KCEG / ITEP report on tax fairness uses flawed methodology

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A ‘tax fairness’ report released this week released by the Kansas Center for Economic Growth (KCEG) and the Institute on Taxation and Economic Policy (ITEP) contains a number of serious flaws, as explained in the following analysis from The Tax Foundation’s Joe Henchman.

“This week, the Institute on Taxation and Economic Policy (ITEP) released their fifth edition of Who PaysWhile the report purports to measure the regressivity of state tax systems by looking at effective tax rates by income groups, the report surprisingly concludes that all states are regressive.

My colleagues Liz Malm and Kyle Pomerleau looked closely at some of the flaws of Who Pays and offer their comments in a new piece we released today. Key findings:

  • The study isn’t actually focused on the distribution of taxes by income group; instead, it’s focused on how well state and local tax systems redistribute income. If the report was really about “measuring the state and local taxes . . . paid by different income groups,” ITEP would rank states by effective tax rates of the poorest residents. Instead, states are ranked based on a complex formula that compares various measures of pre- and after-tax income for various income groups.
  • The report — supposedly a study of state taxes — includes the most regressive feature of the federal income tax, and leaves out all other features of the highly progressive federal income tax.  Including the federal offset makes effective tax rates look more regressive than they actually are.
  • ITEP assumes that business property taxes are partly passed on by business owners to renters and that some are exported across state lines. However, the same logic should also apply to several other tax types. Corporate income and sales taxes are partially exported, because a portion of them are paid by businesses. ITEP does not assume tax exporting for any tax other than property taxes.
  • ITEP does not include taxes such as severance taxes, business license taxes, and other types of business taxes (such as gross receipts taxes and modified gross receipts taxes) in its analysis. This is problematic, because in some states, these taxes make up a significant share of the state budget and significantly alter the over distributional impact of a state’s tax system.
  • ITEP cites a new S&P report that likely overstates the connection between inequality and state tax revenue growth.
  • ITEP’s idea tax system (no sales tax, very progressive income tax with lots of taxation of capital gains, and heavy reliance on individual income taxes) would lead to volatile tax systems that dampen economic growth.

Overall, fairness is a subjective term and largely depends on how you define it. Whatever ITEP’s definiton of fairness and attempt to measure it, there are methodological concerns with the way ITEP presents data that should be addressed, and should be kept in mind when discussing the Who Pays study.”

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