State Income Tax Could Raise $918 Million!
Eager reader Nick Krebs contributed to yesterday’s post on the LRC’s comparison of neighboring state tax systems this comment on the newest analysis from the Institute on Taxation and Economic Policy of how states distribute their tax burdens across income groups. As noted in past discussions at the Legislature and here on this blog, South Dakota continues to reward the rich and punish the poor worse than almost every other state in the nation.
State and local taxes nationwide are generally regressive, due to reliance on sales tax and property tax damping the positive effects of progressive income tax:
South Dakotans do generally pay a lower percentage of their income in state and local taxes than the national average. But the break South Dakota’s rich get is far greater than the break low-income South Dakotans get:
South Dakota ranks #4 in ITEP’s “Terrible 10” most regressive states:
No state is perfect: even ITEP’s “most equitable” state, California, still hits the poor harder than it hits the middle class, but at least the rich pay a higher percentage:
Minnesota, as we would expect, is far more progressive than South Dakota, taxing its poor less than South Dakota does and taxing its rich more, while taking just one percentage point more of its middle class’s higher incomes.
Under ITEP’s lens, it’s probably a good thing we rejected Initiated Measure 25; G. Mark Mickelson’s proposed cigarette tax would have hit the poor harder and lost value over time:
Overall, state excise taxes on items such as gasoline, cigarettes and beer take about 1.7 percent of the income of the poorest families, 0.8 percent of the income of middle-income families, and just 0.1 percent of the income of the very best-off. In other words, these excise taxes are 17 times harder on the poor than the rich, and 8 times harder on middle-income families than the rich.
In addition to being the most regressive tax, excise taxes can be relatively poor revenue raising tools because they decline in real value over time. Since excise taxes are levied on a per-unit basis rather than ad valorem (percentage of value), the revenue generated is eroded by inflation. That means excise tax rates must continually be increased merely to keep pace with inflation, not to mention real economic growth. Policymakers using excise tax hikes to close fiscal gaps should recognize that relying on excise tax revenues means balancing state budgets on the back of the very poorest taxpayers—and that these revenues represent a short-term fix rather than a long-term solution [ITEP, Oct 2018, p. 20].
Remember: our Governor-Elect Kristi Noem agrees that regressive taxes are bad. Since regressive taxes strangle public services and drive young people elsewhere, Noem will surely want to turn to tax reform as the first major project of her governorship.
But remember: the only way you make South Dakota’s tax system less regressive is by adopting an income tax.
Suppose South Dakota adopted an individual income tax with rates reflecting those national averages. What would taxes look like for South Dakotans? Well, first, let’s look at the income brackets ITEP defines for its quintiles and the smaller divisions at the top in South Dakota:
Now if we multiply the average state income tax rates by the average South Dakota incomes within each bracket, and then multiply each of those figures by the number of families in each bracket (I operate from this figure, 340,000, given by Statista.com), we can calculate just how much South Dakota could raise with a conservative yet progressive state income tax built on the average rates imposed by all other states:
|Income Bracket||average income in bracket||income tax rate (nat’l average for bracket)||average income tax||# of households||Total Tax paid by bracket|
$918,187,000, from a state income tax under which 80% of South Dakotans would pay less than 3% of their income. That revenue would replace 92% of our sales tax revenue and would impose far less burden on low-income families. That revenue could pay all $809 million the state spends on education (K-12, universities, and vo-techs) and leave $109 million to pay for corrections and public safety.
Divide that money up as you see fit, but imposing a state individual income tax with the brackets and rates listed above would make South Dakota’s tax system far fairer than the regressive mess it is now.