The price of inequality: How state tax policies widen the wealth gap

Abstract

State taxation has become particularly regressive in recent decades. Across the country, states have increasingly begun to rely on sales and consumption taxes to fund significant portions of their expenditures. Given that these taxes disproportionately hurt lower classes that spend a larger portion of their income on consumable goods and services, these trends widen wealth gaps. By replacing and reducing progressive income taxes with these regressive forms of taxation, levels of inequality have risen. This paper examines the impact of such state and local taxes on the levels of income inequality within each state. Through empirical analysis, it identifies a substantial and positive correlation between the regressivity of state tax codes, as measured by the relative tax burdens on different income brackets, and the levels of inequality, as quantified by the income share of the top 1%. In this study, I examine the relationship between state tax policies and income inequality in the United States. By analyzing the tax structures of different states, I identify a significant correlation between regressive taxes, that disproportionately burden the less wealthy, and increased income inequality. Using quantitative data from 2013 to 2019, I show that states that rely more on taxes that burden working class families, like sales and excise taxes, witness larger portions of wealth concentration within the top 1%. These findings suggest that tax policy at the state level significantly shapes wealth distribution and highlight the need for reforms to reduce inequality at the state level.