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Rich state, poor state

Posted on January 10, 2019

Louisiana receives $1.52 in federal benefits for every $1 of taxes paid to the federal government by state residents. Those findings are from a new study by the Rockefeller Institute of Government that looks at what each state gives and receives from Washington. As The Advocate’s Elizabeth Crisp explains, Louisiana’s high poverty rate is a driving factor:

Rockefeller researchers explained in the report that a variety of factors come into play – poorer states, like Louisiana, get more money through federally-subsidized safety net programs, including Medicaid, food stamps and Temporary Assistance for Needy Families, for example. States that have older populations tend to benefit more from programs like Social Security and Medicare, and federal wages are concentrated in states with a large government presence.

Louisiana is far from alone in getting more dollars from the federal government than it receives. Bill Lucia of Route Fifty reports that 40 states have a positive net balance, while a few wealthy states such as New York, New Jersey, Connecticut and Massachusetts subsidize the rest.   

The Rockefeller researchers explain that states with larger shares of high earners, like New York, will inevitably see greater sums of personal income taxes flow to the federal coffers. … Another factor that can affect the balances, the researchers point out, is proximity to Washington, D.C., or large federal facilities. For instance, Virginia’s beefy positive balance is partly attributable to high concentrations of federal employees and contracts. New Mexico, meanwhile, has large government research installations.

 

Fining the poor
Localities that refuse to raise enough revenue from property and sales taxes to fund adequate services often turn to fines and fees as an alternative funding source.  Unfortunately, this often results in drastic fines and sometimes imprisonment for low-income people who cannot pay. After all, 40 percent of Americans have less than $400 on hand if an emergency were to occur. Matthew Schaer of The New York TImes Magazine breaks down why these fines are becoming so commonplace and problematic:

As the Fines and Fees Justice Center, an advocacy organization based in New York, has documented, financial penalties on the poor are now a leading source of revenue for municipalities around the country. In Alabama, for example, the Southern Poverty Law Center took up the case of a woman who was jailed for missing a court date related to an unpaid utility bill. In Oregon, courts have issued hefty fines to the parents of truant schoolchildren. Many counties around the country engage in civil forfeiture, the seizure of vehicles and cash from people suspected (but not necessarily proven in court) of having broken the law. In Louisiana, pretrial diversion laws empower the police to offer traffic offenders a choice: Pay up quickly, and the ticket won’t go on your record; fight the ticket in court, and you’ll face additional fees.

Schaer spoke with Jamie Tillman of Alcorn, Miss., who was arrested for alleged public intoxication after falling asleep in a library. She received no public defender and pleaded guilty as she did not think the judge would accept her word over that of the arresting officers. Unable to pay a $100 fine, she was sent to serve her time in the Alcorn County jail.

That night, Tillman says, she conducted an informal poll of the 20 or so women in her pod at the Alcorn County jail. A majority, she says, were incarcerated for the same reason she was: an inability to pay a fine. Some had been languishing in jail for weeks. The inmates even had a phrase for it: “sitting it out.” Tillman’s face crumpled. “I thought, Because we’re poor, because we’re of a lower class, we aren’t allowed real freedom,” she recalled. “And it was the worst feeling in the world.”

 

Simple solutions for a more equitable state tax code
The Institute on Taxation and Economic Policy has released a follow-up to its annual Who Pays? report, which breaks down the regressivity of each state’s tax code. This follow-up report is a simple “how-to” guide for states to make their tax codes more fair for low- and moderate-income families. Louisiana’s tax code already incorporates certain suggestions: we have a small but refundable Earned Income Tax Credit, and progressive individual income tax rates. But ITEP’s Dylan Grundman has a few more suggestions:

Another major source of inequity [in tax policy] is the inequality of opportunity created by vastly different starting points for children born into wealthy families compared to those of more modest means. This wealth and opportunity gap is built upon and continues to reflect immense racial disparities. Although the federal estate tax has been greatly weakened, states can promote fairness by applying their own estate and/or inheritance taxes. Like corporate taxes, these do not tend to be major sources of revenue for states, but have a clear progressive impact, generally only applying to a very small share of the largest inherited fortunes. Seven of the 10 most equitable state tax systems levy such a tax.

As of 2017, 18 states and the District of Columbia enact an estate tax, but Louisiana is not one of them. Grundman also suggests that states rid themselves of ineffective tax breaks, of which the most notable is the federal income tax deduction in Louisiana that has no proven return on investment and costs the state nearly a billion dollars each year.

 

How do marginal tax rates actually work?
There has been a lot of ‘outrage’ since Rep. Alexandria Ocasio-Cortez proposed a top marginal tax rate of 70 percent during a 60 Minutes interview. Some of this outrage is due to a common misunderstanding of how marginal tax rates actually work and some is a symptom of partisan politics. To clear things up, Vox’s Alvin Chang provides a simple cartoon explaining how tax brackets actually work in the US.

Minority Whip Steve Scalise likely knows how tax brackets work and is just using this as a shorthand to attack Ocasio-Cortez’s proposal. But he’s playing on a broader misunderstanding of tax brackets among Americans. Every tax season, I come across an astounding number of people who believe that you find your “tax bracket” and then pay that rate on all your income. They’ll say things like, “I got a raise, but it bumped me into the next bracket, so I paid more in taxes.” That isn’t how it works.

When a person’s or a household’s earnings rise above one tax bracket, only those additional earnings are taxed at a higher rate. That way, earning more doesn’t mean anyone is taxed into taking home less pay.

 

Number of the Day
$52 billion – the amount of federal money spent in Louisiana in 2017 (Source: The Advocate)

 

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