Most sales and property taxes are regressive and burden working families more than the wealthy; however,  states can create a fair tax system by balancing those regressive taxes with an income tax that includes higher tax brackets for the very wealthy.  Washington State's antiquated tax structure is an example of the crucial need for progressive reforms.  The state has no income tax and relies heavily on sales, property, and business gross income taxes, leading to, in the words of the Economic Opportunity Institute, "the most regressive tax system in the United States."  The lowest income residents pay 18% of their income in state and local taxes while the richest 1% pay just 3% of their income in taxes.

Make Income Tax More Progressive: As the Tax Policy Center  highlights, there is a wide disparity in state income tax systems, but recently a number of states have been seeking ways to make their tax systems more progressive.  In states with an income tax, creating higher tax brackets for wealthier taxpayers should be the prime tool for easing budget crises. 

  • For example, back in 2004, as New Jersey struggled with both a budget deficit and calls to lower the property tax burden, the state created a new 8.97% tax bracket for those making $500,000 per year or more.  Only 30,000 households saw a tax increase, even as 1.8 million households saw a tax cut. 
  • Similarly, the Minnesota legislature approved a plan last year -- unfortunately vetoed by their governor -- that would have cut taxes for 90% of the populace while raising revenue with a new 9% tax rate for married couples making $400,000 per year or more.  Polls showed that 72% of voters favored the higher tax rate for the wealthy as a way to lower property taxes. 
  • Maryland helped solve a budget crisis and get rid of an unpopular business tax on the computer industry with a simple solution -- ask the richest 6,000 households in the state making more than $1 million per year to pay more of their fair share in taxes.  By raising the top income tax rate in 2008 to 6.5%, Maryland will raise an additional $328.5 million over three years.  This is part of the state's multi-year process of converting what had been a flat tax rate of 4.75% on income over $3,000 into a code that progressively raises the rate as incomes rise. 

Each of these examples is a blueprint for creating a fairer tax system for middle class families without gutting social spending:

Earned Income Tax Credit (EITC):  Creating or increasing State Earned Income Tax Credits to ease the tax burden on lower-income working families is another tool to help increase fairness in the tax code.  These reward work by low-income working families by adding some additional payment on top of the federal EITC, usually as a percentage of the federal credit.  During an economic slowdown, these tax cuts for working families will have the most immediate impact on the economy since low-wage working families invariably have to spend those tax savings on immediate needs, usually at local retailers or other local services that strengthen local economies.

Twenty-three states have enacted EITCs.  Maryland recently expanded the refundable part of its EITC from 20% of the federal EITC up to 25%.  States without an income tax can create a "Working Families Credit" like Washington State's SB 6809.  Passed in 2008, the bill will give 350,000 Washington residents the equivalent of 10% of their federal EITC refund.

Estate Taxes:  Preserving taxes on wealthy estates is another area where states are working to maintain tax fairness (and raise some needed revenue) .  While some states have followed federal law as the estate tax has been rolled back, many others are "decoupling" their estate tax from federal law changes.  And while a few high-income folks duck out of state to avoid state estate taxes, "the number is modest and not nearly enough to offset the revenue gained by keeping an estate tax," as one research report detailed.