What States Can Do to Reduce Poverty and Inequality Through Tax Policy

By Sarah Anderson and Chuck Collins

 

States have an opportunity to act to close the loopholes that hide and protect the wealth of the top 1%, remedy the impact of the new federal tax law that lowers taxes on the wealthy, and make critical investments in infrastructure, energy systems, and programs that create broader opportunity and shared prosperity.  Concentrations of wealth are distorting our economy and undermining our democracy and civic health. State administrations and state legislatures can act to close the loopholes, put a brake on economic inequality and concentrations of wealth, and generate significant revenue.

Here is a menu of some of the most promising options.

TAXES ON HIGH-INCOME EARNERS

The strong majority of Americans support progressive taxes on the rich.  A joint Stanford-Treasury Department report showed that high taxes do not drive millionaires to move across state lines.  State legislatures have increased taxes on the wealthy. In 2018, the New Jersey legislature increased taxes on incomes over $5 million. New York State and New York City have both increased taxes on high-income households as has Washington, D.C.

In 2016, tax increases on high-income earners passed in both states where they were on the ballot, California and Maine. In California, voters extended the nation’s highest top tax rate (13.3 percent) on those making more than $1 million per year, delivering an estimated $4 billion to $9 billion in annual revenue for human needs. Maine voters passed a 3 percent surtax on income over $200,000.

In 2018, Maine activists organized the first ballot initiative to fund universal home care through a payroll tax increase of 1.9% on salaries and wages over $127,000 a year. In the face of a heavily funded opposition campaign, the initiative failed to get majority support. But Caring Across Generations and other groups are working to apply lessons from this effort to similar campaigns in other states.

STATE ESTATE TAXATION

The estate tax is a levy on large fortunes when they are transferred from one generation to the next, with exemption thresholds that shield middle and working-class families. Before the Bush tax cuts passed in 2001, every state in the nation collected revenue from the state estate tax credit, which sent the first 16 percent of federal estate tax revenue to the states. Congress phased out this tax credit gradually until fully repealing it in 2005. Re-instating a progressive state estate tax in states that lost their state estate tax could generate significant revenue while reducing the concentration of wealth in intergenerational wealth dynasties.

Posted In: Allied Approaches