Colorado had the 7th most regressive state and local tax system in the nation in the year 2000 according to a recent report by Dr. Robert J. Landry III of Jacksonville State University.
This is largely a product of a state income tax which has a flat rate, rather than marginal tax rates that increase with income (and hence are less progressive than most state income taxes), a heavy reliance at both the state and local government level on sales taxes, which are regressive, and a property tax system that includes only a very limited homestead exemption, making it also somewhat regressive.
States with state and local tax systems more regressive than Colorado in the year 2000 were (from most to least regressive): Wyoming, South Dakota, Tennessee, Alabama, Washington, and Oklahoma. Colorado was tied with Michigan. Next most regressive after Colorado and Michigan was Pennsylvania.
In Wyoming, South Dakota, Tennessee, and Washington this is largely a product of not having a state income tax. In Alabama and Oklahoma the state income tax is effectively a flat rate tax (the top tax bracket is $3,000 in Alabama and $10,000 in Oklahoma), while Michigan, Colorado and Pennsylvania have true flat rate state income taxes.
The most progressive five state and local tax systems in the year 2000 (from most to least progressive) were: Idaho, Lousiana, Georgia, Montana, and California. All of these states have state income taxes with progressive rate structures.
In the year 2000, Wisconsin and Oregon were tied for coming closest to a flat tax system, each coming within 1% of that dividing line. Wisconsin was slightly regressive and Oregon was slightly progressive. Oregon has no sales tax, but substantial income and property taxes.
Background and Methodology.
Regressive means that the poor pay a larger percentage of their income in taxes than the rich, while progressive means that the rich pay a larger percentage of their income in taxes than the poor. A true flat tax, in which everyone pays the same percentage of their income in taxes, is neither regressive nor progressive.
Income taxes tend to be progressive, although, if the rate is flat or nearly flat, this effect is very modest. Property taxes without homestead exemptions are slightly regressive, while those with homestead exemptions tend to be slightly progressive. Sales and excise taxes are generally regressive. The combination of all of the applicable taxes determines the progressivity, or regressivity, of the tax system as a whole.
In 2000, the hypothetical low income taxpayer ($20,000 a year) considered by the study faced an effective combined tax burden of 7.26% of income in Colorado, while the hypothetical high income taxpayer ($150,0000 a year) considered by the study faced an effective combined tax burden of 5.78% in Colorado.
The tax burden on low income taxpayers in Colorado is typical of many states. The tax burden on high income taxpayers in Colorado in 2000 was exceptionally low. Only eight states impose less of a burden. Wyoming's state and local tax system, at 2.66% of income, imposes the lowest tax burden on high income individuals. Connecticut at 17.61% imposes the highest tax burden on high income individuals.
Cross Posted at Colorado Confidential.