not include the flaws of a financial transactions tax.

How does the FTT work? Basically, it is an excise tax applied to sales of securities such as stocks and bonds. Because these securities are often traded, the proposed tax rate applied to each sale would be very low, yet the tax has the potential to raise a substantial amount of revenue. A FTT proposal from Rep. Peter DeFazio (D-OR), for example, would set a rate of only three hundredths of one percent and would raise about $352 billion over 10 years. Thus, a tiny tax imposed over and over again ends up yielding substantial revenue.

A major problem with the FTT is that it is not based  on taxpayers’ ability to pay. It taxes transactions regardless of whether  investors earned income from the sale. A person could purchase a stock for $100, sell it for $90, and still have to pay the tax even though he or she lost money on the transaction. In contrast, the capital gains tax is applied to profit, if any, from the sale.

An advantage of the FTT that is often touted by proponents is that it could reduce short-term trading, in particular the split-second back-and-forth trading that computer technology has allowed some wily traders to engage in (which can amount to insider trading). But such trading could be outlawed directly.

On the other hand, the fact that securities are frequently traded improves the liquidity of the stock market (making it easy for shareholders to sell their stocks) and reduces the volatility of stock prices somewhat. In fact, many studies have found that the FTT’s increased transaction costs could reduce liquidity and increase volatility by discouraging transactions not only by unprincipled speculators, but also the everyday transactions that are a necessity for pension plans and other normal investors.

Obama’s proposed bank fee would apply a very low variable rate structure (with a higher rate for riskier liabilities) to firms with more than $50 billion in assets. Unlike the FTT, the bank fee’s variable rate structure would discourage excessive risk taking by financial firms, and thus would help avoid a future financial crisis. The fee could raise as much as $110 billion over 10 years.

Obama’s proposals to increase taxes on capital gains and big banks appear to be better targeted at wealthy investors than a FTT, while reducing excessive financial speculation by big banks. In addition, Obama’s proposals could raise roughly the same amount of revenue as a FTT, depending on the details of the latter ($320 billion under Obama vs. $352 billion using the DeFazio FTT proposal mentioned above). 

Despite its throwback name, Adobe Products is a cutting-edge technology company whose products—notably, PDF files—are used by millions of Americans every day. As it turns out, Adobe’s tax-avoidance technology is pretty 21st century too. 

The company’s newest annual financial report, released earlier this week, discloses that Adobe is currently holding more than $3 billion of its profits abroad in the form of “permanently reinvested” foreign earnings, and it has paid very little tax on these profits to any country—a clear indication that much of these profits are likely in foreign tax havens.

Accounting standards require publicly held companies to disclose the U.S. tax they would pay upon repatriation of “permanently reinvested” profits. But these standards also provide a loophole allowing companies to claim they can’t calculate this tax because it is “not practicable.” In other words, companies must report the tax they would owe on this offshore income, but if they claim it’s too difficult then they don’t have to worry about doing so. 

As we have previously documented, the vast majority of Fortune 500 corporations disclosing offshore cash use this egregious loophole to avoid reporting their likely tax rates upon repatriation, even though these companies almost certainly have the capacity to estimate these liabilities.

Refreshingly, Adobe is one of only a few dozen companies that actually admits how much tax it would owe if it repatriated its foreign cash. The latest report says it would owe $900 million, which equates to roughly a 27 percent tax rate. Since the tax it would pay on repatriation is equal to the 35 percent U.S. tax rate minus any foreign taxes paid, the clear implication is that Adobe’s $3 billion offshore stash is largely being held, for tax purposes anyway, in a tax haven country with a tax rate in the single-digits.

While a 2013 investigation by the Financial Times uncovered evidence that the company was using subsidiaries in Ireland (which has a 12.5 percent corporate tax rate) to reduce its effective tax rate, this doesn’t explain how the company has managed to pay an even lower rate on its offshore profits to date. Mysteriously, Adobe’s annual report doesn’t disclose the existence of any foreign subsidiaries in countries with tax rates lower than Ireland—even though it is supposed to publish a list of all its “significant” subsidiaries.

When the hubbub over President Barack Obama’s recently announced plan for reforming capital gains taxes dies down, tax reform talk in Congress this year likely will refocus on the hot topic of corporations that move their profits (or corporate address) offshore for tax purposes. The new Adobe data illustrate perfectly the difficulty Congress faces. Members are under immense pressure from corporate-backed lobbyists and their allies to lower the 35 percent corporate tax rate. But all manner of loopholes and offshore profit shifting enable corporations to substantially lower and in many cases erase their U.S. tax liability. It shouldn’t be too much to ask for these companies to disclose where they’re stashing their offshore profits and whether they’re paying any taxes.   

Much of the fireworks surrounding President Barack Obama’s latest tax reform proposals focus on his aggressive (and laudable) proposal to pare back tax breaks for the capital gains income enjoyed by the wealthiest Americans.

But those interested in a fairer and more sustainable tax system should question the president’s plan to use some of the added revenue from these capital gains hikes to pay for a tax credit for two-earner couples.

The idea is straightforward: married couples in which both spouses work would be able to claim a tax credit equal to 5 percent of the first $10,000 of earnings for the lower-earning spouse.  White House materials note only that the credit is designed to “help cover the additional costs faced by families in which both spouses work.”

On the surface, this sounds reasonable. But in practice, it’s not a sound plan. There are already tax law provisions designed to help offset child-care costs that two-earner couples (among others) incur. The dependent care credit sensibly allows middle-income families to take a tax break for a certain percentage of their child care expenses, if they actually spend money on child care—and Obama’s plan would increase the value of this credit for many parents. There is no need to  pile another tax break—one that gives second-earners tax breaks even if they don’t have children to put in day care—on top of this.

I’m sure the idea of a tax-credit for second earners polls well, and it’s possible that is the entire reason why this proposal was included in the president’s plan. But if the goal is to reduce the cost of living for families in which with both spouses are in the workplace, there’s already a tax credit that does a great job achieving this.  Adding a second credit that does a less-good job will needlessly complicate the task of filing income tax returns.  And, of course, at a time when the federal government continues to run routine budget deficits, with no prospects for returning to the black anytime soon, the most obvious thing to do with any new revenues from closing capital gains tax loopholes is to pay down the deficit and fund vital public investments. 

Legislators in Montana have a full plate this week, including several proposals to cut taxes. One plan would cut state income taxes by 5 percent across the board at a cost of $79 million in lost revenue, while a more modest proposal would cut income tax rates at a cost of $26 million. An ITEP analysis found that the rate cuts in both plans would overwhelmingly benefit high-income taxpayers; in each case, the top 20 percent of taxpayers would receive roughly two-thirds of the tax cut.

Two proposals in the New Hampshire Senate would lower the business enterprise and business profits taxes. Sponsors of the proposals have argued that the state’s corporate tax rates deter investment, but as the New Hampshire Fiscal Policy Institute points out business tax cuts are an ineffective economic development strategy. One bill proposes a reduction in the business profits tax rate from 8.5 to 8 percent. The profits tax falls on businesses with gross receipts over $50,000, though only one percent of filers actually pay it after credits are applied. The other bill would reduce the business enterprise tax, which is levied on businesses’ wages, dividends and interest, from a rate of 0.75 percent to 0.675 percent. Combined, the two measures could cost $35 million in lost revenue each year. Opponents of the cuts complain the lost revenue would mean fewer services and worse infrastructure.

New York Gov. Andrew Cuomo will address state legislators and interested citizens in a joint State of the State and budget address this Wednesday. A key element of his budget proposal is a $1.7 billion property tax circuit breaker credit that would be available to homeowners and renters if their property tax payments exceed 6 percent of income. The circuit breaker would phase out for homeowners with $250,000 or more of income and for renters at $150,000 (13.75 percent of their rent would be considered property taxes). The governor estimates that over 1.3 million New Yorkers would receive an average credit of $950 if his plan is fully implemented. The governor may also express his support for a bill that offers tax credits to individuals and corporations who donate money to public schools or scholarship programs for poor and minority students to attend private schools. The bill is contentious, as some see it as a way to divert state money to private education.

Things We Missed:

States Starting Session This Week:
Alaska
Hawaii
New Mexico

State of the State Addresses This Week:
Michigan Gov. Rick Snyder (watch here)
New Mexico Gov. Susana Martinez (watch here)
Alaska Gov. Bill Walker (Wednesday)
Missouri Gov. Jay Nixon (Wednesday)
New York Gov. Andrew Cuomo (Wednesday)
South Carolina Gov. Nikki Haley (Wednesday)
Delaware Gov. Jack Markell (Thursday)
Nebraska Gov. Pete Ricketts (Thursday)

Governor’s Budget’s Released This Week:
Kansas Gov. Sam Brownback (Monday)
Maryland Gov. Larry Hogan (Wednesday)
New York Gov. Andrew Cuomo (Wednesday)

Last week, the Institute on Taxation and Economic Policy released Who Pays?, a report that examines the state and local tax system in all 50 states. The analysis concludes that every state’s tax system is regressive, meaning the lower one’s income, the higher one’s tax rate.

Not surprisingly, the report ruffled a few feathers. It’s about taxes, after all. A few critics cried foul because the study, which made clear it’s an analysis of state and local tax systems, only discussed state and local tax systems. Such a focus doesn’t paint a complete picture of all taxes people pay, they argue. Well, no kidding. Proponents of progressive taxes made a similar argument in 2012 when Mitt Romney made his widely disproven, notoriously wrong remark that 47 percent of the population doesn’t pay any taxes, based on a narrow analysis of federal income taxes.

State governors and lawmakers have a clear set of policies they can control. Federal tax laws are not among them. State and local tax systems fund all manner of public services that benefit all state residents, including public education, public health and safety, and infrastructure. How states fund these vital services and who the responsibility falls on to pay for them are precisely the questions state policymakers should be debating.  

It is indisputable that states are raising revenue in a regressive way that demands a greater share of income from those who have the least. When state lawmakers are forced to deal with difficult fiscal circumstances that may require tax hikes, what they need to know is who’s getting hit hardest to begin with. And that’s exactly what the Who Pays? report shows.

If it is easy to conclude from Who Pays? that states seeking to increase taxes should not look first to low- and middle-income families, including federal taxes makes this conclusion even more obvious. An April 2014 report from Citizens for Tax Justice shows that the lion’s share of taxes paid by low- and middle-income people are state and local. Yes, our collective federal and state tax system is somewhat progressive overall, but that doesn’t mean states should be absolved from imposing an unconscionably high tax rate on Americans living at or below the poverty line. If our tax system is indirectly contributing to income inequality, state and local taxes are the main reason why.

For those who would argue that regressive state taxes are just fine because the federal system makes taxes more progressive, well, please make that argument to the low-income families in Washington state who pay an effective state tax rate of 16.8 percent while the richest 1 percent pay only 2.4 percent. And while you’re at it, make your case to the residents of Kansas who are dealing with the fallout from Gov. Sam Brownback’s failed supply-side experiment that cut state taxes for businesses and the very rich – and raised taxes on lower-income residents. It’s well documented that Kansas’s irresponsible tax cuts have left the state struggling to raise enough revenue to adequately fund basic public services.

These kinds of facts should be the starting point for tax reform debate in the states—not nuanced ideological arguments that seek to justify regressive state and local taxes because the federal system is comparatively progressive.

Those of us who advocate for just, progressive tax policies are accustomed to anti-tax advocates dangling shiny objects and trying to detract from big picture questions about how to raise revenue in a fair way. But criticizing a 50-state analysis for analyzing 50 states, not the federal system, is an obvious red herring.