The keys to finding fair taxes

When the issue is paying taxes, we all seem to agree: We don’t like to pay them. Find another way to fund the government but get off our backs.

There are some other ways but generally each involves us, the taxpayer. Options include fees collected for parking, using public facilities, licensing fees, tolls and more which might seem less offensive but don’t make us happy.

The main three money sources for state and local taxation are property taxes, sales taxes and the income tax. Idaho utilizes all three.

Are these taxes equal and fair? According to the Institute on Taxation and Economic Policy (ITEP) report, Idaho has the 38th most unfair state and local tax system in the country. The terms used to define fair are progressive (not a reference to people) or unfair, regressive.

A progressive tax is one in which upper-income families pay a larger share of their incomes in taxes than do those with lower incomes.

A regressive tax requires the poor and middle-income to pay a larger share of their incomes in taxes than the rich.

If we agree those who make more money should pay more then we have a common starting place. Keep in mind paying more does necessarily mean more dollars. If I pay $10 and make $100 a week, then 10% of my money goes to taxes. If you make $1,000 a week and also pay $10, then only 1% of your money goes to taxes yet we both paid the same amount.

The three main taxes or revenue sources used by all states and cities are basically the same.

Property Tax

If I own property, then taxes are assessed based on the value of the property. The property tax is a highly visible tax whose costs can be related directly to local government programs. This contributes to the perception of property taxes as an acceptable tax but constant increases create heartburn.

About 30% of local revenue is derived from property taxes in the U.S. In effect, property taxes tend to be unfair, regressive. Property taxes do not relate to your income. Property taxes are very visible when the annual tax bill arrives and the value of my property can be subjective.

Add to this that property taxes tend to be unfair because on average, low and middle income homeowners pay more of their incomes in property taxes than do any other income group — and the wealthiest taxpayers pay the least. On average low-income families pay 4.2 percent of their incomes, middle-income families pay 3.0 percent of their incomes, and the top 1 percent pay 1.7 percent.

Fairness can be improved by the use of exemptions, tax credits, and preferential tax rates for homeowners such as homestead exemptions and low income tax credits. Idahoans may find some comfort in knowing that when all state and local taxes are tallied, Washington state’s poor families pay 17.8 percent of their income in state and local taxes. Compare that to Idaho and Oregon, where the poor pay 9.2 percent and 10.1 percent, respectively, of their incomes in state and local taxes.

Sales Tax

Sales taxes are extremely unfair (regressive). Poor families pay almost eight times more as a share of their incomes in these taxes than the best-off families, and middle-income families pay more than five times the rate of the wealthy.

On average, low-income families pay 7.1 percent of their incomes, middle-income families pay 4.8 percent of their incomes, and the top 1 percent pay 0.9 percent.

Income Tax

The average income in 2018 among the top 1 percent of households was about $1.7 million per year. For the other 99 percent of households, the average was $70,000 per year — or 20 times less.

State income taxes are typically more fair (progressive). As income increases so does the tax rate. On average, low-income families pay .04 percent of their incomes, middle-income families pay 2.1 percent of their incomes, and the top 1 percent pay 4.6 percent.

Of the three major taxes used by states, the personal income tax is the only one under which tax rates rise as people make more money. States often use income taxes as tools to help offset more regressive state and local taxes.

Inequality results by taxing lower-income people at higher rates than wealthy people. Taxing income derived from wealth (e.g. capital gains) at a lower rate than income derived from work, or relying heavily on sales taxes, are worsening the rich/poor divide and increasing the lack of fairness in our three primary state and local funding sources.

To make state and local tax systems fairer, at the very least policymakers and the public should consider what to do. How do we make our tax systems fairer or less regressive?

After recently reading articles on Idaho legislators discussing altering the sales tax, or placing caps on property taxes, I have to wonder if that is either fair or equitable. We must elect leaders with both ideas and an understanding of the needs and services that people want.

Government has neither a bottom line nor a competitor we can go to. Public service demands recognition of the cost and needs of the public. At least common sense should tell us we should make every effort to be reasonable if fair is too high a stretch. We can begin by electing people with workable ideas and being aware of legislators only talking lower taxes, because it could be hurting you.

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Phil Ward is a Coeur d’Alene resident.