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How to Reduce Poverty and Inequality Through State Government Taxes

Sunday, March 11, 2018 By Sarah Anderson and Chuck Collins, Inequality.org | Report
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Illinois demonstrators rally in support of a tax on Chicago financial exchanges and other progressive taxes on November 2, 2015 in Chicago, Illinois. (Photo: Scott Olson / Getty Images)Illinois demonstrators rally in support of a tax on Chicago financial exchanges and other progressive taxes on November 2, 2015, in Chicago, Illinois. (Photo: Scott Olson / Getty Images)

New progressive taxes are needed at the state level to generate much-needed revenue for anti-poverty programs while also curbing the excessive power the wealthiest 1 percent currently hold over our political system. Case in point: the new federal tax law that will lower taxes on the wealthy, despite majority support among US taxpayers for substantial taxes on the rich. And while opponents will no doubt argue the contrary, a joint Stanford University-Treasury Department report shows that high taxes do not drive millionaires to move across state lines.

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

Taxes on High-Income Earners

In 2016, tax increases on the wealthy passed in both states where they were on the ballot. 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 also passed a 3 percent surtax on income over $200,000.

In 2018, at least two states are expected to bring tax increases on the wealthy before voters. A Massachusetts ballot initiative would create a 4 percent tax on incomes that exceed $1 million, with revenue estimated at $2 billion annually dedicated to public education and transportation.

In Maine, activists are working to place a proposal on the ballot to fund access to in-home care through a payroll tax increase of 1.9% from employees and employers on salaries and wages over $127,000 a year. This would partially close the federal loophole that allows the wealthy to avoid paying Social Security payroll taxes on the bulk of their income.

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 steeply 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.

In 2006, Washington state voters supported their state estate tax by a nearly 2-to-1 margin because the revenue raised directly funded education in the state (an education opportunity trust fund). A state estate tax campaign has the power to fund critically important public initiatives like debt-free higher education and universal long-term care while halting the rising wealth at the very top.

The California College for All coalition is pushing a ballot initiative to levy a progressive tax on California estates and fund free public higher education, restoring the state's leadership role on accessible college. The estate tax would generate an estimated $4 billion a year and provide aid to 2.6 million California residents.

Tax on Companies With Extreme Gaps Between CEO and Worker Pay

In 2016, the city of Portland, Oregon, adopted the world's first tax penalty on corporations with extreme gaps between their CEO and worker pay. The city's current business license tax is 2.2 percent of adjusted net income. The surtax will be 10 percent of the business tax liability for companies with a CEO-worker pay ratio of more than 100-to-1 and 25 percent for companies with a ratio of more than 250-to-1. More than 500 corporations that do business in the city, including mega-firms like Wells Fargo and Walmart, will be subject to the surtax.

Lawmakers in at least five US states and in the US Congress have introduced legislation similar to the Portland tax, and that number will likely rise when US corporations begin publicly disclosing the ratio between their CEO and median worker pay through their proxy statements in 2018. A Rhode Island bill would give preferential treatment in state contracting to corporations that pay their CEOs no more than 25 times their median worker pay.

These efforts build on the living wage movement by using the power of the public purse to pull down the top end of the pay scale and send a message that everyone in a workplace contributes value (not just the CEO). 

High-End Real Estate Taxes to Fund Affordable Housing and Other Priorities

In 2016, San Francisco voters approved a tax on high-end real estate transactions that contribute to gentrification. The tax raises additional revenue from commercial and residential real estate transfers over $5 million. Funds have been used to provide free tuition and stipends to San Francisco residents at the city's community college.

Affordable housing coalitions in Boston, New York City, Cincinnati, and other major cities are exploring implementing high-end real estate transfer taxes to off-set the huge disruption that wealthy investors have caused in local housing markets. Many favor using funds to create a fund for the creation and preservation of permanently affordable housing and homeownership. 

Carried Interest Tax

States with significant financial sectors can take action to make up for Washington's failure to close the "carried interest" loophole, which allows private equity and hedge fund managers to reduce their tax bills by claiming a large share of their earnings as "capital gains" instead of ordinary income. This has allowed many of the wealthiest Americans to pay lower rates than firefighters and teachers.

Legislation to close the carried interest loophole has been introduced in New YorkNew JerseyMassachusettsConnecticut, Rhode Island, Maryland, the District of Columbia, and Illinois. Campaigns to introduce bills are underway in several more, and New York Governor Andrew Cuomo backed this effort in his 2018 State of the State speech.

Financial Transaction Tax

The notion of placing a small tax on trades of stocks, derivatives, and other financial instruments has gained increased attention at the national level in recent years, but Congress has failed to take action. Such taxes are designed to discourage short-term financial speculation while raising significant revenue for urgent human needs.

The Illinois state legislature is considering a bill that would place fees of $1-$2 per contract on Chicago's commodities and financial exchanges, with revenue estimated at $10 billion to $12 billion per year. 

Capital Gain Tax

A capital gains tax is a levy on income from investments rather than wages. In the 42 states (including the District of Columbia) that impose capital gains taxes, rates range from 3.1 percent in Pennsylvania to 13.3 percent in California. States without a capital gains tax should implement one and states that have one should increase the rate to at least 10 percent.

Raising or introducing such taxes would mostly impact the wealthy, since the top 1 percent owns half of the nation's financial wealth and the bottom 50 percent only own 0.5 percent of financial wealth. State capital gains taxes help ensure fairness between those who work paycheck to paycheck and those who pocket dividends. 

Luxury Taxes

A luxury tax is a duty levied on luxury goods, such as high-end automobiles and expensive yachts. Both Connecticut and New Jersey, for example, have luxury car taxes. In Connecticut, the sales tax rate jumps from 6.35 percent to 7.75 percent on vehicles costing more than $50,000. In New Jersey, a tax penalizes both luxury cars and gas guzzlers by imposing a 0.4 percent surcharge on vehicles that have price tags above $45,000 or get less than 19 miles per gallon. 

State Payroll Tax on High Incomes

Federal payroll taxes for Social Security have a huge loophole for the wealthy in the form of a cap on the amount of income subject to the tax. It's currently $128,400 and is adjusted annually for inflation. This means a multi-millionaire and someone earning $128,400 per year pay the same amount in Social Security payroll taxes -- not the same rate, the same amount. States can close this loophole by imposing a state level payroll tax on income above the federal cap. (See Maine proposal, detailed above.)

Printable PDF version of this article. 

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Chuck Collins

Sarah Anderson

Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies.

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How to Reduce Poverty and Inequality Through State Government Taxes

Sunday, March 11, 2018 By Sarah Anderson and Chuck Collins, Inequality.org | Report
  • font size decrease font size decrease font size increase font size increase font size
  • Print

Illinois demonstrators rally in support of a tax on Chicago financial exchanges and other progressive taxes on November 2, 2015 in Chicago, Illinois. (Photo: Scott Olson / Getty Images)Illinois demonstrators rally in support of a tax on Chicago financial exchanges and other progressive taxes on November 2, 2015, in Chicago, Illinois. (Photo: Scott Olson / Getty Images)

New progressive taxes are needed at the state level to generate much-needed revenue for anti-poverty programs while also curbing the excessive power the wealthiest 1 percent currently hold over our political system. Case in point: the new federal tax law that will lower taxes on the wealthy, despite majority support among US taxpayers for substantial taxes on the rich. And while opponents will no doubt argue the contrary, a joint Stanford University-Treasury Department report shows that high taxes do not drive millionaires to move across state lines.

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

Taxes on High-Income Earners

In 2016, tax increases on the wealthy passed in both states where they were on the ballot. 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 also passed a 3 percent surtax on income over $200,000.

In 2018, at least two states are expected to bring tax increases on the wealthy before voters. A Massachusetts ballot initiative would create a 4 percent tax on incomes that exceed $1 million, with revenue estimated at $2 billion annually dedicated to public education and transportation.

In Maine, activists are working to place a proposal on the ballot to fund access to in-home care through a payroll tax increase of 1.9% from employees and employers on salaries and wages over $127,000 a year. This would partially close the federal loophole that allows the wealthy to avoid paying Social Security payroll taxes on the bulk of their income.

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 steeply 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.

In 2006, Washington state voters supported their state estate tax by a nearly 2-to-1 margin because the revenue raised directly funded education in the state (an education opportunity trust fund). A state estate tax campaign has the power to fund critically important public initiatives like debt-free higher education and universal long-term care while halting the rising wealth at the very top.

The California College for All coalition is pushing a ballot initiative to levy a progressive tax on California estates and fund free public higher education, restoring the state's leadership role on accessible college. The estate tax would generate an estimated $4 billion a year and provide aid to 2.6 million California residents.

Tax on Companies With Extreme Gaps Between CEO and Worker Pay

In 2016, the city of Portland, Oregon, adopted the world's first tax penalty on corporations with extreme gaps between their CEO and worker pay. The city's current business license tax is 2.2 percent of adjusted net income. The surtax will be 10 percent of the business tax liability for companies with a CEO-worker pay ratio of more than 100-to-1 and 25 percent for companies with a ratio of more than 250-to-1. More than 500 corporations that do business in the city, including mega-firms like Wells Fargo and Walmart, will be subject to the surtax.

Lawmakers in at least five US states and in the US Congress have introduced legislation similar to the Portland tax, and that number will likely rise when US corporations begin publicly disclosing the ratio between their CEO and median worker pay through their proxy statements in 2018. A Rhode Island bill would give preferential treatment in state contracting to corporations that pay their CEOs no more than 25 times their median worker pay.

These efforts build on the living wage movement by using the power of the public purse to pull down the top end of the pay scale and send a message that everyone in a workplace contributes value (not just the CEO). 

High-End Real Estate Taxes to Fund Affordable Housing and Other Priorities

In 2016, San Francisco voters approved a tax on high-end real estate transactions that contribute to gentrification. The tax raises additional revenue from commercial and residential real estate transfers over $5 million. Funds have been used to provide free tuition and stipends to San Francisco residents at the city's community college.

Affordable housing coalitions in Boston, New York City, Cincinnati, and other major cities are exploring implementing high-end real estate transfer taxes to off-set the huge disruption that wealthy investors have caused in local housing markets. Many favor using funds to create a fund for the creation and preservation of permanently affordable housing and homeownership. 

Carried Interest Tax

States with significant financial sectors can take action to make up for Washington's failure to close the "carried interest" loophole, which allows private equity and hedge fund managers to reduce their tax bills by claiming a large share of their earnings as "capital gains" instead of ordinary income. This has allowed many of the wealthiest Americans to pay lower rates than firefighters and teachers.

Legislation to close the carried interest loophole has been introduced in New YorkNew JerseyMassachusettsConnecticut, Rhode Island, Maryland, the District of Columbia, and Illinois. Campaigns to introduce bills are underway in several more, and New York Governor Andrew Cuomo backed this effort in his 2018 State of the State speech.

Financial Transaction Tax

The notion of placing a small tax on trades of stocks, derivatives, and other financial instruments has gained increased attention at the national level in recent years, but Congress has failed to take action. Such taxes are designed to discourage short-term financial speculation while raising significant revenue for urgent human needs.

The Illinois state legislature is considering a bill that would place fees of $1-$2 per contract on Chicago's commodities and financial exchanges, with revenue estimated at $10 billion to $12 billion per year. 

Capital Gain Tax

A capital gains tax is a levy on income from investments rather than wages. In the 42 states (including the District of Columbia) that impose capital gains taxes, rates range from 3.1 percent in Pennsylvania to 13.3 percent in California. States without a capital gains tax should implement one and states that have one should increase the rate to at least 10 percent.

Raising or introducing such taxes would mostly impact the wealthy, since the top 1 percent owns half of the nation's financial wealth and the bottom 50 percent only own 0.5 percent of financial wealth. State capital gains taxes help ensure fairness between those who work paycheck to paycheck and those who pocket dividends. 

Luxury Taxes

A luxury tax is a duty levied on luxury goods, such as high-end automobiles and expensive yachts. Both Connecticut and New Jersey, for example, have luxury car taxes. In Connecticut, the sales tax rate jumps from 6.35 percent to 7.75 percent on vehicles costing more than $50,000. In New Jersey, a tax penalizes both luxury cars and gas guzzlers by imposing a 0.4 percent surcharge on vehicles that have price tags above $45,000 or get less than 19 miles per gallon. 

State Payroll Tax on High Incomes

Federal payroll taxes for Social Security have a huge loophole for the wealthy in the form of a cap on the amount of income subject to the tax. It's currently $128,400 and is adjusted annually for inflation. This means a multi-millionaire and someone earning $128,400 per year pay the same amount in Social Security payroll taxes -- not the same rate, the same amount. States can close this loophole by imposing a state level payroll tax on income above the federal cap. (See Maine proposal, detailed above.)

Printable PDF version of this article. 

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Chuck Collins

Sarah Anderson

Sarah Anderson directs the Global Economy Project at the Institute for Policy Studies.