State and local taxes don't get covered as much as federal ones, but they're still very, very important. Indeed, a new study finds that they can have significant effects on income inequality. Fed researchers Daniel Cooper, Byron Lutz, and Michael Palumbo estimate how major state taxes — sales taxes, income taxes, and motor fuel taxes — have affected inequality from 1984 to 2011. The differences are striking: While in some states, like Oregon, state taxes cut inequality significantly, in many Southern states like Tennessee, they actually exacerbated it.
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The states in dark red did the most to increase inequality through their tax systems, and the ones in dark green did the most to decrease it. Overall, though, state tax systems increased inequality in the US over the period in question. Unsurprisingly, the authors found that states doing the most to fight inequality tended to have progressive income taxes, whereas states without income taxes tended to make inequality worse. Motor fuel taxes made inequality moderately worse, they find, while exempting food and/or clothing from sales taxation, and providing a state-level Earned Income Tax Credit, can cut inequality significantly.
