Taxation is a means through which the government in a given country gets money to fund its expenditure. It achieves this by imposing charges on citizens and their properties. The various levies imposed by the state are compulsory. They are used by the government to keep its economic conditions in check (Slemrod 59). Taxation may also be used to discourage the public from engaging in certain economic activities. A case in point is when the state imposes protectionist taxes on imports and exports.
In this paper, the author will analyze a number of elements related to the U.S tax regime. The analysis will be based on the article titled “Who Pays: A 50-State Report by the Institute of Taxation and Economic Policy”.
To this end, the author will analyze whether state and local government taxes are regressive, progressive, or neutral. The most regressive and progressive states will be identified. In addition, the most regressive and progressive state and local taxes will be reviewed. Finally, the author will analyze how Massachusetts compares to other states with regards to state and government taxes.
Taxation Structures in the American States
The Nature of State and Local Government Taxes
Taxes may be categorized into three main categories. They include progressive, regressive, and neutral taxes (Slemrod 57). A progressive regime implies that the taxes levied on an individual or property rises as their income increases.
With regard to this, levels of income and pay are used to ascertain the tax rate. On its part, a regressive tax regime involves a situation where tax rates decrease with an increase in income. The burden is greater on the poor than on the rich members of society. The final category is a neutral tax regime. The impacts of this arrangement are not felt since there are no changes in any of the economic decisions made by the parties involved. Such decisions entail those to do with the purchase of goods and services.
Reports from analysts and government think tanks reveal that state and local government taxes are mostly regressive (“Who Pays: A 50-State Report by the Institute of Taxation and Economic Policy” [Who Pays] par. 4). The regressive nature of the tax regimes is evident in relation to personal, property, and consumption taxes levied on individuals and businesses.
The situation results in the unfair distribution of wealth and income. The reason is that it is the poor who are mainly targeted by the tax rates (Cubero and Vladkova 15). The only instance where state and local government regressive taxes are high is in the case of personal income. The reason is that the levies are not applicable to all situations. Consequently, regressive taxes impact the balance between high and low-income earners in society.
In instances touching on state consumption taxes involving sales and excise levies, the poor pay a higher percentage compared to the rich. The taxes are mostly charged on the sale and production of goods and services. It is noted that the poor partake in these production processes. However, in spite of this, this group cannot afford these items (Gale and Harris 6). As a result, the poor find it difficult to pay for the taxes. They cannot afford to consume these products, which they are equally entitled to.
Taxes charged on personal and business property are also higher for the low-income earners than on their counterparts in the high-income bracket (“Who Pays” par. 5). The situation brings out the regressive nature of the country’s state and local government taxes (Gale and Harris 6).
The development is made evident in the purchase of households. To this end, property circuit breakers are virtually non-existent. The breakers are used to regulate the prices by making sure that people pay for property according to their personal income. Currently, this is unacceptable.
Most Regressive and Progressive States and Taxes
According to Cubero and Vladkova, the states and taxes considered to be low only benefit the wealthy (5). The poor members of the society are negatively affected due to the regressive nature of taxation systems employed. The most regressive regions with regards to state and local government taxes are listed below. The state’s order from the most to the least regressive in this category:
- South Dakota
- Kansas, and
- Indiana (Cubero and Vladkova 15).
In terms of percentage of tax on income, individuals on the bottom 20% cluster in the ten states pay as much as seven times more compared to the wealthy. The listed states rely heavily on excise taxes as their source of government revenue. It is noted that some of them do not even charge taxes on personal income (Morris and Munnings, 11). Consequently, one may argue that excise taxes are the most regressive. On their part, income taxes are the most progressive.
The most progressive regions in relation to state and local government taxes include California and New Jersey. Others include Vermont, Hawaii, and the District of Columbia. Minnesota, Iowa, West Virginia, New York, and Rhode Island also fall under this category. In these jurisdictions, various tax credits and deductions are provided. The interventions alter the taxes levied (Cubero and Vladkova 15).
Taxation in Massachusetts in Comparison to the Other States
Massachusetts uses its local independent laws and policies to impose two major categories of tax rates. It includes a 5.25 percentage rate imposed on wages, interests, and dividends (“Who Pays” par. 13). Long term capital gains are taxed under this regime.
The second is a 12 percent rate. The latter is charged on both short and long term capital gains on collectibles and installment sales. It is imposed on general short term capital gains. Compared to other states, it is noted that Massachusetts’ tax regime varies with the income of the individuals. The state imposes a sales tax of 6.25 percent on rental charges and sale price of tangible personal property.
Every resident in Massachusetts is required to file annual tax returns. The state has limited income credit. It is usually available for citizens with incomes below the filing threshold (Gale and Harris 6). The credit does not apply to married individuals who file returns separately.
The majority of state and local government taxes in the U.S are regressive in nature. As such, the low-income earners are disadvantaged compared to the rich. The authorities have made efforts to address the discrepancies by introducing credits. However, the credits are of little or no use since the poor continue to pay more compared to the rich. To solve this problem completely, lawmakers need to put into consideration the impacts of state and local government policies on the future of all individuals in society.
Cubero, Rodrigo, and Ivanna Vladkova, Equity and Fiscal Policy: The Income Distribution Effects of Taxation and Social Spending in Central America. 2010. Web.
Gale, William, and Benjamin Harris, Proposal 10: Creating an American Value-Added Tax. 2013. Web.
Morris, Daniel, and Clayton Munnings, Progressing to a Fair Carbon Tax Policy Design Options and Impacts to Households. 2013. Web.
Slemrod, Joel, The Role of Misconceptions in Support for Regressive Tax Reform. 2006. Web.
Who Pays: A 50- State report by the institute of taxation and economic Policy. 2015. Web.