That is the questions an NBER working paper by Fleck, Heathcote, Storesletten, and Violante aims to answer. Using a variety of survey and administrative data, the authors reach the following 8 conclusions:
(i) The federal tax and transfer system is progressive.
(ii) State and local tax and transfer systems are close to proportional, on average.
(iii) There is substantial heterogeneity in tax levels and tax progressivity across states.
(iv) States that are funded mostly by sales and property taxes tend to have regressive tax systems and low average tax rates. States that are funded mostly by income taxes tend to have progressive tax systems and high average tax rates.
(v) Regressive states are concentrated in the South and attract more inter-state net migration, especially of high-income migrants.
(vi) State progressivity has remained broadly stable between 2005 and 2016.
(vii) Incorporating corporate income and business taxes decreases average state progressivity but increases federal progressivity.
(viii) Including spending on public goods and services as a transfer has a large positive impact on measured progressivity.
Which states have the most progressive tax system? Alaska, Minnesota, DC, California and New Mexico top the list.
Which states have the most regressive tax system? Illinois, Nevada, New Hampshire, Tennessee and Texas lead.
Progressivity is clearly illustrated by comparing California and Texas. Both states have a progressive income tax. However, income tax makes up a much larger share of funding in California than Texas and the California tax code is much more progressive. State transfers are also progressive in both states, but California has much larger transfers as a share of its budget than does Texas. Conversely, sales, excise and property taxes are regressive in both states, but Texas relies much more on these funding mechanisms. Due to a combination of these funding mechanisms, overall Texas has a highly regressive tax system whereas California’s is highly progressive.
Much more interesting detail can be found in the full paper here.
