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Tuesday, January 29, 2013

Study says the poor pay a higher rate of local and state taxes - including in Phil Mickelson's California

There has been a good bit of reaction to golfer Phil Mickelson's comments recently about his taxes going up because of tax increases, including those in the fiscal cliff deal, as well as in the Affordable Care Act. That's in addition to an increase of state taxes in California.

He initially hinted that he might leave the state or possibly even retire before backing off the statement after receiving considerable blow back. The debate touched on the difference between the way we tax wealth and work, which is why Mickelson's reported rate - he said north of 60 percent - is higher than Mitt Romney's roughly 14 percent rate, because Mickelson earns a salary and Romney's wealth is built largely upon investment income that is taxed at a lower rate.

That is an important debate to have. But it is not the only one. Here's another important piece: The poorest Americans in most states - including North Carolina and South Carolina - pay more of their income in local and state taxes than do the richest Americans.

According to the Institute on Taxation & Economic Policy, the poorest residents in South Carolina, who earn less than $18,000 a year and average about $10,400, pay an effective state and local tax rate of 7.1 percent while the top 1 percent - who earn more than $390,000 and average $1.07 million - pay 5.5 percent. The difference is even bigger in North Carolina, which has a 9.5 percent to 6.8 percent split and incredibly large in South Dakota, which has an 11 percent to 1.9 percent split. In California, the difference is smaller - 10.2 percent to 7.4 percent - but still present.

Florida, which has no state income tax, the disparity is a whopping 13.5 percent, which is what the poor pay, to the 2.1 percent the rich pay.

Those states are not outliers.

"The study's main finding is that nearly every state and local tax system takes a much greater share of income from middle-and-low-income families than from the wealthy," the researchers wrote. "Fairness is, of course, in the eye of the beholder. Yet almost anyone would agree that the best-off families should pay at a tax rate at least equal to what low- and middle-income families pay. Virtually every state fails this basic test of tax fairness: as this study documents, only two states require their best-off citizens to pay as much of their incomes in taxes as their very poorest taxpayers must pay, and only one state taxes its wealthiest individuals at a higher effective rate than middle-income families have to pay."

Here's a link to that study: Who pays?

I'm not sure how that changes with the recent federal tax increases aimed at the high-end, though it is hard to imagine that has changed a great deal, particularly given that one of the reasons for the disparity is that the rich get a bigger federal deduction offset than the poor.

N ot only that, proposals by some governors will actually increase this disparity.

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