JACKSON, Miss. — Farish Street has an all-too-familiar story. 

Once a booming Black-owned entertainment and business district that drew Black customers from all over Mississippi, it struggled after segregation ended. Today, it suffers from the same blight and infrastructure issues as many other Jackson neighborhoods — and far too many once-segregated communities across the country.

I decided to visit Farish Street to get the perspective of small business owners on the state’s tax cut policies for an investigation published this week about a wave of such cuts pushed by conservative groups. Several told me that the state’s income and corporate tax cuts rarely benefit the Black business owners there. 

“The tax cuts are for big businesses and the rich,” said Eric Collins, owner of Herbal Blessings, a health food store and vegan cafe. “As for the support our small businesses get from the state? It’s very little.”

Marshall’s Music and Bookstore, owned by Maati Jone Primm, is located a few doors down. Primm’s grandmother, an activist who came to Jackson from nearby Utica, started the bookstore 85 years ago. 

“This used to be a hotspot,” Primm said. “The elders will tell you that on a Saturday, Black people used to come from all over Mississippi to come to Farish Street. You used to have to walk sideways.”

Primm connects the way the state Legislature handles taxes to a longstanding practice in the state to oppress Black Mississippians. Its tax structure – and the new reforms – benefit the state’s wealthiest, who are mostly white. And the majority-white state Legislature has long starved majority-Black Jackson of tax revenue.  

She sees taxes as one tool in a box filled with policies enacted by the mostly white Legislature, including voter restrictions, limited access to medical care and underfunded public schools, that make it difficult for Black residents to thrive. 

“I feel like they are attacking us,” Primm said. “It’s plantation politics. It’s absolutely awful. You have all these different attacks. It’s almost death by a thousand cuts.” 

Part of that punishment, she said, is starving Jackson of tax revenue.

It’s not a new allegation. The NAACP and nine Jackson residents filed a Civil Rights Act complaint with the U.S. Environmental Protection Agency last year alleging that state decisions about Jackson’s access to tax revenue have reduced or blocked funds needed to maintain the city’s water supply, ultimately resulting in long-running problems accessing clean water. City residents suffered through a days-long outage last summer.

“It’s the culture of Mississippi that says they must oppress Black people,” Primm said. “They don’t want to share power, and they really don’t want to share resources.” 

Mississippi enacted a substantial income tax cut in 2022 that moved the state to a single tax bracket, regardless of how much you make. These “flat” taxes sound equitable, in that everyone is paying the same percentage of their income in taxes. But the rest of a state’s taxes don’t work that way, sales taxes especially, and the main way governments can avoid leaning most heavily on lower-income people is with income-tax rates that increase as earnings do. 

Mississippi’s tax structure already took a larger share of income from its poor and middle-income residents than its richest, according to an analysis by the Institute on Taxation and Economic Policy. The newest change will worsen that inequity. According to the group’s analysis, the state’s highest-income residents would receive an estimated $31,400 in tax cuts on average each year, while the lowest would get average savings of $20.

The state will likely see a $419 million reduction in revenue every year on average from the income tax cut, according to the University Research Center, a division of Mississippi Institutions of Higher Learning that studies state and local policies.

Primm is most concerned about what that could mean for Mississippi’s public education system, already underfunded and underperforming, especially in places with larger lower-income Black communities. 

Her great-grandmother, who was enslaved, created a school. A visit to Primm’s bookstore makes her passion for education clear. As I waited to speak with Primm, she was helping provide books for a local church group. She’s stocked her store with countless books on Black culture and history, from Maya Angelou poems to soul food cookbooks to nonfiction on medical discrimination and books detailing the history of how African slavery in the U.S. began. Primm has adorned its walls with pictures of freedom fighters; Black people who have been murdered throughout the country’s history, including Emmett Till and Trayvon Martin; and modern cultural icons, like Morgan Freeman and Oprah Winfrey.

Underfunding education is a form of disenfranchisement in itself, Primm said. 

“The largely white power brokers want to maintain the status quo and in order to do that, they need to disenfranchise us,” Primm said. “What they count on is the people to be silent for all of this and suffer in silence. I’m not going to do that.”

The post In a historic Black business district, ‘death by a thousand cuts’ appeared first on Center for Public Integrity.

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ABERDEEN, Wash. — Under an overcast sky, Patty Flores led a group of colleagues to an empty lot in the mobile home park where she lived. A bare patch of grass traced the outline of a home set ablaze in an electrical fire.

She saw it as a symptom of a larger problem, one that connected to her rising rent, the potholes pockmarking the street and the paradox that taking another job to cover the extra rent would require child care that she couldn’t afford.

The tax system in her state has long been one of the most inequitable in the country, leaning most heavily on the people with the least money. That, in turn, means less revenue to spend on services that can help people live less tenuous lives.

“I want to trust that there will be change,” Flores said. “I want a better life for my kids.”

When legislators proposed a bill in 2021 to increase taxes on Washington’s wealthiest residents and put the money toward child care and education, Flores was elated. She showed up to testify in support.

The bill passed. This year, the money started flowing in — hundreds of millions more than legislators anticipated. 

While efforts to pass a federal wealth tax are at a standstill, a nascent movement at the state level to get high-income people to contribute more to public coffers is beginning to notch successes. 

Washington state’s tax, on capital gains, overcame a court challenge in March. Massachusetts voters amended their constitution in November to tax millionaires at a higher rate. And legislators in eight more states introduced bills this year aimed at reforming tax systems that take a smaller share of household income from people with the most money than from people with the least. Those changes would yield hundreds of billions of dollars in potential new revenue. 

But this push is a far cry from the decades-long conservative effort to reduce taxes, particularly ones that higher-income people pay. 

Most of the recent tax-the-wealthy proposals never made it out of committee. The Washington and Massachusetts measures took years of efforts organized by local groups facing well-funded opposition. 

The State Innovation Exchange and State Revenue Alliance, two national groups now helping to coordinate state wealth-tax efforts, are outspent by billionaire-funded organizations that argue for yet more cuts. 

“The reality is wealthy people across this country wield enormous political power in terms of lobbyists, think tanks and organizations created to entrench their financial advantage,” said Kyle Huelsman, senior director of legislative affairs at the State Innovation Exchange. 

“We are really in a generational fight, and an incredibly disproportionate fight in terms of resources.” 

Washington and Massachusetts offer lessons for states wanting to make their tax systems more equitable. A big one: Drumming up the support can take a long time — and a lot of money. 

A ‘pure tax justice argument’

In Massachusetts, a constitutional amendment to increase taxes on the wealthy took a decade of advocacy work. Supporters gathered signatures to put it on the 2018 ballot, only to see it booted off by a court ruling after business groups sued. The Legislature then put it on the 2022 ballot, bypassing restrictions that doomed the other attempt.

A key reason that states take a higher share of household income from their lower-income residents than their wealthiest is sales tax. An income tax with different brackets — rates that go up as your income does — is the main tool states have to counterbalance that impact.

Massachusetts didn’t design its income tax that way. It had a single rate across income levels since its enactment in 1916, because its constitution required it.

That’s what the proposed amendment that went before voters in 2022 aimed to change. It called for an additional 4% income tax for millionaires on top of the state’s 5% flat tax. The proposal specified that revenue would go toward schools, public transportation, roads and bridges, more than 650 of which need repair. 

Labor, community and faith groups joined forces to support the ballot measure. Business interests and conservatives lined up in opposition.

The latter organized the Coalition to Stop the Tax Hike Amendment and raised more than $14 million to defeat it, with funders that included billionaires Jim Davis, the chairman of New Balance, and New England Patriots owner Robert Kraft, through his containerboard company. The Boston-based Pioneer Institute, a member of the State Policy Network, which advocates for tax cuts around the nation, wrote a book in opposition — “Back to Taxachusetts?”

While the money flowing to national tax-cutting groups is substantial, supporters of the Massachusetts amendment outspent the opposition. They did it by raising more than $32 million as Fair Share Massachusetts, a large part from teachers’ unions and other worker-funded groups. 

The conservative State Policy Network and its affiliates know that unions can be a key counterweight to the struggle over taxes. The groups’ solution: Cut off their opponents’ funding at the source. 

In a 2016 fundraising letter reported on by The Guardian, the State Policy Network said that “freeing teachers and other government workers from coercive unionism” would mean “permanently depriving the Left from access to millions of dollars in dues.”

Two of the network’s partner organizations provided free legal representation in a lawsuit that produced the 2018 U.S. Supreme Court ruling weakening public unions’ ability to collect membership fees.    

But that didn’t stave off a big-money battle in Massachusetts. Once the ballot measure survived a trip to the state’s high court, the decision was up to voters. 

Both coalitions made their pitch as the November election loomed. 

The Stop the Tax Hike group argued that the measure would impose one of the largest tax increases in state history, that the revenue could be put toward spending beyond the intended purposes, and that the results would leave small business owners “reeling from an unprecedented new financial hit.”

The Fair Share group pointed to Massachusetts Budget and Policy Center data showing that the wealthiest residents paid an average of 6.8% of their income in state and local taxes, while everyone else paid an average of 8.9%. Changing that, the group said, “is how we build an economy that works for everyone.”

“It became a pure tax justice argument,” said Phineas Baxandall, policy director of the Massachusetts Budget and Policy Center. “The richest need to pay their fair share.”

Voters approved the amendment, 52% to 48%.

The Pioneer Institute vowed to track the tax’s impact. State and national teachers’ unions “claimed that it would be a net benefit for the state. However, they ignore the negative impact on the overall economy while at the same time avoiding accountability when it comes to how those dollars are spent and whether or not we are doing a better job of educating our children,” Mary Connaughton, the group’s director of government transparency and chief operating officer, said in an email.

For Huelsman, Massachusetts demonstrated what’s possible. 

“They really put out the guiding light of an incredibly popular issue,” he said. 

The fight over taxes on the wealthy

Taxing wealthy people at higher rates than residents with less money isn’t a novel idea. That’s how the federal income tax is designed to work. But Congress has cut top tax rates in big ways over the past four decades, contributing to the growing gap between the rich and everyone else. 

And the U.S. doesn’t impose an annual tax on wealth, a person’s assets. A ProPublica investigation showed that loopholes in the system allow the country’s richest people to pay very low tax rates, when they owe anything at all.

Several other countries impose wealth taxes. In Norway, for instance, such taxes are levied up to 1.1%. Switzerland’s cantons — semi-sovereign states — have had them since the early 18th century, accounting for nearly 10% of canton and local tax revenues in 2018. Colombia and Spain both approved wealth taxes last year, the latter for 2023 and 2024 only. 

In the United States, though, proposals for a tax on the ultrarich, including from Democrats Sen. Elizabeth Warren of Massachusetts and Rep. Pramila Jayapal of Washington have stalled in Congress. That’s despite polling showing that the majority of Americans support the concept.

And in the past two years, at least 19 states have lowered their income taxes in ways that primarily benefit their most well-off residents, pushed along by conservative groups that include the State Policy Network.

All of that is energizing legislators and activists in Democratic-led states to band together to try to increase taxes on the wealthy — in some cases with actual wealth-tax proposals.

On Jan. 19, elected officials in eight states — Connecticut, New York, California, Washington, Hawaii, Maryland, Illinois and Minnesota — introduced legislation or held rallies for bills filed afterward. In March, Nevada legislators proposed a study on wealth taxes. It was the first public effort of a movement organized by State Innovation Exchange and State Revenue Alliance to move the needle on tax parity.  

They set the stage last summer, convening activists, think tanks and lawmakers from 10 states to strategize. Formed in 2014, State Innovation Exchange provides lawmakers with research, training, strategy and policy guidance to advance progressive legislation.

“One of the things that we saw really clearly in those conversations” was that “fights around wealth taxes were very siloed in individual states,” State Innovation Exchange’s Huelsman said. “But at the same time, the problem is very much felt across every state in the country in terms of the ultrawealthy avoiding taxes.”

The cohort met virtually once a month through April to share best practices and lessons learned. They’re planning an in-person meeting in September and are looking to add people from additional states.

How long it might take to see results outside of Massachusetts’ “millionaire tax” and Washington state’s capital gains tax remains to be seen. None of the proposals introduced this year have become law, and the infrastructure built to produce more tax cuts, especially tax cuts aimed at high-income people, is better funded.

According to 2021 tax filings, the most recent available, the State Innovation Exchange had just over $9 million in revenue. The fledgling State Revenue Alliance said it had about $2 million. 

Meanwhile, that same year, revenue at the conservative American Legislative Exchange Council (ALEC) and the State Policy Network was about $35 million combined. That doesn’t count the network’s state affiliates, which also raise money to advocate for tax cuts. 

And Americans for Prosperity, an influential State Policy Network partner whose lobbying efforts include tax cuts, had revenue of nearly $114 million.

They’re only some of the groups in the fight. Among U.S. think tanks conducting tax policy research or advocacy, organizations on the right have two-and-a-half times the money of the ones on the left, according to a 2020 study published in the Nonprofit Policy Forum journal.

ALEC and Americans for Prosperity did not respond to requests for comment. The State Policy Network, while not answering questions about funding disparities, characterized its tax-cut efforts as sensible.

“States have received record amounts of revenue in every year since the coronavirus pandemic,” Michael Lucci, State Policy Network visiting economy policy fellow, said in a statement provided to the Center for Public Integrity. “Cutting taxes provides relief and allows revenues to grow a bit less quickly than they otherwise would. Even some states that are not cutting taxes have struggled to figure out what to do with all the excess revenue.”

Temporary infusions of federal pandemic aid is part of the reason. Opponents of the tax cuts argue that budget consequences will follow.

“The same people and organizations who patiently packed the courts with judges who would take away our rights are the same who are making it harder to raise revenue for what our communities need,” Kristen Crowell, executive director of the State Revenue Alliance, said in an email. “For them, it’s a business decision — spend millions to avoid paying billions in taxes. For us, tax justice is woven into the fight for democracy, racial and economic justice.” 

‘We’ve suffered for so many years’

In 2019, Flores from Aberdeen went door to door, listening to low-wage workers in Washington state’s timber country talk about the problems they saw and the solutions they wanted. 

Flores was volunteering for Firelands Workers Action, a group that organizes and advocates on behalf of working people in rural and small-town swaths of the state. 

The survey results from over 200 conversations revealed pressing worries about affordable housing, health insurance, mounting disasters like wildfires and “impossible choices.”

“When the fires were coming through, they just had one cop car coming around to tell us to evacuate,” a veteran told Firelands volunteers. “No help getting out, nothing.” A social worker said that she paid as much for child care as she did on her mortgage. Asked what they thought should be done to help fix the challenges their communities faced, 69% of respondents said they supported taxing the rich.

In Washington state, “we live and breathe the regressive tax system every day through the many different ways we’re seeing our communities facing decades of disinvestment,” said Firelands’ executive director, Stina Janssen.

The nonprofit’s workers and volunteers sought to change that. They wanted to see investment by the state — one of nine without an income tax — that would usher in more affordable housing and public child care.

But there’s a history of pushback in the state when people have tried to change the tax system. 

In the early 20th century, the state relied on revenue from property taxes to fund the government — largely through farmland. But by 1930, the farm population dropped by nearly a third, placing a disproportionate amount of the tax burden on farmers’ shoulders. Many were unable to pay. 

A fraternal group called the Washington State Grange, which fought for the improvement of farmers’ lives through political action, spent years trying to get an income tax enacted. A ballot measure the group spearheaded passed by more than 70% of the vote in 1932. 

The Washington State Supreme Court overturned it the next year, arguing that its graduated rates violated the state constitution’s requirement “that all taxes shall be uniform upon the same class of property.” The high court did the same to another attempt a few years later.

The justices left intact new sales, business and occupation taxes. Washington’s system has largely been the same ever since: It relies heavily on state and local sales taxes that average more than 9% — among the nation’s highest. That’s why it leans hardest on the poor.

Washington’s constitutional requirement that all taxes be “uniform” has a backstory rooted in inequity: Slaveholders in Southern states pushed for the policy as a lucrative loophole.

“The ’personal property’ at issue in the adoption of the first uniformity clauses was not commercial wealth, tangible or intangible,” Robin Einhorn of the University of California, Berkeley, wrote in a Journal of Economic History article. “It was slaves.”

Uniformity clauses spread from there. But Massachusetts and Washington are among the few states where courts have interpreted it to prohibit different tax rates. 

Tax policy has been “used as a weapon against overburdened communities, especially the Black community,” said Sen. Joe Nguyễn, a Democrat who represents a Seattle-area district. “So for me, our tax structure is rooted in racism, is rooted in economic division, but it’s also a way for us to heal some of that from the past as well.”

Efforts in the early 2000s again fell short, including a ballot measure for a tax on the wealthy that failed after two of the state’s wealthiest residents helped fund the opposition in 2010. 

A decade later, Firelands and other tax reform proponents set their sights on capital gains. This time, they aimed for a clear message and strong public support. 

The 2021 bill filed from that effort called for levying a 7% tax on profits exceeding $250,000 from the sale and exchange of assets such as stocks and bonds. Lawmakers earmarked the revenue for early childhood education. 

More than 100 groups, including labor unions, human service organizations and immigrant rights nonprofits, teamed up to push the legislation forward. As soon as the Legislature passed it, several Washington residents represented in part by a State Policy Network affiliate, the Freedom Foundation, filed a lawsuit challenging the policy. 

“Washington has long benefited from its status as one of the few states without an income tax, though attempts by the political Left to impose one have continued unabated for about 90 years,” the Freedom Foundation’s director of labor policy, Maxford Nelsen, wrote in a statement at the time.

The group didn’t respond to requests for comment.

Flores, recalling that lawsuit, switched from English to Spanish at the Firelands office as Janssen, Firelands’ executive director, provided translation.

“So even as the common people are making a small incremental advancement, we see that some wealthy people are strategizing to repeal and roll back even that win,” she said. “We’ve suffered for so many years.”

But this time, when the case reached Washington’s high court, its ruling allowed the tax to stand. 

As of May, the state had raised more than triple the expected amount, with nearly $850 million collected from 3,190 payments. The first $500 million of annual revenue will go toward child care and early learning programs. The remainder will fund school construction.

Those results inspired advocates in Hawaii, one of the states where wealth tax and capital gains tax legislation was proposed this year.

“We can point to that and say, ’Look at this huge success,’” said Will Caron with Hawaiʻi Appleseed Center for Law & Economic Justice.

The tip of the iceberg

In Flores’ blue mobile home, mold stretched along the walls and ceiling. She feared it caused the respiratory problems plaguing her then 4-year-old son, Mathias.

Flores wanted to move into a single-family home with proper insulation. That, she thought, would be the end of her constant worries about mold. But the three-bedroom homes in her area cost around $200,000. 

“How am I supposed to pay when the wages are so low?” asked Flores, who was working two part-time jobs, at Firelands and a grocery store. 

Her experience is a common one. An analysis by Washington state’s Tax Structure Work Group revealed that those earning between $17,000 and $30,000 per year pay 15% of their annual incomes in Washington state and local taxes — substantially reducing their take-home pay.

By contrast, the wealthiest 10% of Washingtonians — those making at least $208,000 — pay only 3.4% of their annual incomes in state and local taxes.

Wealth inequality is growing, and “taxes are an important tool at all levels of government for pushing back against that,” said Washington Budget and Policy Center Senior Fellow Andy Nicholas. “And yet, we have a tax code that not only doesn’t push back against that, but makes it worse.”

But recent changes that make the system slightly more equitable are starting to kick in. The Working Families Tax Credit — a state version of the federal earned income tax credit — went into effect this year and offers up to $1,200 for low-to-moderate income working households in Washington. As many as 400,000 Washingtonians may receive the credit. The deadline to apply for the 2022 tax year is Dec. 31, 2023. 

The capital gains tax will increase annual state and local taxes for the wealthiest earners by half a percentage point on average, while the Working Families Tax Credit will lower the same taxes by 1.1 percentage points for the lowest earners, according to the Institute on Taxation and Economic Policy. 

Nguyễn, the Seattle-area legislator, co-sponsored a wealth tax bill in this year’s legislative session that would impose a 1% tax on individuals owning financial assets including stocks, bonds and mutual funds exceeding $250 million. Revenue would go toward education, affordable housing, disability services and a tax credit for low-to-moderate income people. 

The state’s Department of Revenue estimated that the tax would collect $3.1 billion per year beginning in 2026 from around 700 Washingtonians, some of whom are the wealthiest people in the world. 

“The main wealth-building tool of the middle class has always been our homes, and we already tax that,” state Sen. Noel Frame, a Democrat who represents Seattle, said during a March 9 Senate committee hearing. “But the main wealth-building tool of the billionaires and ultra-millionaires is financial property, and we don’t tax that at all.” 

The Seattle-based Economic Opportunity Institute worked with the Legislature to help draft the proposed tax on what’s known as “unrealized” capital gains. For the organization’s Carolyn Brotherton, wealth is an iceberg. Realized capital gains — what the state just began taxing — serve as the tip of the iceberg, while “unrealized capital gains are everything floating beneath the surface,” she said. 

The proposal has stalled in committee. 

A major claim leveled against these types of measures by the groups opposing them: People and companies will be driven out.

“A lot of businesses are leaving the state,” Lance Christensen, California Policy Center’s education policy and government affairs vice president, said in an interview with Public Integrity. The group is a State Policy Network affiliate that dismissed a California wealth-tax proposal as a “goofy” union effort. “Once they decide they can’t do business here, they’ll move to Texas, Florida, Tennessee.”

Over 30 multimillionaires and billionaires left Norway in 2022, according to local newspaper Dagens Naeringsliv, after the nation increased its existing wealth tax. 

But a growing body of U.S. research shows that while some rich people migrate out of state because of increased taxes, most stay. A recent Center on Budget and Policy Priorities report showed that lower-income households are more likely to move out of state than higher-income people across 41 states. 

“Wealthy people, like all of us, are embedded in our communities. [They] have businesses in the state, go to church, have family and communities in those specific places. Those connections root everybody, including wealthy folks,” said State Innovation Exchange’s Huelsman, who sees the “millionaire tax flight” argument as an empty threat designed to maintain an unfair tax code.

Case in point: Shortly after Massachusetts’ voters agreed to raise taxes on millionaires, the Lego Group toy company announced its plans to relocate its Americas office to the state. 

In search of the dream

Originally from Michoacan, Mexico, Flores moved to Aberdeen 17 years ago to pursue the American dream. To her, that meant access to affordable housing, health care and child care. With a more equitable tax system, Flores believed that could be possible. 

But the mother of two struggled to find affordable child care. She’s not alone. Flores’ sister quit her job at a local grocery store to avoid hiring a babysitter. Instead, she took up cleaning houses so she could bring her children with her.

For Flores, the gulf between the dream and reality was large. She walked through the mobile home park where she lived in July 2022, pointing out the signs of decay.

“I have hope,” she explained later that afternoon, over a lunch of pupusas in the Firelands office. “That’s why I’m still here.”

That summer, Flores and her family managed to buy a house — a place with no mold. A year later, her 5-year-old son Mathias is healthy and breathes easily. She now works full time as a Firelands organizer.

They are inching closer to a more comfortable life. But there’s still a long way to go. 

“When the American dream comes true is when we have equity,” Flores said.

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JACKSON, Miss. — Amia Edwards lives here because she wants to make a difference. But in this majority-Black city, long starved for funding by the state’s mostly white Legislature, that’s proved a steep challenge.

The city’s recent water crisis came after years of chronic underfunding of Jackson’s aging water infrastructure. The stench lingers in Edwards’ front yard after raw sewage flooded her home twice — neither the city nor the state agreeing to help. Abandoned homes blemish her south Jackson neighborhood as residents fled for better-funded communities. And at her nonprofit that prepares Jackson youth for performing-arts careers, she sees the results of cash-strapped schools when her kids struggle to read scripts and rap lyrics.

Then Mississippi further sliced into its revenue to fund such needs by cutting income taxes in a way that mostly benefits its wealthiest — largely white — residents.

It’s one of at least 19 legislatures that seized the opportunity to do so in the midst of budget surpluses fed by federal pandemic funding. The expected revenue hit, according to the states’ own estimates: more than $10 billion in fiscal years 2023 and 2024. That’s more than double the entire 2023 general-revenue budget for the state of West Virginia, one of the states making cuts. 

Residents of Jackson, such as Edwards, say the move to disproportionately lower what the wealthy pay in taxes will further undermine communities that suffer from disinvestment. They worry that more budget cuts will come for essential services, like public education and infrastructure maintenance. Lower-income residents, they warn, will be hurt most. 

“The wealthy tend to always look out for themselves,” Edwards said. 

Conservative groups funded by rich political donors pushed these tax cuts. It’s a well-oiled machine working to ensure that the highest earners in every state pay as little in taxes as possible.

A network that includes the American Legislative Exchange Council (known as ALEC), the State Policy Network, Americans for Prosperity and their member groups have advocated for tax-cut efforts in at least 21 states in the past two years while opposing efforts to raise taxes for the wealthy in at least eight others, according to a Center for Public Integrity investigation. Their funding sources include billionaire Charles Koch and a dark money fund used by wealthy conservatives.

The groups have it down to a science: ALEC disseminates model bills. The State Policy Network puts out research and commentary promising economic benefits. Americans for Prosperity handles on-the-ground lobbying. And in a few cases, groups in their network sue.

Mississippi House Speaker Philip Gunn, a Republican who sits on ALEC’s board, introduced that state’s income tax cuts in 2022 — something he had tried to pass before.

Mississippi’s tax structure already took a larger share of income from its poor and middle-income residents than its richest, according to an analysis by the Institute on Taxation and Economic Policy. That’s common nationwide, driven by states’ reliance on sales taxes that fall hardest on people with the least money. 

The main way to at least partially counterbalance that: income taxes with rates that increase as income does.

Gunn’s bill, which a State Policy Network member group campaigned for and ALEC lauded, would eliminate Mississippi’s graduated rates and replace them with a “flat” tax. It passed the Legislature in April 2022. Now everyone in the state pays the same income-tax rate.

And the gap between the share of income that people with the least and most money contribute to the government will worsen. According to an Institute for Taxation and Economic Policy analysis, the state’s highest-income group would receive an estimated $31,400 in tax cuts on average per year, while the lowest would get an average of $20. 

Gunn did not respond to requests for comment.

Washington state, meanwhile, has tried to ease the burden on its lower-income residents from a system that disproportionately taxes them, but the same network of conservative organizations tried to stop the effort.

Washington is one of only nine states without an income tax and heavily relies on its high sales tax to fund its government. After a decade of attempts to make the system more equitable, the Legislature in 2021 passed a tax on certain types of capital gains — the profit on sales or exchanges of assets, like stocks — over $250,000. 

The Freedom Foundation, a conservative think tank that’s part of the State Policy Network, filed a lawsuit on behalf of Washington residents to overturn the tax before the governor had even signed the measure.  

“There is a general hostility to taxation, considering it theft, which is false,” said Lisa Graves, the executive director of True North Research, a progressive corporate watchdog group. “The second component is tactical. They want to limit the power of government — state and federal — and one way is to limit their revenue to fund things like public schools.” 

ALEC, Americans for Prosperity and the Freedom Foundation did not respond to requests for comment. In blog posts, legislative testimony and other public comments about their tax efforts, the groups say that states benefit when taxes drop.

State Policy Network spokeswoman Camille Walsh said in a statement provided to Public Integrity that the group’s policy priorities include “reducing state income taxes so that there is a lower tax burden on taxpayers, while balancing other important objectives like tax environments that incentivize investment in the United States.” 

The new cuts are the latest front in a quiet financial war over taxes as a tool to consolidate wealth and power — to the detriment of lower-income Americans and people of color. The same conservative groups organized a similar campaign roughly a decade ago. 

Kansas was a high-profile example. Its 2012 legislation was designed with help from a former Reagan administration adviser on ALEC’s board of scholars, economist Arthur Laffer. Proponents of the tax cut claimed it would increase economic activity and pay for itself. Instead, the state lost hundreds of millions of dollars in revenue, slashed public spending, hurt its credit rating and eventually repealed the tax cuts. 

This year, Kansas’ Republican-led Legislature tried again, passing a flat tax like Mississippi’s that state fiscal estimates said would reduce revenue by $330 million annually. 

Americans for Prosperity and a Kansas-based State Policy Network organization were among those in favor. ALEC testified that the lesson to take from 2012 was to pair tax cuts with “appropriate spending reforms.” 

Multiple studies have found that income tax cuts, especially those that mostly benefit higher-income households, don’t have significant impacts on economic growth or unemployment, but they do increase wealth inequality.

Democratic Gov. Laura Kelly vetoed the bill.  She cited the budgetary disaster after the previous tax cuts. 

“I refuse to take us back to an era of chronically underfunded schools, four-day school weeks, crumbling roads and bridges, and crippling debt,” Kelly said in April. “That’s exactly what this bill would do.” 

Republican Kansas legislators have vowed to try again next year.

In Washington state, where the capital-gains tax survived its legal challenge, a lopsided tax structure is at the heart of inequities faced by lower-income people, said state Sen. Joe Nguyen, a Democrat who represents a Seattle-area district.

“We have so many billionaires here who have been able to build wealth and generate value because of the resources and the people in Washington state,” Nguyen said. Revenue from capital gains “is an investment in the community that helped build their businesses and that will generate economic opportunities in the future.”

‘Intolerable in any modern society’

States braced for tough economic times in 2020 when faced with the COVID-19 pandemic. But many found their coffers flush with cash in the following years. 

The surpluses were largely created by federal pandemic aid and other factors, including consumers purchasing more goods than services, helping states because the former is taxed more than the latter. 

Members of Congress thought states might use the fleeting budget boost of the stimulus aid to cut taxes, and the law is written to prevent that. But states sued. A federal appeals court ruled that the provision was unconstitutional.

This set the stage for the flurry of state income tax cuts passed in 2021, 2022 and 2023.

Reversing a tax cut is politically unpopular. So when state budgets contract, cuts to public services follow. Public education is often one of the largest cuts, as K-12 education makes up big chunks of state budgets.

Lower-income residents feel that most keenly because they don’t have the money to, for instance, seek out a private school if their children’s public schools are badly underfunded. Higher-income residents often won’t feel the same reduction in quality in their local schools — and they’re the ones getting most of the benefits from the tax cuts. 

The changes in tax policy will hit hardest in states where funding for public services already is low.

In Mississippi, households with incomes below $30,000 will receive only 7% of the savings from its tax cut despite making up more than half the state, according to an analysis by the Urban-Brookings Tax Policy Center. 

Households making more than $100,000 will get 55% of the savings, even though they’re just 12 percent of all households.  

Meanwhile, the state will likely see a $419 million reduction in revenue every year on average, according to a forecast for the next decade produced by the University Research Center, a division of Mississippi Institutions of Higher Learning that studies state and local policies.

That revenue reduction is equal to salaries for 8,700 teachers at the state’s average rates. 

Or it’s equal to state funding for childcare for more than 70,000 children.

It also is equal to almost half of what state and local officials have estimated is needed to fix Jackson’s water system.

Six months after the Legislature approved the tax cut, the NAACP and nine Jackson residents filed a Civil Rights Act complaint with the U.S. Environmental Protection Agency alleging that state decisions about water funding are discriminatory. 

“The State has repeatedly interfered with Jackson’s access to tax revenue and repeatedly reduced or blocked funds from flowing to Jackson for its water facilities,” the complaint alleged in the aftermath of a days-long shutdown of the city’s water supply. “The result is persistently unsafe and unreliable drinking water and massive gaps in the access to safe drinking water that are intolerable in any modern society.”

The EPA is investigating the complaint.

West Virginia, the second-poorest state after Mississippi, approved a more than 20% reduction in income taxes in March. The new law could phase out the individual income tax entirely over time if the state’s sales-tax revenue growth outpaces inflation.

But the state’s fiscal impact estimate projects a loss of nearly $700 million in revenue next year alone. 

That amount could pay the salaries of nearly 14,000 teachers at the state’s average rate.

The top 1% of earners in the state would receive an average tax cut of about $10,000 per year, according to an analysis by the Institute on Taxation and Economic Policy and West Virginia Center on Budget and Policy. The bottom 20% of earners, the groups say, would receive an average of $21 per year — less than the cost of a tank of gas. 

In February, as the Legislature considered the plan, Republican Gov. Jim Justice held a roundtable forum with two State Policy Network partners, Americans for Tax Reform and The Heritage Foundation, to hail the march to zero income tax. 

“That would be a flashing billboard around the country to entrepreneurs, businesses and to workers that West Virginia is open for business,” Stephen Moore, a Heritage Foundation  distinguished fellow, said during the forum. “You have a big surplus, don’t flounder. This is a magical moment for the state.”

Asked for comment, Moore said in an email that people at the bottom of the income ladder benefit the most from pro-growth policies like cutting income taxes. He said he tells State Policy Network organizations across the country that eliminating the income tax is a proven path to prosperity. 

That argument lacks context, said Richard Auxier, a senior policy associate with the Urban-Brookings Tax Policy Center.

“If you’re in Mississippi and West Virginia and you think the only difference between your states and Florida and Texas is income tax, I really think you ought to be doing a whole lot more looking,” Auxier said. “The reason you have an income tax is to shift the burden onto higher-income households. The reason to get rid of an income tax is because it can shift the burden onto lower-income households.”

The disparate impact of these income tax cuts can also be seen across racial groups. Auxier found that Arizona and Ohio’s 2021 tax cuts, for example, mostly benefited white households, while Latino households in the former state and Black households in the latter saw little to no benefit.

In Arkansas, the nation’s third-poorest state, the Legislature has lowered the personal income tax rate repeatedly, most recently in 2022 and 2023. Legislators cut the corporate income tax rate, too.

Arkansas is home to Walmart’s headquarters. The Waltons, whose family founded Walmart and are among the richest in America, contributed $1.2 million to the State Policy Network in 2021 through their foundation. The money was earmarked for “an education policy and advocacy program.” (The Walton Family Foundation is among Public Integrity’s funders, providing a grant for improving national-local news collaborations.)

One State Policy Network affiliate in Arkansas touts the income tax cuts on a list of its accomplishments. Another affiliate advocates for the state to eliminate its income tax entirely.

For some advocates in these poor states, the loss in revenue is alarming.

“We have so many other issues to deal with,” said Kyra Roby, a policy analyst with One Voice Mississippi, an advocacy group. “The state is embroiled in a welfare scandal, a health crisis in the aftermath of the Dobbs decision that originated out of Mississippi. We have one of the highest maternal mortality rates. Our rural hospitals are closing. Education is still underfunded. The residents in Jackson are still fighting for clean drinking water. But tax cuts are being pushed by outside interest groups.”

State Rep. Ronnie Crudup Jr., a Democrat who represents south Jackson in the state’s Legislature, voted against the tax cuts. He said the surplus of funds used to justify the cuts could have been put toward urgent problems.

“I just don't understand, for the life of me, why we continue to try to cut taxes when there's so many needs across this state,” he said.

Kelly Allen, executive director of the West Virginia Center on Budget and Policy, shares the same concerns in her state. Tuition for state colleges doubled over the past decade as West Virginia’s funding dropped, according to an October analysis by her group.

“Instead of further future revenue growth going to schools or infrastructure or healthcare or programs that benefit families, it will automatically be diverted to income tax cuts, which mostly benefit the state's wealthiest,” Allen said. 

Advocates of tax cuts often argue that they will attract businesses or that the money is better spent by taxpayers directly. In Mississippi, both those arguments draw skepticism. 

“If you’re not funding basic services, there’s no new businesses moving to a state where your kids can’t get an education, you can’t move your products out on the state roads and bridges, you don’t know where the closest hospital is going to be,” said Sarah Stripp, managing director of Springboard to Opportunities, a Mississippi nonprofit that works with low-income families. 

Added Nancy Loome, executive director of The Parents’ Campaign, a public school advocacy group: “You can give me money back, but I can’t hire public school teachers or pave the roads by myself. There are so many things Mississippians want that are why we pay taxes.”

‘The No. 1 issue’

The 2010 midterm elections saw a wave of conservative wins across the country. Republican-controlled states — where the party held the governor’s seat and both houses of the legislature — jumped from nine to 21. 

The following year brought a slew of similar proposals across these states to weaken unions and collective bargaining power, scale back access to abortion and voting rights, expand the ability to buy and carry guns and lower taxes on wealthy people and businesses, as documented by Alexander Hertel-Fernandez of Columbia University in his book, “State Capture.”

Many of these bills were largely identical. They were introduced and passed with unusual speed. And it was thanks to the trifecta of ALEC, the State Policy Network and Americans for Prosperity. 

ALEC, which first launched in the 1970s, is a network of conservative state legislators, philanthropies, wealthy donors, advocacy groups and private-sector businesses that drafts and disseminates “model bill” proposals for state legislation.

The State Policy Network is made up of state-level conservative, pro-business think tanks that produce reports, media commentary and testimony, often on behalf of bills that ALEC drafts.

Americans for Prosperity, the newest of the three organizations, was created and directed by the Koch brothers’ political network. It conducts electoral work and policy lobbying at both the state and federal level.

Financial disclosures show that donors to these organizations, in addition to the Walton Family Foundation and Charles Koch Foundation, include the foundation for the Coors family of Coors beer fame; the Sarah Scaife Foundation, started with money from Pennsylvania’s wealthy Mellon family; the Roe Foundation, whose businessman founder was an adviser to President Ronald Reagan and started the State Policy Network; and the Thomas W. Smith Foundation, a major funder of the anti-critical race theory movement.

But many of the people underwriting these groups’ efforts are anonymous. They send their money through DonorsTrust, which shows up as the contributor instead.

That obscures who’s benefiting from the tax cuts that their donations — tax deductible in the case of the State Policy Network and ALEC — helped bring about.

In 2021 alone, DonorsTrust funneled around $48 million to the State Policy Network and its affiliates and partners, including ALEC and Americans for Prosperity, according to the organization’s latest financial disclosures. On its website, DonorsTrust describes its donors as “conservative- and libertarian-minded.”

“We help streamline our givers’ charitable wishes and don’t comment on the specific policy positions of the organizations our accountholders recommend grants to,” said Lawson Bader, president and CEO of DonorsTrust, said in an emailed statement. “That said, our givers are ideologically diverse and over the years have directed their giving to more than 1,100 unique charities, some of which approach the tax-policy debate from different perspectives.”

A 2019 investigation by the Center for Public Integrity and USA TODAY found that Mississippi’s Legislature introduced more ALEC model legislation than any other state in the country.

“I don’t understand the state thinking the way they think,” said Credell Calhoun, a Democratic supervisor of the county where Jackson is predominantly located, which he said struggles to get state funds to fix roads and bridges. “But I think it’s coming from the national Republicans, pushing, pushing down here to cut taxes.” 

Usually business groups are reliable supporters of such a move. But in a 2022 report detailing the concerns of local business leaders, the state’s chamber of commerce wrote that “the Mississippi tax environment was not high profile nor ever discussed significantly as a priority.”

ALEC's 2022 annual report credits ALEC legislators for helping to dump graduated income tax rates in five states. A State Policy Network member, the Goldwater Institute, describes itself as having helped write Arizona’s 2021 tax-cut law. In nearly every state with a recent income tax reduction that benefited the state’s wealthiest households, these groups or their affiliates were there, promoting these policies.

“This is the No. 1 issue that we’ve heard from Utahns all over the state, and the No. 1 concern is that they’re feeling the pinch in their pocketbooks with inflation at all time highs,” Heather Andrews, Utah state director for Americans for Prosperity, said at a hearing last year for a tax-cut bill.

The legislation passed. She urged Utah to cut even more.

And this year it did, with a law the state estimated would reduce revenue by $475 million next year ⁠— the equivalent of average salaries for nearly 8,000 Utah teachers.  

“Utah does more with less,” Andrews said in her testimony for this year’s bill, “and that’s what we do.”  

‘ALEC puppet state’

The atmosphere was somber as people who advocate for policies that benefit lower-income households gathered in a modest, chilly conference room at a Homewood Suites in Jackson in March.

Advocates, local politicians and service providers bustled in and out, grabbing lunch and talking about taxes while keeping an eye on other legislative proposals in the waning days of the session. 

Further tax cuts had been floated in Mississippi this year but didn’t make it through.

Even so, they know more will come.

A provision in the 2022 tax law requires the Legislature to revisit by 2026 a proposal to eliminate the income tax entirely. Everyone in the room worried about funding for education, housing, infrastructure and other public goods their communities rely on.

Roby, with One Voice Mississippi, laid out two potential policy solutions: raise taxes on the wealthy to bring in more revenue or enact tax credits aimed at lower-income households to make the state’s tax system less reliant on money from poor people.

Both seem unlikely in the state’s current political climate. For now, Roby said to the people around the conference table, her primary goal is to stave off more cuts.

Alicia Netterville, principal at Acclivity Group and former deputy director of ACLU Mississippi, listened and then turned the conversation to a basic right underpinning every other policy: “Your vote is your currency.” State decisions would look different, she said, if every Black person in Mississippi could vote and participate in state government equally to white people.

Overall voter turnout in the 2020 presidential election in Mississippi was about 60%, sixth worst in the country. Registering to vote here is more difficult than in almost any other state, Public Integrity found as part of a 2022 review of voting access. The state employs most of the tactics traditionally used to keep Black people from voting or thwart their influence in government, including felony disenfranchisement, racial gerrymandering and strict photo ID requirements at the polls.

“You have to pay to play in Mississippi, and that leaves out a lot of people,” Netterville said.

Among the groups pushing restrictions that suppress voting across the country: ALEC and the State Policy Network.

Such restrictions can help state officials enact or ignore policies without worrying as much about the breadth of support for the ideas.

A Mississippi Today/Siena College poll in January, for instance, found that cutting the state’s grocery tax, which most impacts lower-income households, is more popular than eliminating the state’s income tax. 

Mississippi’s grocery tax is the nation’s highest. Most states don’t have one.

“You know, I will argue all day that we're an ALEC puppet state,” Stripp, with Springboard to Opportunities, said at the March meeting. “I think the hardest part of this argument is that the Mississippi Legislature is not accountable to the people of Mississippi. How do we as people of Mississippi push them forward when it's hard to make them accountable to their actual citizens?”

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High food prices and the end of extra food-stamp allotments mean hard choices around the country for lower-income people:

“You’re having to make the decision between ‘am I paying my mortgage, or my medical bills or my medication or buying food?’” said Stacey Andernacht with hunger relief organization Feeding South Dakota. 

But in her state, there’s yet another factor pushing up costs: South Dakota is one of just three — along with Mississippi and Alabama — that levies its full sales tax rate on groceries without a credit or rebate to offset the costs.

That hits low-income people hardest because they spend a higher percentage of their income on groceries than wealthier residents, said Rick Weiland, co-founder of grassroots advocacy organization Dakotans for Health. It’s the reason that most states have eliminated sales taxes on groceries over the past couple of decades.

A bill to do the same has been introduced in the South Dakota Legislature for years to no avail. But in November 2024, South Dakotans may have the opportunity to repeal the grocery tax themselves. 

Dakotans for Health began collecting signatures earlier this month on a ballot measure that would eliminate the state portion of the grocery tax. Municipalities would be able to continue taxing groceries, as the state has more resources than localities, Weiland said. Dakotans for Health is forming a coalition of nonprofits and faith-based groups to work together on the campaign.

“This is just something that’s long overdue,” Weiland said. “And so I don’t think the timing could be any better than to do this after 20 years of failed attempts to get it done by the Legislature.” 

Grocery taxes falling out of favor

Statewide sales taxes originated in Mississippi during the Great Depression and quickly spread throughout the nation. Groceries were included in the general sales tax in most states at first, said Eric Figueroa, senior manager of strategic projects and initiatives at the Center on Budget and Policy Priorities. 

A few decades ago, concerned about the impact on hunger, states began to exempt groceries from that tax. Of the 45 states that impose sales taxes, only 12 still apply it on groceries. And nine of those — Hawaii, Oklahoma, Utah, Arkansas, Idaho, Kansas, Tennessee, Illinois and Missouri — do so at a reduced rate or offer rebates or credits. 

A surge in food prices has brought repealing grocery taxes back to the forefront of policy discussions. “It has always been an issue that anti-hunger advocates have rallied around, but I think recently we’ve seen both parties be involved in efforts to try to eliminate it and try to figure out how to pay for the loss of revenue,” Figueroa said. 

Earlier this year, Virginia eliminated its 1.5% state sales tax on groceries. (Local jurisdictions there can still levy up to 1%.) Alabama’s Legislature is poised to cut its state grocery tax rate in half. A cut already went into effect in Kansas in January, while Idaho increased its credit on the tax beginning this year. Illinois residents are in a year-long pause on collection and Tennessee instituted a three-month suspension that begins in August. 

During South Dakota Gov. Kristi Noem’s re-election campaign last year, she promised to eliminate the grocery tax. But the proposal died in the House earlier in the year. There was also concern that eliminating the tax could reduce $2 million that goes to the nine Native American reservations’ tribal government operations, though Noem later said that the tribes’ contracts would be renegotiated so they would not be economically affected. 

However, state leaders did agree to reduce the statewide general sales tax for four years, starting in July, from 4.5% to 4.2%, which will also affect groceries.     

Noem originally expressed support for Dakotans for Health’s petition. She backed out due to fear that as written, the ballot measure would jeopardize an annual $20 million that the state receives through a 1998 agreement with major tobacco companies to settle lawsuits for healthcare costs related to smoking. 

“She supported it in the past, in the present, and will in the future. But that tax cut needs to be written appropriately,” her chief of communications, Ian Fury, said in an email. He added, “The language proposed by the Governor and legislators during the legislative session did not have these problems and is the right way to go for the state.” 

Weiland expressed skepticism about the potential risk to the settlement. 

“If the initiated law we are currently circulating passes, and if the courts determine that it exempts tobacco from state sales tax, the Legislature with its one-party supermajority has full authority, before the initiative goes into effect on July 1, 2025, to eliminate any of the Governor’s recent concerns about any potential problem by amending the initiated law to fix any alleged problem,” Weiland said in a press release. 

In 2004, over 67% of South Dakotan voters cast ballots against a similar initiative to eliminate the tax on groceries. But Weiland, whose group was among those coordinating a successful 2022 ballot measure to expand Medicaid in the state, believes that the governor’s campaign for eliminating the grocery tax and legislative action in recent years will help garner widespread support for a new citizen-led proposal. He said the organization is working with the tribes to try to ensure that the loss in revenue won’t impact them. 

“By letting the people vote on it, we can bypass all the politics that goes on in the Legislature and do what we did with working on the Medicaid expansion campaign — by taking it directly to people and letting them make the decision,” Weiland said. 

The organization is going door-to-door, attending events and standing outside public buildings to collect the 17,509 valid signatures needed from registered voters. Those signatures must reach the secretary of state by May 2024 in order for it to appear on the November 2024 ballot.

The state of hunger

Accessing healthy food is already a challenge in the rural state of South Dakota, where grocery stores are sometimes few and far between. One in 12 people in the state, and one in nine children, experience hunger, according to Feeding America. 

A 2021 study that looked at grocery taxes between 2006 and 2017 found that areas with the tax experienced some of the greatest food insecurity in the nation. 

In South Dakota, food insecurity is particularly pronounced in the state’s nine Native American reservations, where residents face the additional challenge of lack of transportation. On the Rosebud Indian Reservation in St. Francis, Feeding South Dakota’s Andernacht said, residents shop at a convenience store when they can’t reach the closest grocery store 40 miles away. Getting a ride there and back can cost around $100. The nonprofit has increased its food distribution to the reservation from every other month to once a month.

Another client in the central part of the state lives 30 miles from a discount grocery store, so she bought more expensive groceries at a nearby shop where her food stamps didn’t stretch as far. As a result, she used the nonprofit’s mobile distribution food drive to supplement her groceries until she found a better paying job. Now she’s returned to the food drive due to increased food prices, Andernacht said. 

Feeding South Dakota provides food for hungry families throughout the state through programs including drive-through sites, school pantries and food boxes for seniors. 

Over 11,500 families are served through mobile food distribution per month, which Andernacht says is a 22% increase since last year. She attributes that rise to higher food costs and an end to the Supplemental Nutrition Assistance Program’s emergency allotments, which resulted in a $90 a month decrease in grocery money for the average SNAP recipient nationwide. 

Filling the revenue gap when grocery taxes disappear

Any state repealing its grocery tax must account for the loss of revenue. In South Dakota, the tax brings in about $102 million annually. 

The sales tax on groceries has an even greater impact in Alabama, generating about $500 million that goes toward the state’s already strained education coffers. 

“It’s been a very hard political problem to eliminate the tax and make up for the revenue in a way that satisfies everybody,” said Figueroa, from the Center on Budget and Policy Priorities.

However, a 2020 paper he co-authored suggests that states can raise revenues in ways that don’t hit lower-income people hardest, such as expanding taxes for the wealthy and corporations and cutting special-interest breaks. 

Figueroa also referenced a proposal in Alabama he found powerful. Proposed by the organization Alabama Arise, the plan would replace grocery-tax revenue with a cap on the state income tax deduction for federal income taxes, which would bring in an estimated $520 million annually. 

“We are in this peculiar position that we have an incredibly regressive tax in the sales tax on groceries and we have a tax cut that is really a tax break that benefits … mainly the top 5% of income earners in the state,” said Carol Gundlach, senior policy analyst at Alabama Arise. 

The plan would require a constitutional amendment, so it was not included in a current state bill to cut the sales tax for groceries in half, which Gundlach expects will pass. Eliminating the sales tax on groceries has been a priority for Alabama Arise for three decades. The organization was involved in writing the bill, education, outreach and lobbying.  

Gundlach is hopeful that South Dakota will manage to eliminate its grocery sales tax next year. 

“We get Alabama and South Dakota, then all we’ve got to do is Mississippi,” she said. 

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While race intersects with every aspect of American life, hard data on that is limited when it comes to taxation. The IRS does not collect taxpayers’ racial or ethnic identity.

New research using novel methodology — starting with Survey of Consumer Finances household survey data, creating tax units and running a tax calculator against it — supports what Black legal scholars have long posited: that racial disparities are baked into the tax code. 

The analysis, from the Urban-Brookings Tax Policy Center, looked at the impact of the “marriage penalty,” when a couple pays more in federal income tax than the combined bill if they were single. That generally occurs when each spouse earns around the same amount of income. 

In situations where a couple pays less, they’re receiving a marriage bonus. 

The new analysis shows that Black couples are more likely to experience marriage penalties than white couples, even controlling for income. Under the 2017 Tax Cuts and Jobs Act that’s still in place, 46% of Black couples paid marriage penalties, compared to 43% of white couples. Marriage bonuses are more stark: only 36% of Black couples get them, compared to 43% of white couples.

The Tax Policy Center’s paper, published last month, builds on work by Dorothy Brown, a Georgetown University law professor who wrote The Whiteness of Wealth. Black women have worked outside the home more than white wives throughout history, she noted, whereas the marriage bonus often goes to couples with one spouse who stays home. The new paper attributed the presence of children and differences in income distribution as additional reasons for the disparities. 

The Center for Public Integrity sat down with Janet Holtzblatt, senior fellow at the Tax Policy Center and the study’s co-author, to learn more about racial disparities in the joint tax return and how agencies are working to make it easier to study the impact. 

This conversation has been edited for length and clarity.

Q: What findings surprised you while working on this paper?

To some extent our findings confirmed what others have been saying. Going back to the 1990s, there were several Black legal scholars who had looked at the data and indicated that it was likely that Black married couples would incur larger penalties than white couples. And the premise was that Black couples were more likely to have two spouses who were working and for those two spouses to have equal earnings. And our findings confirmed that. 

I expected that would be the case in the 1990s, when the scholars were first making this analysis and conclusions. And the reason I thought it’d be likely to happen in the 1990s was that … the tax rate structure and standard deduction was structured in a way that gave rise to marriage penalties. When two people got married and they were both working, their combined income as a married couple would push them into a higher tax rate. In the ‘90s, amongst all couples, you would expect a higher probability of marriage penalties. 

The other aspect was that between the 1970s and the 1990s, there were more and more two-earner couples in the labor market. I anticipated that would continue to grow so that whatever gap that legal scholars had seen in the 1990s between two-earner couples who were white, rather than two-earner couples who were Black, would shrink over time so there would be less of a racial disparity between the two groups. 

Beginning in 2001, Congress took a number of steps that reduced marriage penalties. They doubled the standard deduction and increased rate brackets for married couples relative to unmarried couples. And in 2017, under the Tax Cuts and Jobs Act, more and more married couples were getting that kind of relief. There are still lots of provisions in the tax code that give rise to marriage penalties. But I thought that the combination of more two-earner couples and that changes in the tax code to reduce marriage penalties would mitigate this observation in the ’90s that there was greater occurrence of marriage penalties among Black couples than white couples. 

We looked at marriage penalties over time, prior and post the 2000 and 2017 tax law changes. And we did find that both white and Black couples were less likely to have marriage penalties over time than before 2001. 

But there’s still a gap. 

So the biggest surprise, to me, was that after all the legislation of the past 20 years … under the 2017 tax law, we still observed that Black couples are more likely to incur marriage penalties than white couples. And that the magnitude [of the gap] is a greater percent of income for Black couples than for white couples. 

Q: What do you think still needs to be done to make the tax code more equitable for all couples?

We are beginning to do research where we see more and more inequities in the way in which the tax code affects white taxpayers versus Black taxpayers. That’s an area of research that has not had much attention, in part because we [as a country] think that the tax code is race neutral and we don’t have tax data that distinguishes taxpayers by race. 

All of that is changing now. But because it’s very unlikely, and perhaps undesirable, to have taxpayers indicate their race on their tax return, it’s also unlikely to [have] tax laws that achieve equity between Black and white taxpayers by explicitly referring to race. 

So what are the characteristics that can be observed in the tax code that affect these racial disparities? There are several factors that differentiate Black couples from white couples that contribute to marriage penalties. And some have fixes and some may represent a trade off with more desirable policy goals. 

So one way to fix the marriage penalties, which will affect both Black and white couples, is to allow couples the option of filing as individuals. That would eliminate marriage penalties and it would be very expensive. It might be difficult to allocate which spouse gets unearned income, interest income, dividend income, capital gains, and mortgage interest deductions, or who gets to claim the kids as dependents. It could still open the door for tax avoidance where taxpayers come up with strategies in order to minimize their tax liability in various ways. 

It also cuts away the progressivity of the tax code. Because right now the tax rates go up based on the combined taxpayers’ income. But if you were to tax each individual, you could then end up with a lower tax liability because one of the individuals might get taxed at a low salary and not fully adjust for the resources that the family has in combination. 

The other approach was one done in the 1980s that lasted for about three years, … called the two-earner deduction. It was targeted to a group of people who were most likely to move up into a higher tax rate as a consequence of their combined income. It gave them the opportunity to reduce their income by a portion of the lower earner’s income to alleviate marriage penalties. 

That approach is desirable in that it’s very well targeted. It’s undesirable in that the benefit of the 1980s law was regressive, because the more income [the couple had], their tax rate and the value of that deduction increased. So it was much more valuable to higher-income taxpayers than lower-income taxpayers. 

Another reason we observed marriage penalties more likely among Black couples than white couples is that Black couples are more likely to have dependents. And the reason that matters is that Congress recognizes that families with dependents have greater expenses that make it more difficult for them to pay taxes on the same amount of income as a taxpayer who doesn’t have kids. And so the tax code provides the child tax credit, the earned income tax credit and the head of household filing status. But those provisions actually lead to an increase in marriage penalties.

The head of household filing status gives taxpayers a standard deduction that’s halfway between being single and filing jointly. And that means that if an unmarried single person marries a single parent, the single parent loses a head of household filing status and it makes it more likely that they’re going to have a marriage penalty. 

When a couple gets married, their combined income may result in a smaller or no Earned Income Tax Credit, relative to what they would have gotten filing as unmarried individuals. 

Q: You mentioned that it’s not ideal to eliminate marriage penalties altogether. Why is that? 

Policymakers try to achieve a number of different goals through the tax system. One is tax progressivity, where people pay a higher proportion of their income in taxes as their income goes up. A second goal may be treating families who are similar alike … and [another is] trying to reduce complexity. 

[Marriage] neutrality may be a fourth goal, but tax experts have not found an equation that works. It’s not possible to achieve progressivity, treating similar families alike, and marriage neutrality [with neither penalties nor bonuses]. So policymakers are forced to make trade offs and sometimes those other goals have taken precedence over [eliminating] marriage penalties. In addition, there may be other goals such as tax subsidies. 

For over 100 years, in one way or another, Congress has dealt with how married couples are treated relative to unmarried couples. Sometimes it’s been to the benefit of married couples and sometimes it’s been to the benefit of unmarried couples. 

So this has been a struggle since 1913, when the tax code was first in place. And they still haven’t come up with a solution that achieves all of these goals simultaneously. 

Q: Now that all federal agencies are required to assess how their programs impact racial and ethnic equity under Biden’s Racial Justice Executive Order, do you find that there’s greater access to data around the racial implications of taxes? 

There’s definitely greater attention to how we’re going to measure this. 

Taxpayers are not asked to declare their race on their tax returns, and at least from my perspective, it’s a good thing … [because of]  concerns that it might have dangerous effects on tax enforcement. But on the other hand, without that information, we have been stymied in the past in our efforts to understand how the tax system affects Black and white taxpayers differently. 

So what is happening right now across the government agencies that evaluate tax policy — Department of Treasury, the Joint Committee on Taxation and Congress, the Congressional Budget Office, the Government Accountability Office — is [that they] are developing methodologies to impute race into the tax data. 

And they’re not alone. The Tax Policy Center is also working diligently to come up with methodologies to better understand the racial implications of tax policy. Our study on marriage penalties is an example of one way of doing it, where we started with the [Federal Reserve’s Survey of Consumer Finances] household survey data, created tax units and ran a tax calculator against that. 

But what’s [a bigger] effort for various government agencies and us, is beginning with tax return data, which can give a fuller picture of what’s going on in the tax system, and developing imputations for race and ethnicity to add to our tax analysis. Then we can get this broader picture of the different disparities in a tax code by race and ethnicity. 

Some preliminary results are beginning to emerge, but there’s still a lot of work to be done before we’re able to produce more comprehensive studies of the impact by race and ethnicity. It’s a very important question and a lot of very smart people are working as quickly as they can, but they’re essentially building new infrastructure from scratch.

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The 118th Congress that convened this month marked the end of one-party control of the federal government. The Democrat-controlled Senate and Republican-majority House will determine the landscape of tax policy for the next two years, with any action or inaction rippling for generations to come. 

In one of its first votes of the session, the House approved a bill that would make it easier for wealthy people and corporations to evade tax laws, said Amy Hanauer, executive director of the Institute on Taxation and Economic Policy. 

The “Family and Small Business Taxpayer Protection Act” would, among other things, rescind $45.6 billion in funding to enforce the tax code for businesses or households making over $400,000. The Inflation Reduction Act that passed last year granted nearly $80 billion in funding to bolster taxpayer services, auditing, operations and the modernization of the troubled Internal Revenue Service. 

“We have seen a decade of decline in IRS staffing and a decline in funding that left the agency unable to enforce the tax code, particularly for the wealthiest tax evaders whose returns tend to be more complex,” Hanauer said. She believes the bill is unlikely to pass the Democratic-controlled Senate, and President Joe Biden vowed to veto it if it reaches his desk.  

A more robust tax auditing team in the IRS is needed now more than ever, tax equity advocates say. Nearly a quarter of the IRS’s enforcement budget was slashed from 2010 to 2021, after adjusting for inflation, according to a Center on Budget and Policy Priorities analysis.  Over the same period, the number of revenue agents who audit tax returns declined by 40% — from 14,000 to 8,321.  

That change has benefited wealthy people, according to a recent report from Syracuse University’s Transactional Records Access Clearinghouse. The number of IRS audits of millionaires fell more than 70% from 2012 to 2020. 

Meanwhile, low-income workers who claimed the earned income tax credit were audited at over five times the rate of everyone else last fiscal year, the report found. 

Fewer audits of wealthy people means less revenue for public spending. The IRS recently estimated a $496 billion gap between taxes owed and collected from 2014 to 2016. 

That problem paired with federal tax cuts aimed at the rich in the last four decades has helped fuel America’s fast-growing income gap, the Center for Public Integrity reported in November. Even so, state and local tax systems are comparatively worse as a whole because the residents paying the highest share of their income in taxes make the least money, according to a calculation by the Institute on Taxation and Economic Policy.

That’s in large part because of sales taxes. Another new bill from House Republicans would switch the federal system to rely on that type of tax.

The Fair Tax Act, introduced in January, would eliminate payroll, estate, gift and income taxes and instead impose a national sales tax at 23% in 2025. Opponents say the tax would be closer to 30%. 

“This would be incredibly regressive, and its implications would end up really raising taxes on low- and middle-income families, while cutting taxes for the wealthiest people,” Hanauer said. It also would eliminate the Child Tax Credit, which helps tens of millions of low-income families. 

A 2005 advisory tax reform panel established by then President George W. Bush advised against the creation of a national sales tax. At the time, the U.S. Department of Treasury estimated that total federal taxes would more than double for a family making $40,000, while taxes would drop 19% for a family earning $300,000. 

Additionally, the House approved a rule that will increase the share of votes required to raise income taxes, while another rule would require increases in spending for programs such as Social Security, unemployment compensation and Medicare to be offset by cuts to similar programs, without an increase in taxes. 

All of that would exacerbate the nation’s wealth gap, Hanauer warned.

“There are so many things that we fail to provide in any universal way in this country that we should not be wanting to move backwards as the new Republican Congress wants to do,” she said. Higher taxes on very high levels of wealth could help pay for universal healthcare or more affordable childcare and college, she added. 

Extreme wealth is globally on the rise. A recent report released by international anti-poverty charity Oxfam found that billionaire fortunes are increasing by $2.7 billion a day throughout the world. 

“We’re in a situation where, for over 40 years, the ultra, ultra rich and big corporations have been incredibly successful at writing the rules of our economy in their favor,” said Nabil Ahmed, Oxfam America’s director of economic justice. 

“We have to tell a very different kind of story for our economy, one that brings us closer together, that invests in our children and that meets people’s rights,” he added. 

States trying a different tack on taxes

Some states are taking matters into their own hands by offering refundable tax credits or revising their tax systems to make them more equitable, Hanauer said. For instance, Washington passed a 7% capital gains tax for profits over $250,000 on assets such as stocks and bonds, with revenue from the tax going toward childcare. The state’s Department of Revenue will continue to collect the tax while it is in litigation.    

Last week, legislators in eight states — Connecticut, California, Illinois, New York, Maryland, Washington, Minnesota and Hawaii — introduced bills or announced plans to increase taxes on the wealthy.  

In Massachusetts last fall, voters approved a 9% income tax for millionaires — higher than the state’s 5% flat tax — with revenue going toward bridges, roads, public education and public transportation. 

The levy came as the public transit network struggles with a large deficit and over 600 bridges across the state are deteriorating and in need of repair, said Phineas Baxandall, policy director of nonprofit think tank Massachusetts Budget and Policy Center. 

“The schools that need the most help tend to be in low-income districts, and low-income people can suffer the most from poor transportation, especially if they don’t have the flexibility to work at home,” Baxandall said. 

It took nearly 10 years of advocacy efforts to pass the surtax on Massachusetts’ 26,200 millionaire households. The state constitution was amended to allow it.  

Baxandall sees Massachusetts as a potential model for other states. “Especially with a split Congress, states can’t wait for the feds to be their knight in shining armor,” he said. “They need to take action themselves.”

The post How will a divided government affect taxes? appeared first on Center for Public Integrity.

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OSAGE NATION — On a crisp November morning, Teresa Bates Rutherford gazed at the construction site of her future home — her mind on her tax struggle with the state of Oklahoma.

The trust land she is building on has passed down through generations of her family on the Osage Reservation, located in northeastern Oklahoma. The state and county have limited jurisdiction on her land — a protection that should extend to taxes, but too often doesn’t.

Rutherford knows the tax laws better than most. She sits on the Osage Nation’s Tax Commission Board. Every month, she and two other Osage women pore over tax records for the tribe. Many of those records deal with the state, she says, which always wants more tax revenue.

For instance, Oklahoma makes vendors charge Rutherford state sales taxes on the materials for her home until she can provide them with proof that she qualifies for a tax exemption. There are no instructions available to apply for the exemption, she said, and she doesn’t know yet if the state will approve her request. She suspects most Osage citizens aren’t even aware they don’t have to pay these taxes.

“There’s always problems with taxation and the state,” said Rutherford, who has long dreamed of building this home for herself and her daughters. “The state just cannot accept us as a sovereign nation.”

An investigation by the Center for Public Integrity in partnership with ICT (formerly Indian Country Today) found that many state and local governments infringe on tribal nations’ taxing authority, siphoning billions of dollars in tax revenue from reservations over the past few decades alone.

It’s a modern version of wealth extraction, treating tribes as lesser entities whose sovereignty can be ignored. And it reduces the money tribal governments can spend on services in their communities, where poverty rates are often higher than in surrounding areas. 

After enduring centuries of stolen land and seized resources, many tribes have been seeking economic recovery through commercial ventures. Tax policies are a major obstacle to further progress, tribal leaders say.

“Quite simply, we are asking for parity in the federal tax code and to be treated as other sovereigns in this country as reflected in the U.S. Constitution and numerous federal laws, treaties and federal court decisions,” said Mashantucket Pequot Chairman Rodney Butler during 2020 congressional testimony. “Without question, tax parity for tribal governments will allow for greater self-determination, economic growth and self-sufficiency for Indian Country.”

States are not allowed to tax economic interactions between tribal citizens and their governments. But courts have protected states’ ability to tax most economic interactions between tribal-run entities and non-tribal companies or individuals, precisely where most of the revenue opportunities lie. 

Imagine if California made this demand of Nevada: When our residents visit, you have to charge our sales tax on their purchases and hand it over to us.

That’s effectively what states and counties do to tribal governments, and not only with sales taxes.

No national estimates exist for the total amount tribes have lost due to these tax policies. But court cases, reports and interviews with tribal leaders, attorneys and advocates compiled by the Center for Public Integrity and ICT show the scope is at least in the hundreds of millions of dollars each year. For instance:

• Since 2008, North Dakota has collected more than $2.5 billion in tax revenue from the oil and gas industry on the Fort Berthold Reservation, according to Mandan, Hidatsa and Arikara Nation Chairman Mark Fox. 
  
• A recently settled lawsuit in Washington said the state was collecting more than $40 million annually in various taxes from a shopping center the Tulalip Tribes built to help generate revenue for the tribal government. The state and county collected another $20 million in taxes on the Tulalip Reservation in 2015 that was not disputed in the lawsuit.
  
• In 2019, courts upheld Riverside County’s right to collect $23 million in annual tax revenue from non-tribal entities or people leasing trust lands from the Agua Caliente Band of Cahuilla Indians in California.
  
• Montana collected more than $347 million from taxes on alcohol, tobacco and fuel sales and natural-resource development on reservations statewide in 2016. The state sent less than $11 million of that to tribal governments.
  
• California and San Diego County collect more than $400,000 in property taxes every year from a wind-power project on the Campo Indian Reservation. The state also took $4 million in sales taxes when the turbines were installed. 

When states and counties tax non-tribal businesses and customers on reservations, tribal governments face a thorny decision: Do they add their own taxes on top, which can drive economic activity away because it increases costs? Or do they forgo that, losing a source of critical revenue needed for government operations? 

Unequal burden

The way governments choose to tax can help blunt fast-rising inequality. Instead, tax policies often make it worse.

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Many tribes have either not imposed their own taxes or reduced what they were charging, according to interviews with tribal leaders and records reviewed by Public Integrity and ICT. Some entered revenue-sharing agreements, often with the state or local government taking at least half of the tax revenue earned on tribal lands.

These outcomes largely keep tribal governments from using tax policy to attract business development in ways that cities, counties and states routinely tap. 

And many tribal leaders say states, after collecting taxes from tribal economic activity, provide minimal services that benefit tribal citizens on reservations.

“It’s a real inhibitor of economic opportunity,” said Robert Odawi Porter, former president of the Seneca Nation and managing principal of the Capitol Hill Policy Group, a government relations firm that works with tribes. “The tribal government should have the same right to determine its tax policies as a state, local and federal government.”

The backdrop to this dynamic: Nearly all states tax in ways that take a greater share of income from people with less money and a lesser share from people with more. That increases economic inequality while reducing the revenue that states can collect, a Public Integrity investigation found. 

Several states said they collaborate with tribal governments on taxation, though they gave little detail on the services they provide on reservations in exchange for the taxes they collect.

“New Mexico has made a concerted effort in recent years to work as cooperatively as possible on taxation issues with tribal governments in recognition of their sovereignty,” Charlie Moore, spokesman for the state’s Department of Taxation and Revenue, said by email.

Mike Nowatzki, a spokesman for North Dakota Gov. Doug Burgum, said by email that the administration works with tribes “to avoid a patchwork of taxation that might discourage economic development.”

Oklahoma officials did not respond to requests for comment.

In lawsuits about the matter, many states argue that they should be collecting tax revenue from economic activity on tribal lands because they provide services off-reservation — such as highways — that the customers and companies involved in on-reservation businesses need.

The U.S. Department of the Interior, the primary agency carrying out the United States’ obligation to protect tribal rights and assets, and to which tribes have turned to urge action on the taxation issue, declined to comment. Its reasoning: It didn’t “have anything to add on this.”

Looking to tribes for ‘free money’

Tribal nations — and their lands — possess immunity from taxation by the U.S. and state governments.

Hundreds of treaties state this. So does the U.S. Constitution, which put it this way: “Indians not taxed.” 

“It has been litigated and debated for many, many years as to what those words mean,” said Gabe Galanda of the Round Valley Indian Tribes of California and managing lawyer at Galanda Broadman, an Indigenous rights law firm in Seattle, Washington. “I just know that sitting here today, you know, 200 or more years from when that law was written, that unless you have clear indication in federal statute or treaty that what is being sought to be taxed should not be taxed, it more than likely will be taxed.”

The shift first began after the Indian Citizenship Act of 1924. Federal courts concluded that because Native people were now U.S. citizens, they had to pay federal income taxes.  

There was no concurrent effort by the U.S. government to restore land and resource wealth stripped from most tribes after the continent was colonized. 

“A lot of us feel strongly that we paid our taxes through the land that we ceded,” said Henry Cagey, councilmember and former chairman of the Lummi Nation. “Why do we as Indian people have to pay taxes to the United States when the land that we gave up is their tax base? The property taxes, the business taxes, all the income that they generate and run their government is based on the land we ceded.”

The development of tribal enterprises got a boost in the 1970s in part from federal programs, grants and loans. 

That’s when state tax collectors came calling.

“Unfortunately, cash-strapped states continued to look at on-reservation resources and activity as potential ‘free money’ and subsequent cases proved disastrous,” Gavin Clarkson of the Choctaw Nation, who served as deputy assistant secretary for Indian Affairs at the Interior Department during the Trump administration, wrote in a 2020 Federal Lawyer article.

As states tried taxing tribal economic interactions with non-tribal customers or companies, federal judges gave them the greenlight to keep doing it.

In a 1976 case, the U.S. Supreme Court ruled that states could tax cigarette sales to non-Native customers on reservations and upheld a state of Montana requirement that tribes keep records of such sales, reasoning that these requirements amounted to a “minimal burden.” The court noted that tribal citizens were also Montana citizens, voting in local elections and benefiting from state-funded services like roads and schools.

In 1989, the Supreme Court decided in Cotton Petroleum Corp. v. New Mexico that states could charge their taxes on non-tribal businesses operating on reservations. In its majority opinion, the Supreme Court found that the state provided “substantial services … that justify the tax” — pointing in part to services off the reservation — and said the tax “imposes no economic burden on the Tribe.”

Tribes with resources to sue have challenged these tax policies. But federal judges — only seven of which in the country’s history have been Native American — often favor states.

An October 2022 ruling by the 8th Circuit Court of Appeals is among the most recent, finding that South Dakota could impose its excise tax on work performed by a non-tribal contractor hired by the Flandreau Santee Sioux Tribe for a renovation and expansion of its casino and hotel.

“In these cases, the argument is often that the issue is really about a tax avoidance or scheme, rather than the economic development of tribes and how they’re using their revenues,” said F. Michael Willis, a non-Native attorney with Hobbs Straus Dean & Walker, who works with tribal councils on these types of cases. “But tribes use these economic development programs to generate revenue for their citizens. Tribes are coming up with any models they can to generate revenue to overcome a history of hundreds of years of asset deprivation in their communities.”

State gets taxes, the tribe gets the bill

One after another in the last decade, oil and gas companies operating on Ute Mountain Ute lands in the Four Corners region have declared bankruptcy.

“They abandon their pollution,” said Peter Ortego, general counsel for the Ute Mountain Ute. “They abandon their machines and pumps and everything else they have on the reservation, and they basically wash their hands and say, ‘We’re done with it.’”

The subsequent cleanups that fall to the tribe have added to a list of needs that leaders there must address. Ortego said they would have more resources to deal with these issues if New Mexico weren’t taking more than $1 million in state taxes from oil and gas operators on Ute Mountain Ute lands every year. 

“The tribe is kind of struggling to get the funds and everything to clean that up,” Ortego said. 

In 2009, the Ute Mountain Ute sued New Mexico over five taxes the state was imposing on oil and gas operators on the reservation, including a severance tax generally intended to help mitigate damages caused by extraction.

The tribe said that the state had no right to collect this money and was inflicting an economic burden on its people. 

The state argued that the tribe and the oil and gas producers it contracted with didn’t operate in an economic silo.

“The activity conducted on the reservation by the nontribal taxpayers is simply the first step in the creation of profits for the taxpayers and royalties and taxes for the Tribe,” the state’s attorneys wrote in a brief. “The subsequent steps take place off the reservation, in New Mexico. The producers take full advantage of the infrastructure made possible by New Mexico law.”

Texas could say the same of oil and gas activity that starts in New Mexico and crosses state lines. But if a company refines New Mexico oil in Texas, Texas couldn’t tax the operator for the extraction that happened elsewhere.

Nearly 40% of the roughly 2,000 Ute Mountain Ute lived below the poverty line at the time, court documents noted. The per-capita income of tribal members was $8,159 during the previous decennial census, approximately half the average for residents in neighboring counties, and the unemployment rate among tribal members was around 11%, far higher than the surrounding counties.

The tribal government tries to help its members by providing payments every year. According to court documents filed by the tribe, if the New Mexico taxes were found unlawful, the tribe would collect an additional $1.3 million in severance taxes annually and all of that money would go to its members — an extra $650 per person each year. 

A district court agreed that the state didn’t have the right to take those taxes. But the 10th Circuit Court of Appeals reversed that decision in 2011. 

In a dissent to the majority ruling, 10th Circuit Judge Carlos F. Lucero noted the additional $650 per tribal member would be “no small sum for a tribe whose yearly per capita income is a scant $8,159.”

New Mexico still collects those taxes. 

That court ruling came before the rash of oil-company bankruptcies. Today, one in four Ute Mountain Ute Reservation residents live in poverty and, accounting for inflation, per-capita income hasn’t improved.

Moore, with the New Mexico Department of Taxation and Revenue, said by email that the state cannot share the tax revenue with the Ute Mountain Ute without legislative action.

A portion of all severance tax revenues in the state is used to finance bonds for capital projects, and 4.5% of that bonding capacity is earmarked for tribal infrastructure, Moore said. The state also offers at least two tax credits to oil and gas producers who operate on tribal lands to soften the impact of double taxation on the companies.

In Fort Berthold, North Dakota, which provides more than 2% of the country’s domestic oil production, the MHA Nation faces a similar issue. Since 2008, the state has collected more than $2.5 billion in tax revenue from oil and gas production on the reservation, according to the tribe.

“As far as I’m concerned, that creates a shortfall,” said Fox. 

Between 2008 and 2013, the tribe got only one-third of the revenue. That’s gone up since, with the current agreement resulting in the tribe keeping roughly 60% over the past couple of years.

On average each year, the MHA Nation collects about $100 million in royalties from oil and gas producers and an additional $250 to $350 million in taxes. Roughly 90% of the royalties go toward providing health care and health insurance for its people, both on and off reservation, and cash distributions for every citizen. The oil and gas tax revenue, Fox said, funds the regulation and mitigation of drilling and other necessities such as roads and schools. 

But the tribe still faces major budget and infrastructure deficits.

In 2020 alone, the nation needed $1.6 billion for road construction and maintenance, according to congressional testimony Fox gave that year. 

With a population increase on the reservation has come a dire need for housing — Fox estimated costs of more than $1.1 billion for new and rebuilt homes required between now and 2030.

Asked how much of the tax revenue collected from the reservation goes toward services and infrastructure there, North Dakota Deputy Tax Commissioner Sandy McMerty replied by email, “Dollars collected from the varied tax types go to fund a variety of government and local services that impact all citizens of North Dakota.”

Fox said in an interview that not being able to collect the full tax revenue earned on the reservation keeps the MHA Nation — and many tribes — dependent on federal funding to meet many of their needs. 

“As long as we depend on the federal government, we’ll never build ourselves out of this social economic poverty,” Fox said.

‘You’re taking tax revenue’

When the Tulalip Tribes sued Washington state and Snohomish County in 2015 over taxes, the federal government intervened — on behalf of the tribes. 

At issue was more than $40 million the state and county were collecting annually from the tribes’ Quil Ceda Village shopping center while leaving the Tulalip with the bill for typical government functions.

The Tulalip invested approximately $153 million in physical infrastructure to support commerce, including roads, freshwater and sewage treatments, electrical lines, highway interchanges and a fiber telecommunication system.

The county, meanwhile, didn’t provide business licensing or inspections, building permitting or code enforcement, land use planning, roads or road maintenance, animal control services, or fire marshal services with the disputed tax revenue, according to the plaintiffs. Nor did the state provide, for example, food, health, and safety inspections, drinking water regulation and monitoring, or environmental permitting that it typically handles elsewhere. 

The plaintiffs said Quil Ceda Village visitors, businesses and employees rely entirely on the Tulalip and the United States for all that.

“We, of course, said, ‘Hey, wait a second, you’re taking tax revenue that’s generated within our own city, within our own boundaries, and it’s not even coming back to make improvements,’” said Cameron Reyes, property manager for the Consolidated Bureau of Quil Ceda Village.

Of the few services the state does provide there, “virtually none of them are funded by the disputed taxes,” the tribes’ counsel noted in its post-trial brief.

Federal lawyers in their intervening complaint wrote that the state and county taxes “completely preclude Tulalip and the Village from imposing and enforcing their own like tribal taxes, and deprive the Tribe of the tax base that other sovereigns use to fund important government activities.” 

“The State and County provide extensive government services benefitting the non-Indian taxpayers in return for the taxes collected,” wrote the defendants in their post-trial brief. They cited clean air and education as examples.

One of the state and county’s other arguments was that the tribes didn’t appear to need the additional tax revenue because, in constructing infrastructure for a resort, casino and shopping center, the Tulalip had expenses more like a “typical developer” than a government.

“No such argument could succeed against a non-tribal sovereign,” the plaintiffs responded in their post-trial brief. “The Tulalip people, with the support of the United States, have fought against overwhelming odds to reclaim a measure of the economic self-sufficiency that was their historical trademark.” 

After a five-year legal battle, the parties settled. Under a revenue-sharing agreement, the Tulalip will get $500,000 of the sales tax going to the state each year until the 2023-to-2025 state budget cycle. At that point, the tribes can receive half of all the sales tax receipts — but only if they have obtained a site and permits for a $35 million facility to address mental health and addiction.  

Not all tribes have the resources to take states to court, said Rutherford, the Osage tax commissioner in Oklahoma.

“Anytime we try to tax, they want to come in and say, ‘Well, a share of that belongs to us,’” she said.

She gave the example of the Osage Nation’s tobacco compact with the state. It dictates that Oklahoma is due half the taxes from non-Native customers on tobacco in smoke shops owned by tribal citizens on reservation land. 

“They don’t go to the other side of the hand and say, ‘Well, we should consider that all Natives who buy cigarettes from QuikTrip or Love’s, that portion should go back to the tribes.’ They never offer that,” Rutherford said. “No, that’s not even mentioned.”

Of the half-share of sales taxes the Osage reservation collects, the Osage Nation government keeps 30% and returns the remainder to the smoke shop owners.

“They put tribes between a rock and a hard place, knowing that litigation is going to take a lot of money if the tribe wants to fight it,” Rutherford said. “So, unfortunately tribes end up having to do these compacts that are not fair.”

A tax war and ongoing negotiations

Hundreds of protestors from the Seneca Nation took to the streets in the summer of 1992. A court had just ruled that the state of New York could impose its sales tax on non-Natives who bought gas and cigarettes on reservations.

The court ruling meant the state could collect an estimated $50 million annually from tribes. For the Seneca, it was a blow to their sovereignty.

The tax war — as it was referred to at the time by the Seneca and news outlets — escalated to violence after New York sent state troopers to stop the protestors. Both Seneca protestors and troopers were injured. For about a week state troopers commandeered the highway near the reservation, stopping and questioning drivers who sought to enter it.

The clash ended when the state agreed to defer collection of the taxes as the issue made its way through appeals. The Seneca have maintained their right to choose how to tax cigarettes since, opting to not tax them.

“We fought hard, our men, women, elderly and young, to preserve our immunity from any external taxation,” said Porter, the former Seneca president.

Some tribes have worked out tax agreements that they’re happy with — sometimes after legal pressure.

“I grew up being told that we had a lot of issues with the state, but there’s not a whole lot you could do about it because we had no way to fight back,” said Bo Mazzetti, chair of the Rincon Band of Luiseño Indians in San Diego, California. Then the tribe was able to open a casino, providing revenue to hire attorneys. 

Under the current agreement with the state, the Rincon Band keeps all sales taxes paid by both tribal and non-tribal members, charging the same tax rate as the state and county.

“We’re not a political subdivision of the state,” Mazzetti said. “Anything generated in the reservation should stay on the reservation in terms of taxation.”

California still gets something out of it. The tribe pays the employer share of payroll taxes for employees working in its gaming operations, hotel and other ventures. The band’s revenue also helps fund services that non-tribal residents on and off the reservation benefit from, including a fire department that helps respond to wildfires in the region. 

The tribe’s gaming operations provide jobs to tribal citizens and non-citizens alike, Mazzetti said, all of whom spend money outside the reservation, generating tax revenue for the county and state.

Indeed, studies from other states, including Oklahoma and Washington, show that tribal ventures help tribal and non-tribal economies around them.

“We’re not talking about the state losing out on the economic benefit of these dollars,” Porter said. “No tribe has a truly self-sustaining economy. The revenues are going to get taxed by the state anyway as the dollars get spent off-reservation. The way I view it is, ‘Please, can’t the Indians just touch the money once?’”

Washington state has the best gaming compacts, according to Sammy Mabe, councilman for the Suquamish Tribe. The now largely positive relationship between Washington and the Suquamish took time and work to build.

“My biggest advice to people is be open-minded, to dialogue with the non-Native counterparts, because it’s real easy to hold grudges and let historical trauma get in the way of progress,” Mabe said. “But if you’re not working with the state that you’re in, and fighting for your sovereignty but also fighting for collaboration, then you’re always going to run against opposition.”

Litigating these tax disputes “results in ‘winners’ and ‘losers,’” Washington State Department of Revenue spokesman Mikhail Carpenter said in an email, whereas negotiated compacts can mean wins for both parties. 

“Historically compacts are proven tools in settling disputes between the Tribes and the state on complicated issues,” Carpenter said. “Tribal Nations are recognized as separate sovereigns from states, and their rights and actions must be respected and balanced with the state’s own rights and actions.”

After a 2016 report from Harvard University and the University of Arizona found that the system of state taxation on reservations was “deeply flawed,” the Interior Department began gathering feedback on whether to change the federal law on trade with tribes. That effort appears to have stalled. 

“A clear statement by the Secretary of the Interior is necessary to preempt concurrent state taxation of Indian commerce in Indian country,” the director of the National Indian Gaming Association wrote in support of the proposal at the time. A U.S. Treasury Department advisory committee made up of tribal leaders also urged the federal government in 2020 to fix the taxation issue.

Porter now advocates in Washington, D.C., for fixes to double taxation. He thinks he needs more data to show that states will benefit fiscally from additional tribal economic activity without encroaching on tribal taxing authority.

Some tribes take the stance that Congress has the power to give them absolute tax immunity, undoing the impact of court decisions to the contrary. A simpler tweak by Congress that could help counteract state taxation: Give all tribal citizens credits for any federal income tax they pay.

“There’s not a huge amount of income taxes going from Indian Country to the federal government,” Porter said. “But for a family to save $5,000 a year is a huge amount of money that could affect what you could do for your children. Every dollar really counts, and it can’t be said enough.”

Thousands of tax protests

The biggest unresolved tax fight between a state and tribes is playing out in Oklahoma. The U.S. Supreme Court ruled in 2020 that the state must recognize several tribes in eastern Oklahoma and their reservation territory, which the state said were disestablished at its conception.

McGirt v. Oklahoma had to do with criminal jurisdiction, but the repercussions spilled into taxation for the Cherokee, Chickasaw, Choctaw, Muscogee and Seminole nations, whose reservations were reaffirmed by the ruling. The state has been collecting income taxes from tribal citizens who earned income on tribal lands involved in the McGirt case.

A 2020 report from the office of the executive director for the Oklahoma Tax Commission estimated that if these regions are considered Indian Country for taxing purposes, it could reduce state income tax collections by nearly $73 million per year and state sales and use tax collections by about $132 million annually.

Since the ruling, the state has faced thousands of administrative tax appeals and requests for exemptions, only some of which have moved to more formal hearings, the Oklahoman reported.

But in October, the Oklahoma Tax Commission ruled that it can keep collecting these taxes from citizens of the tribes in eastern Oklahoma despite McGirt. Commissioners said that the McGirt ruling did not expand to tax jurisdiction and noted that the 2020 report was published by a former executive director without their review or approval. 

“This results in millions of dollars of overpayment by tribal citizens who are unlawfully subjected to Oklahoma income taxes,” Stacy Leeds of the Cherokee Nation, who teaches federal Indian law at Arizona State University, wrote in her own protest to the state over her income taxes. “This over-taxation occurs, in large part, because Oklahoma knowingly misrepresents the law.”

The state tax commission and governor’s office did not answer questions about the impact of McGirt on taxes or Rutherford’s unrelated battle over sales taxes with the state, which is still ongoing.

In 1906, the U.S. government divided the Osage Reservation into 2,229 parcels of land, one for each Osage citizen. Rutherford is building her home on her family’s original allotment. 

The land is in restricted status, the federal government holding it in trust to protect it for Rutherford. But she still has to prove that she can build on the land without the state intruding.

She submitted documents to the state to apply for an exemption for sales and use tax that would cover supplies for her new home. Now she is waiting to see whether she’ll be reimbursed for the taxes she already paid the state and exempted from taxes on future materials she’ll need as she moves forward with construction.

Since she is a restricted Osage landowner, she said, all the purchases she made for that new home should be free from state taxes.

“There are laws to back that up,” Rutherford said. “The state does have the right to tax in certain situations, but not this one. But as you know, Oklahoma doesn’t give that up very easily.”

Maya Srikrishnan is an investigative reporter with the Center for Public Integrity. Shannon Shaw Duty, Osage, is the editor of the Osage News. Joaqlin Estus, Tlingit, is a national correspondent for ICT.

Clarification, Dec. 27, 2022: One sentence was changed to make clear that the Osage Nation’s tobacco compact with Oklahoma dictates how taxes are split on certain tobacco sales, not on non-tobacco purchases. 

The post Tribes need tax revenue. States keep taking it. appeared first on Center for Public Integrity.

A dense fog rolling in off the Pacific enveloped President Ronald Reagan’s majestic 688-acre ranch, high in the hills above Santa Barbara, California.

Visibility was limited, but a crowd of cameramen, photographers and reporters were gathered on that day in 1981 to record the president signing a major piece of legislation.

Wearing jeans, a faded dungaree jacket and cowboy boots, Reagan strolled out of the adobe farmhouse where he and first lady Nancy Reagan were vacationing to a table on the gravel driveway below the house. As he slid into an old leather chair, Reagan flashed his radiant smile to the journalists awaiting the ceremony.

He had much to smile about. Stacked on the table was ERTA, the 185-page Economic Recovery Tax Act of 1981, whose passage fulfilled a campaign promise to cut taxes in a big way.

Signing the bill repudiated everything he had once believed in as a New Deal supporter. ERTA slashed personal, corporate and estate taxes and was stuffed with other tax favors for high-net-worth individuals and corporations. The tax cuts carved a $750 billion hole in the federal budget, prompted cuts in multiple public programs and added to the deficit.  The cuts, spread over six years, totaled $2.4 trillion in today’s dollars — basically the cost of the Biden administration’s multi-year, scaled-down Build Back Better bill that never made it out of Congress. 

But that was just the beginning. The bill signing on that foggy day set in motion a trend in tax policy that is supercharging America’s escalating income inequality. In the past four decades, Congress after Congress has cut taxes on the richest people and corporations — billions of dollars that would otherwise have gone to the federal till for spending that could help the rest of the public get ahead. 

Along the way there were some tax increases, most recently the Inflation Reduction Act signed by President Joe Biden in August that levied a 15% minimum tax on corporations and a 1% excise tax on stock repurchases by public companies. That law was a modest but significant breakthrough for the Democrats after years of Republican-driven tax cuts. 

To some, the value of the reforms isn’t just monetary: “They will help restore the public’s confidence in the fairness of our tax system,” said Frank Clemente, executive director of Americans for Tax Fairness, a coalition that advocates for progressive taxation.

These increases notwithstanding, the trajectory over the past two generations has been in the opposite direction. 

In 1980, the top income tax rate for individuals was 70%. Today it’s 37%.  

The political forces behind that seismic shift haven’t stopped pushing for more. Already, House Republicans are proposing to extend or make permanent some of the most recent tax cuts. 

Setting the pattern

Before the income tax was enacted in 1913, average Americans paid the bulk of federal taxes through levies on imported goods. Democrats succeeded in passing the income tax as a way to compel the wealthy to pay more of the cost of running the national government. 

Until World War II, the income tax was levied on only the richest Americans. Even after that, the system was designed so people with more money paid higher rates — much higher for the wealthiest.

Elected officials, largely Republicans with some assists from Democrats, have spent the past four decades pulling that system apart. 

They’ve tucked large breaks for the rich into proposals with small cuts for millions of other Americans, effectively disguising the main beneficiaries. They’ve promoted tax cuts with claims about economic benefits that have not panned out.

“It’s vastly oversold that tax cuts will generate job and economic growth,” said William Gale, co-director of the Urban-Brookings Tax Policy Center. “When you cut taxes for the upper income, you give them more after-tax income, but you don’t do anything for growth.”

The nonpartisan Congressional Research Service reached essentially the same conclusion in 2012 that tax cuts don’t spur growth but do increase income inequality. After Senate Republicans heatedly objected to the report, CRS withdrew it.

ERTA charted the course in 1981. It cut the top tax rate from 70% to 50% on so-called unearned income — dividends from stocks and interest on bonds and savings. While modest tax breaks sprinkled throughout the bill affected millions of taxpayers, the top rate cut had just one constituency. Only the richest 2% of taxpayers were subject to taxes up to the 70% rate. 

Lowering that rate had long been a Republican goal, but the party’s lawmakers had been reluctant to propose it in ERTA for fear that voters would see them as favoring the rich. Instead, it was the Democrats who proposed it. It was a trade, a way to get Republican support for other provisions in the bill.

ERTA gave the wealthiest Americans who received dividend and interest payments a hefty yearly tax cut of $6.7 billion, the equivalent of $21 billion today. Out of 95 million taxpayers who filed that year, this bounty went to just 82,000: the richest sliver of the top 1%.

People in this group who received $250,000 in dividends owed $175,000 in taxes on them for the 1981 tax year. ERTA gave them a tax cut of $50,000 the next year — more than twice what the majority of American families lived on at the time. It was a gift that kept giving, year after year.  

To fully understand the amount of money involved, think of it this way: 

If the 70% rate were still on the books, taxpayers with more than $1 million in income in 2019 could have owed $87.9 billion more in taxes that year, according to a Center for Public Integrity analysis of IRS data. That’s more than enough money to rebuild and repair all the bridges and water systems across the country slated for work under the Infrastructure Investment and Jobs Act passed by Congress in 2021.

Cutting taxes for the rich over the past 40-plus years has had a huge impact, leaving less money for public programs that benefit millions of Americans while enriching a tiny percentage of the population. Where once the code strove for a certain balance — the more you earned, the more you paid — the rates have been reduced so much that there’s not nearly as much difference now between the top tax rate a billionaire investor pays on their income and what a middle-class salaried professional pays on theirs.

Income inequality in America is at heights not seen for a century. A variety of factors have contributed, including the erosion of good-paying manufacturing jobs, deregulation, a weakened trade union movement and the elimination of pensions and other rungs in the safety net. But taxes have been a principal engine of worsening economic inequality simply because the wealthy, thanks to their success in Congress, now have more money — to buy stocks, invest in real estate, build megayachts, blast off into space and make campaign contributions to politicians so the cycle isn’t interrupted. 

It wasn’t always this way.

For decades leading up to 1980, all incomes from top to bottom rose at nearly the same pace. But that changed dramatically afterward. While median family income was largely stagnant, top incomes soared. 

In 1980, the top 4% of taxpayers earned as much as the bottom 39%. By 2019, the top 4% earned as much as the bottom 57%, according to a Public Integrity analysis of the most recent IRS data. 

As more money flowed upward, the gap in accumulated wealth widened. In 2019, the top 10% of Americans had three times the wealth of everyone else in the country combined.  

The pandemic greatly exacerbated the trend. The stock market has been volatile this year, but a June study by Americans for Tax Fairness and the Institute for Policy Studies concluded that 745 U.S. billionaires had grown $2.1 trillion richer since the start of COVID-19.  

The tax reform game

Five years after ERTA, tax cutters triumphed again. 

Two Democrats, Sen. Bill Bradley of New Jersey and Rep. Richard Gephardt of Missouri, cosponsored bills to wipe out abusive tax shelters in exchange for lowered tax rates.

Reagan embraced the plan as a way to further gut progressive taxation. As it worked its way through Congress, the Tax Reform Act of 1986 was widely hailed by Democrats and Republicans.

On the plus side, the law for the first time taxed long-term capital gains at the same rate as wages and salaries in addition to restricting tax shelters. 

“[The bill] will close the loopholes and curb the tax shelters that giant corporations and wealthy individuals have used for decades to escape their responsibilities and avoid paying taxes,” Rep. Robert A. Borski, a Pennsylvania Democrat, told his House colleagues on Sept. 25, 1986.

But overlooked in the euphoria was the price paid in other parts of the legislation. It lowered the top rate on wages, salaries and all other personal income from 50% to 28%, the largest single drop in the history of the federal income tax. 

Proponents contended that was justified because few wealthy people were paying the top rate, thanks to tax shelters. 

However, the data shows that not every wealthy taxpayer was loaded with tax shelters, and the 1986 act gave them a big break.

In 1985, all taxpayers reporting income of $1 million and up had an average income tax of $910,931, according to IRS data. In 1988, the first year showing the full impact of the law, that same group paid $226,000 less on average.

For Reagan, the low rates were the heart and soul of the bill. 

“Our Founding Fathers … never imagined what we’ve come to know as the progressive income tax,” Reagan said while signing the bill on Oct. 22, 1986. He said it “struck at the heart of the economic life of the individual, punishing that special effort and extra hard work that has always been the driving force of our economy. … I feel like we just played the World Series of tax reform — and the American people won.”

Some won much more than others.

IRS data shows that taxpayers with upwards of $40,000 in income received on average a modest tax cut of $603 a year. Upper-income Americans earning $500,000 to $1 million took home an average of $73,617. And those at the top received far more.

To those who knew how the benefits of tax reform had been oversold to average Americans, this came as no surprise. Daniel Halperin, a former assistant treasury secretary, told a congressional committee as the bill was being considered: “Over 40% of American families will either have a tax increase or no change.” People with the highest incomes, he said, would be “the biggest winners.”  

Republicans claimed that the 1980s tax cuts would stimulate so much economic activity that tax receipts and budgets wouldn’t suffer. But by the end of the eight-year Reagan presidency, revenues were an unprecedented $1.3 trillion short of federal spending. That was more than three times the deficits for the eight years before Reagan — combined. 

In 1980, while running for the Republican presidential nomination against Reagan, George H.W. Bush called his competitor’s claim that the country could cut taxes but not add to the national debt “voodoo economics.”

In 1991, Bush, by then president, went along with a Democratic plan to raise the top tax rate for the richest Americans from 28% to 31% to stem the red ink. Though top rates remained far below what they were when Reagan took office, any tax increase was anathema to large swaths of the Republican party. Bush paid the price when he lost the 1992 election to Bill Clinton.

A tax tug-of-war

After that, every Democratic president tried to increase taxes on the wealthy and every Republican president did the reverse.

In 1993, with his party controlling the House and Senate, Clinton proposed raising taxes to deal with deficits and offset Reagan-era tax cuts, settling on a package that raised the top rate from 31% to 39.6%. 

“After 12 years of trickle-down economics where taxes were lowered on the wealthiest Americans … we now have real fairness in the Tax Code,” Clinton said as he signed the bill in August 1993. 

Republican lawmakers and conservative pundits condemned the increase and warned that it would hurt the economy. “It will kill jobs, kill businesses and yes, kill even the higher tax revenues that these suicidal tax increasers hope to gain,” said Rep. Christopher Cox, a California Republican. 

Rather than tanking, the economy took off. The seven years that followed represented what was then the longest sustained period of economic growth in the nation’s history. Tax revenues soared, prompting three straight years of budget surpluses under Clinton — the only time that’s happened in the past half century.

The Clinton-era top rate and surpluses didn’t last long. The federal government began running deficits again after President George W. Bush put through two tax cuts in 2001 and 2003.

While those tax bills contained modest cuts for most Americans, the benefits once again flowed largely to the rich: The top 1% of households received an average tax break of $570,000 for the eight-year period that followed the second bill, according to the Center on Budget and Policy Priorities.

It wasn’t just a result of lowering the top rate to 35%. 

For decades, dividends paid to shareholders — predominantly wealthier people — were taxed like salaries and wages. But the 2003 law created a new category called “qualified dividends.” What constituted such a dividend was complicated, largely how long the stock was held, but its main benefit was that it would be taxed at 15% rather than 35% for upper-income people. 

An auto worker in Detroit who received $5,000 in qualified dividends might have saved $500 under the new law. An auto executive who received $100,000 in such dividends would have saved $20,000.  

This tax break, narrowed since then but only modestly, has cost the U.S. Treasury an estimated $350 billion since 2004. Upper-income taxpayers have benefited the most. In 2019 alone, it was worth $16.2 billion to taxpayers earning $1 million or more. 

To put that $16.2 billion in perspective: It’s the equivalent of the federal income taxes paid by everyone earning $50,000 or less in California, Idaho, Iowa, Kansas, Minnesota, Nebraska, New Hampshire, Oklahoma, Pennsylvania, South Dakota, West Virginia and Wisconsin — combined. 

President Barack Obama later signed legislation that made the tax break permanent, but he also steered tax increases through Congress, pushing the top rate back to where it had been under Clinton as well as imposing a surtax on investment income and hiking Medicare taxes for high earners to help pay for the Affordable Care Act.

All this led to what would be the signature legislative triumph of the Trump presidency, the Tax Cuts and Jobs Act of 2017. The sheer magnitude of the tax cuts it gave to the wealthy and corporations made the law the most significant since the Reagan era.

The arguments for it sounded very familiar.

“I not only don’t think it will increase the deficit, I think it will be beyond revenue neutral,” Senate Majority Leader Mitch McConnell declared after the bill’s passage. “In other words, I think it will produce more than enough to fill that gap.”

Instead, with its generous tax cuts for individuals and companies, it gushed red ink. The Congressional Budget Office estimated in 2018 that it would add $1.9 trillion to the deficit over the next 10 years.

In 2019 alone, the tax cuts cost the U.S. Treasury $259 billion. Virtually half that money flowed to those earning $200,000 or more, according to data from the Joint Committee on Taxation.  

Workers earning between $50,000 and $75,000 that year got a tax cut of $840 on average. Those earning $1 million or more? Over $64,000.

Corporate clout

As Congress cut the taxes of wealthy Americans after 1980, it also slashed taxes on corporations. Their rate plummeted from 35% to the present 21% — the lowest in 80 years.  

With the help of corporate lobbyists, companies have found ways to cut their share of taxes even more by exploiting rules deep in the dense thicket of the Internal Revenue Code.

Many corporate tax provisions are so complex as to be indecipherable to the average person, and even to most lawmakers. A change in one percentage point here, an addition of a word there, the insertion of a date — any one of those can be worth millions of dollars to a corporation by giving it permission to do something previously prohibited. 

The section on taxing the foreign income of U.S. companies is full of gifts negotiated by lobbyists. Here, thanks to Congress, multinational corporations enjoy a special status: They can offset their U.S. income with credits and other write-offs generated by their foreign operations. One economist estimated that the U.S. Treasury in one year alone — 2008 — lost upwards of $90 billion in revenue as a result. 

The top corporate tax rate was once 35% on income earned anywhere in the world. But U.S. corporations such as Procter & Gamble, Pfizer and Hewlett-Packard had long avoided paying that rate on overseas income by stashing profits in offshore tax havens.

As billions and billions of corporate profits piled up offshore and began to approach $1 trillion, the companies fretted. A group that included Microsoft, Intel, Apple and Coca-Cola formed a lobby called the Homeland Investment Coalition to pressure Congress to change the law so they could bring that money back to the U.S. — at a lower tax rate than domestic corporations pay. 

For example, while a local construction company in Des Moines might pay 35% on profits from building a high school in Iowa, the coalition proposed in 2003 that multinationals with foreign earnings would pay only 5.25% in U.S. taxes on profits earned from selling products or services outside the country.

Lawmakers were happy to help.

“We want job creation,” Sen. Gordon Smith, a Republican from Oregon, said when the American Jobs Creation Act of 2004 was being considered with a provision he helped insert to make the tax holiday happen. “We want this to get to the shop floor, not to the corporate boardroom. … We want it to go to those things that will improve the productive capacity of American industry and the rehiring of American workers. We don’t want it to be part of some financial flimflam.” 

But flimflam it was. After the bargain-basement tax break became law, companies did bring money back to the U.S. Nearly half the repatriated $312 billion came from just 15 companies, including Hewlett-Packard, Pfizer and Merck. The U.S. Treasury later estimated that the tax break benefited only 4% of American corporations.

How many jobs were created by the American Jobs Creation Act of 2004? 

None.

That’s according to a 2011 report by a subcommittee of the U.S. Senate Homeland Security committee. In fact, it found the 15 largest repatriating corporations cut jobs and reduced their overall U.S. workforce by 20,931 people. 

The top companies increased stock buybacks, rewarding shareholders and boosting their executives’ pay — despite provisions of the 2004 law prohibiting use of the repatriated cash for those purposes.

It’s another way that tax changes are worsening both income inequality and the racial wealth gap, because stock buybacks disproportionately benefit high-income white Americans.

The 2004 repatriation “not only failed to achieve its goal of increasing jobs and domestic investment in research and development,” concluded the subcommittee’s report, “it did little more than enrich corporate shareholders and executives while providing an estimated $3.3 billion tax windfall for some of the largest multinational corporations.”

Congress responded by doing it all over again in 2017, giving the same group of companies a variation on the tax break it had awarded them in 2004.

The Tax Cuts and Jobs Act of 2017 lowered the tax rate on most repatriated funds to 15% — not as bargain basement as in 2004, but still a dramatic cut — and gave multinational corporations a much longer holiday to bring the money home: eight years.

Promising that the tax break would “turn America into a job magnet,” President Donald Trump claimed that no less than $4 trillion would come back to the States. “This is money that would never, ever be seen again by the workers and the people of our country,” he said. 

The money is coming back — but not to American workers or communities thirsty for corporate investment. Instead, just as in 2004, it is flowing to shareholders and executives. A report by the Federal Reserve found in 2019 that share buybacks for the 15 largest corporations holding offshore cash “rose sharply” after the law passed.  

Money helps explain why this sort of thing keeps happening.

Every year corporations spend more than 85% of the total reported expenses associated with lobbying Congress. By contrast, labor unions, which represent interests of working people, account for less than 2%. 

And though corporate donors lean Republican as a rule, they give generously to both parties. Over the past six election cycles, business-related donors contributed roughly $7 billion to Democrats and Republicans apiece, according to OpenSecrets, a nonpartisan body that tracks contributions. 

Ellen Miller, who long oversaw Washington-based nonprofits that tracked the influence of money in politics, thinks that’s why Republican zeal to cut taxes was long met by less-than-energetic opposition.

“The campaign finance system we have that is inundated by corporate donors has kept Democrats asleep on this issue,” she said in an interview. 

The so-called carried interest loophole is a perfect example of how companies use the influence they’ve bought.

Democrats and some Republicans have railed for years against the provision, which lets private-equity and hedge fund executives pay taxes on their pay at nearly half the going rate. Even Trump called for its end. The Inflation Reduction Act negotiated this year by Sens. Chuck Schumer and Joe Manchin would have narrowed the loophole, but even that was too much for the private-equity industry. 

Company lobbyists turned to Sen. Kyrsten Sinema of Arizona, a Democrat to whom investment firms have contributed $2.7 million in the past five years.

She killed the provision. The carried interest loophole lives on.

The ‘angel of death’ loophole

Washington’s restructuring of another tax — one that affects only a handful of Americans — may best show how elected officials have shaped the tax system for the few.

In place since 1916, the estate tax has been defended by Democrats and some Republicans for many years to prevent what President Franklin D. Roosevelt once described as the “transmission from generation to generation of vast fortunes by will, inheritance, or gift.” Andrew Carnegie, one of the richest Americans and an income tax foe, had this to say about the estate tax: “Of all forms of taxation, this seems the wisest.”

But laws enacted by Republican-controlled Congresses slashed the number of taxpayers paying it from 27,568 in 1982 to 2,584 in 2021. 

Collections, adjusted for inflation, were virtually unchanged over that period — even though household wealth among the rich exploded during that time. 

That dramatic reduction in estate tax filings is the result of highly successful campaigns over the years by Republicans labeling it the “death tax” and advancing specious arguments about alleged injustices. One of the most popular was the claim that it forces the sale of family farms. 

“They have wonderful farms, but they can’t pay the tax, so they have to sell,” Trump said in 2017. 

But according to the Urban-Brookings Tax Policy Center, several analyses have not turned up “a single farm that went out of business due to estate tax liability.”  

Because of favorable laws and clever tax planning, the number of estate tax returns continues to plummet. “Only morons pay the estate tax,” Trump White House advisor Gary Cohn is said to have told congressional Democrats in 2017 when they were calling for a rate increase.

Even before cuts in the estate tax, the wealthy long ago figured out how to pass along the family fortune tax free: It’s called the “angel of death” loophole, the vehicle by which great wealth is passed from one generation to the next and allowed to compound tax free into even greater value. It is the foundation on which the wealth of some of America’s richest families is built.

It works like this.  

Say you bought 1,000 shares of Widget Company stock at $50 a share in 1980. By 2022, the stock is worth 10 times as much. If you sell those shares, you’ll owe capital-gains taxes of $100,000. But if you die and leave those shares to your favorite niece, no tax is owed and your niece has escaped a $100,000 tax bill.  

Estimates put the amount of lost tax revenue from this loophole as high as $54 billion a year. 

Closing it is on Biden’s agenda, as it was on Obama’s, as it has been on tax reform agendas for decades. But still it exists, having avoided any serious challenge in recent years. 

Contrast that plum preserved by Congress for the rich with what Congress took away from the middle class in the so-called SECURE Act in 2019 (Setting Every Community Up for Retirement Enhancement).

Prior to the law, someone who inherited an IRA could withdraw payments from that retirement account over their entire life, thus stretching out taxes owed over many years, possibly decades. But SECURE mandated that withdrawals from an inherited IRA be taken within 10 years. Now a much larger portion of inherited IRAs will go to taxes because many beneficiaries will have to withdraw the money while in a higher tax bracket, before their own retirement.

That means a middle-class worker who inherits a $1 million IRA might pay $240,000 to $320,000 in taxes. A scion of a wealthy family who inherits $100 million in stock, meanwhile, pays no capital-gains taxes at the time and can cash it out whenever desired.

The bottom line

Over the past four decades, the federal tax system has been transformed into something akin to a private-equity fund for wealthy taxpayers, giving them remarkable returns from multiple sources. As Congress showered them with benefits, most Americans struggled to keep up with the cost of living. 

Median household income in 1981 was the equivalent of $62,000 in today’s dollars. Since then, the earnings of the majority of American families have been mostly stagnant, just barely keeping up with inflation. Think of it as standing still financially for 40 years.

Social Security and Medicare taxes add to the brutal squeeze. They take 7.6% of wages from workers who earn $60,000. It’s only a 2% bite for someone earning $1 million because Social Security taxes are capped for high earners. 

The flow of money to those at the top is at the heart of the growing concentration of wealth. The more money you make, the more opportunities to save and allow your excess income to compound.

No group of working Americans has paid a steeper price for income inequality in the tax-cutting past four decades than African Americans. Their median household income of $45,870 is nearly 40% lower than that of white households. Over the decades, “next to no progress has been made in closing the black-white income gap,” concluded a report for the Federal Reserve Bank of Minneapolis in 2018. “The typical black household remains poorer than 80 percent of white households.”   

Because Black families have fewer opportunities to set aside money and accumulate assets, the wealth gap between white and Black families is even worse. White families on average have six times more wealth than Black families: $983,400 for whites; $142,500 for Blacks, according to Federal Reserve data. Half of African American families have assets of less than $25,000. 

And those numbers were compiled before COVID-19, a bigger financial hit to African Americans than any other racial or ethnic group, according to the Census Bureau.

For most of the period when the country had a more progressive tax system, racial discrimination was legal. By rule and practice, the U.S. government largely blocked Black families from accessing federal programs that helped white families build generational wealth.

In the past four decades, meanwhile, wealth-building opportunities for people with modest resources have been in short supply. Sixty percent of the country — the people on the less-income side of the scale — have a lower share of total assets in the U.S. now than in the late 1980s, according to the Federal Reserve.

It would take big change to turn that around. The tax provisions in the Inflation Reduction Act are only a modest step in that direction.

Biden’s original tax proposals were much more ambitious than what wound up in that law. He called for raising top tax rates on individuals back to the Clinton-era 39.6% and on corporations from 21% to 28%, taxing capital gains like wages, eliminating the “angel of death” loophole that allows the wealthy to pass their stock holdings to heirs tax-free, and many other provisions to shift more of the tax load to those at the top. 

Public opinion polls show significant support for most of his tax proposals. But there’s virtually no hope for their adoption by the politically split incoming Congress.

Yet some believe that these proposals show a shift in thinking about taxes that could pave the way for more in the future. 

“Biden’s investment and tax plans were more impressive than in any other previous election campaign, and he followed through with those proposals in his budget,” said Clemente, the Americans for Tax Fairness executive director.

To Chuck Collins, a senior scholar at the Institute for Policy Studies who has been tracking income inequality for years, it is more urgent than ever that the U.S. do something about the growing chasm between those at the top and everyone else — something besides making it worse.

“Our current policies are propelling us toward a society that even the rich don’t want,” he said, “with the ultra-wealthy living in walled, gated communities driving bulletproof Mercedes, a precarious middle class with a larger percentage of people with no financial reserves.

“You don’t want your children growing up in an apartheid society. It creates volatility and social and political instability. Which is what we are wading into now.”

Journalist James B. Steele has twice won the Pulitzer Prize for coverage of federal taxes and is the co-author most recently of America: What Went Wrong? The Crisis Deepens.

Clarification, Dec. 12, 2022: We added a note to a graphic showing business income taxes as a share of the total to clarify how the IRS defines those taxes.

The post How four decades of tax cuts fueled inequality appeared first on Center for Public Integrity.

ABERDEEN, Wash. — The further I drove from Seattle toward the coast, the denser the grove of evergreen trees on a drizzly July morning. Off of the Olympia Highway,  a green welcome-to-Aberdeen sign bore the song lyrics “Come as you are” — an ode to grunge band Nirvana, which formed in the old lumber town in 1987. 

I was there to visit the team at Firelands Workers Action, an organization that advocates for good-paying jobs in Washington’s timber country. 

While reporting on state taxation, I was reminded that Washington — a place I’d called home for over five years until last fall — had policies that place a heavy tax burden on poor people. Stina Janssen, Firelands’ executive director, suggested I visit Aberdeen to see what state disinvestment looks like. So I tacked the visit onto a pre-planned trip for a best friend’s wedding.

Most states make poor residents pay a greater share of their income in taxes than wealthier people do. Across the country, the share of state and local taxes paid by the lowest-income households is 54% more than what the wealthiest households contribute, according to the Institute on Taxation and Economic Policy. 

When you’re living paycheck to paycheck, every dollar counts. A higher sales tax applied to diapers or a single increase in your property tax bill can pose tough decisions. And the burden of these taxes has been even more acute recently with high levels of inflation that have driven up the cost of essential goods. 

This is particularly true in Grays Harbor County, where the poverty rate is over 50% higher than the state average. David Henson, a longtime resident and Firelands volunteer, said the sales tax on cat food has made the item one of his greatest monthly expenses. He pointed to that and rising property taxes as the reason he’s unable to replace his 20-year-old car that needs new tires and belts. 

In Aberdeen I saw houses with peeling paint that were damaged by annual flooding. Potholes littered the roads throughout a mobile home park where homes suffered mold growth.  

“Everything is connected,” said Edith Baltazar, a Firelands organizer, from the back of the car during a tour of downtown that afternoon. Without health insurance or the funds for healthy homes, she said, people get sick and then their mental health declines. She thinks that this accounts for the area’s high suicide rates. 

With the loss of so many jobs, especially unionized ones with good pay in the area, Janssen said young people in the county don’t see a future there. “The feeling that our best hope is young people leaving is what makes a community die,” she told me. 

Tax structures that negatively impact low-income earners and people of color today are shaped by state laws that were rooted in racism and classism, researchers told me and other reporters working on this project. And because they’re often codified in the state constitutions, the systems are very difficult to change. 

“If the wealthy people … pay what they owe, there should be enough resources for everybody in the whole state,” Baltazar said back at the Firelands office. The walls were lined with posters with the message “Rebuild Timber Country” against an orange background. 

On the ride back from Aberdeen I blared Nirvana as I imagined lead vocalist Kurt Cobain driving the same route to Seattle early in his career. Cobain’s moody crooning mirrored the endlessly gray sky. I thought about Cobain’s depression that likely started in Aberdeen and how Baltazar noted the lack of mental health resources there. 

State tax policy could help address inequality. But in most states, it just makes things worse.

Our state taxation project launched today with a story that takes a nationwide look at this trend, with a significant focus on Washington state and elements that range from a quiz to an animated explainer.

We’re still reporting on this, and we’d appreciate your tips. Let us know what to look at:

Public Integrity reporter Maya Srikrishnan contributed to this piece.

The post What Nirvana’s birthplace taught me about inequality appeared first on Center for Public Integrity.

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ABERDEEN, Wash. — As she opened her $1,600 property tax bill in February, Edith Baltazar suddenly lost her appetite for the eggs she’d prepared for lunch with her daughter. Her thoughts raced: Would their home be taken away if she couldn’t pay it? 

Baltazar’s daughter wept. The family would have to make a difficult decision: the property tax or $2,000 for diabetes medication. 

The taxes won. 

“Sometimes you have to choose — pay your property taxes instead of paying your water bill and everything else,” said Baltazar, recalling the stressful experience in a July interview.

The lowest-earning residents in Washington state, where Baltazar lives, pay almost 18% of their annual incomes in state and local taxes, while the wealthiest chip in 3%. 

All but a handful of states make poor residents contribute a greater share of their income to taxes than wealthy people do. Economists call that upside-down approach “regressive.” Nationwide, the share the lowest-income earners pay to state and local taxes is 54% higher than what the top earners pay, according to the Institute on Taxation and Economic Policy. 

And those policies hit communities of color the hardest. 

Undocumented immigrants contribute billions of dollars in state and local taxes, according to estimates by ITEP and other groups, but aren’t eligible for many tax-funded services or tax rebates. Studies show assessors tend to inflate property tax assessments of low-priced properties, disproportionately owned by Black and Latino people. The higher tax bills increase the odds of what Baltazar feared — losing your home.

All this means state and local tax systems that could help address America’s widening economic inequality are instead making the problem worse.

The federal system also increases inequality, with legal loopholes giving very high-net-worth people massive tax breaks. But the Internal Revenue Service doesn’t force low-income residents to shoulder the biggest relative burden. Most states do.

“We’re asking people to fund government programs even when they can’t afford basic needs, like food and shelter,” Ariel Jurow Kleiman, an associate professor at Loyola Law School in Los Angeles who focuses on tax law and policy, said via email. “That strikes me as profoundly unfair.”

A key reason: sales and other consumption taxes. Unlike the federal government, almost all states collect them. Spend $50 on clothes for your kid, and you’ll pay the same sales tax as anyone else in your area, regardless of income. The poorer you are, the greater the share of your resources the sales tax gobbles up.

income tax is the main tool states have to counteract that. But some choose to tax everyone at the same rate, rather than following the federal model of increasing up the income scale. 

And some states, like Washington, don’t tax income at all. These places lean especially heavily on sales tax and other revenue options that make lower-income people contribute more.

How a state chooses to collect money impacts not only who pays more but also how much revenue it generates to fund public services. Poor people handing over a higher percentage of their income in taxes and fees to fund state and local services often end up with less in return. That’s often the case with school funding. 

In a 2018 study, ITEP found that tax structures vary widely even in states with similar costs of living and demographic makeup. The organization ranked Washington state as having the most regressive tax system in the nation, for instance, while judging neighboring Oregon’s system as one of the most equitable.

With no state income tax, Washington’s average state and local sales taxes of more than 9% are among the nation’s highest. This is what Baltazar faces every day. When the time came to pay the first installment of her property taxes, there was no flexibility left in the family’s budget. 

Baltazar, her husband Rafael and adult daughter Kary had all lost their full-time jobs and couldn’t get unemployment benefits. Her husband, who found occasional work on a farm, went without insulin for three months so they could pay the property tax. They relied on home remedies such as hibiscus tea as well as a small supply of the diabetes pill metformin to manage his Type 2 diabetes instead. He developed a painful stomach ulcer that caused him to stop working altogether. 

There’s no mystery about how states can make their tax systems more equitable, policy analysts say.

“A progressive income tax with multiple rates that go up the higher the income is very boring and it’s not new, but it’s really the only way,” said Richard Auxier, a senior policy associate with the Urban-Brookings Tax Policy Center. 

But making that change won’t be easy. Some states have gone to extra lengths to ensure efforts to tax poor people less and rich people more end in failure.

Some of the most regressive state tax policies today originated during the Reconstruction era that followed the Civil War, when Southern state governments had to start building schools and providing other government-funded services to formerly enslaved people. 

Tax rates nearly doubled in the South between 1860 and 1870. According to a 2019 National Bureau of Economic Research paper, white Southerners violently resisted changes to the tax code that could redistribute wealth built from slavery, organizing to intimidate Black politicians. Larger tax revenues in areas “were strongly correlated with an increased likelihood of a violent attack against black policymakers,” economics scholar Trevon D. Logan found.

Ultimately this led to the adoption of tax policies that favored whites. In 1890, Mississippi adopted a new constitution with a provision to require three-fifths majority votes to pass most tax increases, guaranteeing that white legislators could block such changes even if they were in the minority. In 1901, Alabama adopted a new constitution with caps on property taxes, which limited the amount of money white homeowners would have to contribute to fund Black public schools. 

One of the Mississippi delegates, Marye Dabney, wrote a few years later that the major goal of the 1890 constitution was to “effectually remove from the sphere of politics in the State the ignorant and unpatriotic negro.”

State tax code can’t be divorced from the “racist, sexist, classist” laws and practices that prevent large groups of people from building wealth, said Andy Nicholas, senior fellow at the Washington State Budget & Policy Center. 

When Washington state was still a territory in 1864, the government levied a tax on Chinese adults to deter migrant workers from settling in the area. That was repealed five years later.

In the early 1930s, a coalition of urban workers and rural farmers in the state helped pass a ballot initiative to reduce property taxes and create a personal income tax with rates increasing up the income scale. The Washington Supreme Court threw it out in 1933, saying it violated the state’s constitution. 

“It definitely took away a tool that could have been there, and it forced lawmakers to rely on consumption taxes,” said Nicholas. The state’s tax system hasn’t changed much since. 

At the other end of the continuum is Oregon, which has an income tax with rates that rise as earnings do and is one of five states without a sales tax.  

Whenever he gives talks on tax policy, Juan Carlos Ordóñez at the Oregon Center for Public Policy points to his neighboring state as an example of what not to do. 

The “situation in Washington is diametrically opposed and much worse for low-income folks,” he said. 

Still, Ordóñez said, Oregon’s tax structure is considered only “mildly progressive.” 

Oregon has a tax rebate known as “the kicker,” approved by voters in 1980 to kick money back to taxpayers when revenue tops projections by at least 2%. This year, the richest 1% of residents received a $17,000 rebate. The lowest-earning 20% of Oregonians averaged $30. 

An anti-tax movement prompted overhauls of the state’s system in the 1990s, capping property taxes and making it harder to pass bills for raising revenue. 

The state’s wave of tax provisions that largely benefit people with more means — disproportionately white — were part of a nationwide trend that gained steam beginning in the 1970s. 

“After the victories of the civil rights movement, there’s this backlash to the public sector that’s motivated, certainly in part, by racism,” Ordóñez said. “We’re sort of stuck with suffering the consequences of those decisions and the misguided policy that sees public investments in a very detrimental way.” 

Ballot measures and legislative action aren’t the only explanations for regressive systems. Courts play a role, too. 

In Pennsylvania, judges have consistently interpreted the 1870s uniformity clause in the state’s constitution, that “all taxes shall be uniform, upon the same class of subjects,” in a narrow way that saves wealthier people money at low-income taxpayers’ expense. 

The clause was a reaction to legislative favoritism of railroads and big businesses in the 19th century. But it ultimately stopped the state from creating a graduated income tax like the federal government. Instead, Pennsylvania has a flat rate, said Frances Beckley, an educator at Temple University law school’s Center for Tax Law and Public Policy. It also taxes commercial real estate at the same level as residential.

Forty-eight states have uniformity clauses in their constitutions regarding state and local taxes, according to The Pew Charitable Trusts. Few are bound by court decisions like Pennsylvania’s. 

“Those legal interpretations which do not flow necessarily from the language of the constitution, but are now very well established in Pennsylvania law, put real limits on doing anything progressive in terms of taxes,” Beckley said.

The federal government used to rely on customs duties, a cousin of sales tax. The Sixteenth Amendment in 1913 added income taxes, at first only on the wealthiest people. When the country needed more money to fund war efforts, it increased those rates on high earners. 

“Part of the reason the federal tax system got so progressive was a historical accident of the income tax coming in at the right time,” said Lawrence Zelenak, a professor at Duke University School of Law.

In 2005, then President George W. Bush tapped experts to recommend federal tax code reforms. One change they advised against: replacing the income tax with a federal sales tax. The burden, the panel concluded, would fall on lower and middle-income Americans the most. 

Total federal taxes for a lower-income single mother with one child would increase more than eightfold from $723 to $6,186 under such a system, the U.S. Department of Treasury estimated at the time. A national sales tax policy was never adopted.

But by then, nearly all states relied on sales taxes.

The first, Mississippi, adopted it amid the mass unemployment of the Great Depression. Mississippi Gov. Mike Conner, who was later described in a Time magazine article as “solidly foursquare for white supremacy,” wanted to turn around a huge budget deficit while also reducing property taxes.

The beneficiaries — property owners — were overwhelmingly white. Overall taxes increased for Black families, who were less likely to own property. 

Louisiana, which created its first sales tax several years later in 1938, today has the nation’s highest combined state and local sales tax rate at 9.55%, according to the Tax Foundation. Its poverty rate, meanwhile, is 50% higher than the national average.

The state’s heavy reliance on sales tax revenue exacerbates the wealth gap between white and Black families, according to a 2021 report by the Louisiana Budget Project that used ITEP data. Mostly because of sales tax, Black households there pay the highest share of income on taxes, while white households pay the lowest, the study found. 

“Make no mistake, Louisiana’s lower-income communities and communities of color are subsidizing lower taxes for rich households and corporations through our high sales tax rates,” said Neva Butkus, state policy analyst at ITEP.

The difficulties that high sales taxes cause low-income families aren’t just financial. A mother in Alabama was recently reported to the state’s Department of Human Resources, which includes Child Protective Services, for not sending diapers to daycare when she couldn’t afford them, said Lindsay Gray, executive director of nonprofit diaper bank Bundles of Hope in Birmingham. 

Birmingham’s combined state and local sales taxes are even higher than Louisiana’s average. People who aren’t financially strapped might think the nearly $5 of sales tax on top of $50 of diapers isn’t much, “but it really impacts a family in a huge way,” Gray said.  

“When families literally have $0, that $5 over and over again really adds up and really can be devastating,” she said. “Every single quarter and dollar counts when families live in poverty.”  

Delaware, one of the few states without sales tax, manages it by collecting an unusually high share of its revenue from fees associated with headquartering a company in the state. That’s driven by its reputation as an especially business-friendly tax haven.

It makes Delaware a rarity with mildly progressive taxes overall, but at the expense of other states’ revenue. The companies that would otherwise have paid them corporate taxes get to avoid it with a Delaware address.

The state, meanwhile, has lowered income taxes on top earners over time. Its top rate is half as high as its pre-1985 level. And it starts taxing low-income residents once they cross the $2,000 threshold, much lower than where federal taxes kick in.

State Rep. John Kowalko said his efforts to increase the rate for the wealthiest residents and lower taxes on the poorest died in committee, victims of a political ideology that favors low taxes and minimal scrutiny of corporate behavior as a means of encouraging businesses to set up shop in the state.

“They’d say, ‘You have this many businesses in your district,’” Kowalko said of those arguing against changing the state’s tax structure. “They also conveniently leave out, ‘You also have 20,000 people that pay your taxes at an unfair rate.’”

State and local governments have two main tools to make taxes more equitable, said Loyola Law School’s Jurow Kleiman: reducing the taxes low-income people pay through more progressive income tax structures and transferring money through programs and rebates, such as state versions of the federal earned income tax credit. 

“It’s all part of the higher cost of being poor,” Jurow Kleiman said of taxation that hits low-income people harder. “But in the case of taxes it’s a cost imposed consciously and intentionally by governments, which in theory means there’s something we can do about it relatively easily.”

Thirty-four states as well as Washington, D.C., and Puerto Rico have such tax credits, though most are small. Some are nonrefundable, meaning that people can’t get back more than what they owe in taxes. Jurow Kleiman said refundable credits are more equitable policies, because they can act as cash transfers to households that are too poor to owe high income taxes.

Many rebates also include carve-outs that limit eligibility, Jurow Kleiman said. Some programs are only for seniors or don’t allow childless workers to participate. 

While undocumented immigrants are ineligible to receive federal Earned Income Tax Credits, several states, including California, Colorado and Maine, have expanded their tax credit to include eligible workers regardless of immigration status. 

Washington, D.C., followed suit this year and is expanding its credit to match the federal amount by tax year 2026, something no state has done. Officials funded that — and other budget items to help lower-income residents — by changing income tax rates and brackets last year. Now top earners pay a greater portion of their income than the rest of the district instead of the other way around, the DC Fiscal Policy Institute says. 

“I will just note that [this] enhances racial equity in our tax code as well, because households at the high end of the income spectrum, folks in that top 20%, are disproportionately white,” said Erica Williams, the institute’s executive director. “Folks who are in the bottom 20 to 40% are disproportionately Black and brown folks.”

Top leaders in some states acknowledge their tax rules are regressive. Washington Gov. Jay Inslee “has reminded people of this fact while advancing policies to make our system more balanced,” spokesperson Mike Faulk said in an email. 

Beginning next February, more than 400,000 Washingtonians will be eligible to apply for a new Working Families Tax Credit worth up to $1,200. 

And last year, the state enacted a 7% tax on the exchange or sale of capital assets such as stocks and bonds on profits exceeding $250,000. The revenue will go toward funding childcare and early learning — if it survives an ongoing legal fight. 

But some states are going the other direction, approving tax changes likely to shift more of the burden onto lower-income earners.

So far this year, at least 10 states cut their personal income tax rates, largely in ways that benefit upper-income people, according to the National Conference of State Legislatures. Some of these states also lowered their corporate tax rates.

Idaho, for example, reduced the tax rate on its highest-income bracket. South Carolina did the same while promising additional cuts to the top rate should the state meet revenue targets.

Georgia, Iowa and Mississippi went a step further, replacing their graduated income tax brackets with a flat tax. 

flat income tax rates tend to exacerbate economic inequality: In Illinois, which has one, the state’s poorest residents paid more than 14% of their income in total state and local taxes while the wealthiest paid a little more than 7%.

The changes in tax policy in Georgia and Mississippi will disproportionately benefit white residents, according to an ITEP analysis, while reducing state revenue that could be going toward services like education that can reduce inequality.

In Washington’s financially stressed Aberdeen, Baltazar’s community, the effects of state decisions about how to tax and where to spend — and not spend — are visible everywhere.

About 80 miles southwest of Seattle, Aberdeen’s once booming lumber industry began to decline in the early 1980s due to environmental concerns and demand loss. Wages fell. From 2016 to 2020, median household income in the county, Grays Harbor, was $26,000 less than the state median. The poverty rate was more than 50% higher. Suicide rates are elevated, too.

On an overcast, gray day with intermittent rain in early July, four people drove around the city center, pointing out houses with weathered facades. They work or volunteer for Firelands Workers Action, a social welfare organization that advocates for workers in Washington’s timber country.

“The state of the housing makes a lot of people sick,” said the organization’s executive director, Stina Janssen, looking out from the back seat next to Baltazar. “It’s full of mold … and it’s extremely expensive to heat or cool.” 

They drove past a homeless encampment, tents pitched beside a field with boulders. Passing over the Chehalis River, Baltazar said: “A lot of people come here and take their life away on this bridge.” 

Formed in 2019, Firelands Workers Action advocates for good-paying jobs, affordable housing and access to healthcare. Leaders think a state tax system that asks more of high-income earners would provide funding for the better housing, schools and mental health resources the county so desperately needs.  

“There’s not enough spaces for community, not enough resources in the school for them to go to counseling,” said Baltazar, who moved to the area in 1993 from Mexico. 

When she lost her restaurant job due to an injury in 2019, Baltazar struggled to get another full-time position. She volunteered for Firelands as she searched.

A month after the property-tax bill arrived, her luck turned. She landed a job as a Firelands organizer, and her husband and daughter are both employed again, too. 

Still, there’s not enough money to go around. With a more equitable tax system, Baltazar said, perhaps she could afford repairs on her house and get a mammogram. Perhaps her county could get the resources to build a levee to reduce flooding. 

It’s a relief, at least, to have the means to shop for groceries again. The family relied on a food bank for the first time during their two-year rough stretch beginning in 2020. Now when she’s off work, Baltazar packs a picnic of sandwiches and fruit to watch the sunset with her husband at Lake Quinault, 45 minutes north of her house. 

“We struggled so much in the past,” she said, “and we need to enjoy life.”

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