YOUR TAXES : PART FIVE: PAYING YOUR TAXES : States unfairly tax poor, study shows

WASHINGTON — Most state and local taxes have become so unfair that families making more than $500,000 a year pay a smaller share of their income to the tax collector than those living below the poverty line, a study has concluded. In two states--Wyoming and South Dakota--the poor pay a percentage of their income that is four times as large as that paid by the rich, the study found. Fifteen states tax the poor at a rate more than double that applied to the rich. In 10 states, the burden on middle-income families is at least twice what the rich pay.

“With very few exceptions, state tax systems are shocking in their inequity,” Citizens for Tax Justice said in releasing the study. The Washington-based organization, whose research was a moving force behind the 1986 federal tax overhaul, is financed by unions and several groups that line up on the liberal side of social issues.

Citizens for Tax Justice used the study to kick off a campaign to rewrite state and local taxes in the wake of federal overhaul.

“Federal tax reform has closed many of the loopholes that have made avoidance of the federal income tax possible,” the study said. “States that follow the federal lead also will put the tax avoiders back on their tax rolls and, by doing so, create a far more level playing field for all taxpayers.”

The new federal system has a major impact on state systems because most of the 43 states that have income taxes model them after the federal tax. The new law wipes out or reduces several federal deductions, cuts rates and increases personal exemptions.

Even if the states amend their income taxes to reflect the federal changes, the wealthiest Americans will continue to pay smaller shares than will the poorest families, the study said.

If all states conformed, it said, “the share of income paid in state and local taxes by the super-rich would rise from 73% to 91% of that paid by the poor, and from 75% to 92% of that paid by middle-income families.”

Those states that do not conform to the new federal law will collect more revenues, in some cases significantly more.

“Federal tax reform provides states with a golden opportunity to close the loopholes that have made state tax avoidance possible,” Citizens for Tax Justice said. “What better way of raising needed revenue than by reclaiming the tax windfall enjoyed for so long by the rich?”

The study listed three causes for what it called the disgraceful state of state and local taxes: allowance of basically the same tax preferences--loopholes, opponents call them--permitted under the old federal law; inaction on the part of the states to periodically raise personal exemptions, which are of major benefit to lower-income groups, and increasing reliance on sales taxes, whose impact falls most heavily on the poor.

On a national average, the poorest people paid 6.9% of their earnings in state and local taxes, a figure that will rise to 7.1% under the new federal law. The middle-income families paid 6.8%, which will go up to 7.1%; the super-rich paid 5.1%, which goes up to 6.5%.

The report is based on data from the Internal Revenue Service, Census Bureau and Congress. It did not consider special taxes on fuel, tobacco and utilities, which tend to fall more heavily on those with lower incomes.

Alaska was not considered in the study because most revenues there come from oil companies, the authors said.