New research by the Institute on Taxation and Economic Policy (ITEP) shows that Florida’s tax system remains among the “Terrible Ten” most inequitable in the nation, ranking 48th among all states. Florida’s reputation as a “low-tax” state belies the reality that it is, in fact, a high-tax state for low- and moderate-income residents. Floridians with the lowest incomes — those earning less than $18,700 — contribute 12.7 percent of their incomes to state and local taxes, while the wealthiest top 1 percent — those with incomes of more than $548,700 — contribute just 2.3 percent of their income.
Florida’s upside-down tax system makes it the ninth highest-tax state in the country for low-income families. Because the state does not levy a personal income tax — which helps to mitigate inequality — it relies heavily on consumption (sales and excise) taxes for revenue. These taxes, which account for more than half of all revenue in the state, cost the most for lower-income families, as they spend a greater share of their incomes on purchasing the items and goods they need. As incomes increase, the share spent on consumption decreases.
Nationally, families with the lowest incomes pay eight times more in sales and excise taxes as a share of income than wealthy families, while middle-income families — earning $47,300 on average — pay more than five times as much. Florida’s sales and excise taxes are 10 times higher than the national average, and the gap between the lowest income families and most wealthy is the primary driver of the state’s upside-down tax structure.
ITEP found that most state and local tax systems — 45 out of 50 — exacerbate inequality, making incomes more unequal after collecting state and local taxes. Of the “Terrible 10” states, seven out of 10 don’t have a personal income tax, while the other three have a personal income tax rate that is flat or virtually flat. On the other hand, the most progressive states have a graduated income tax, which is the primary vehicle for mitigating inequality in the tax system. These states, on average, derive more than a third of their revenue from income taxes, compared to the national average of 27 percent. In order to reduce inequality, these states employ progressive income tax brackets and rates, and offer few deductions and exemptions that only benefit the wealthy.
Another characteristic of more equitable state tax systems is targeted refundable low-income credits, such as the Earned Income Tax Credit (EITC). As a refundable credit, if a taxpayer’s credit exceeds their tax liability, they receive the excess as a refund. The 10 states with the fairest tax systems all offer a permanent EITC. Florida does not offer an EITC, nor does it offer any other tax credits for low-income workers to offset the high cost of sales and excise taxes.
Florida’s upside-down tax system also contributes to inequality along racial and ethnic lines, cementing the state’s deeply embedded economic disparities. According to the most recent U.S. Census data, Floridians of color face higher rates of poverty than white Floridians. Almost 22 percent of African-Americans and nearly 18 percent of Latinos in Florida live below the poverty level, which is $25,094 for a family of four. These Floridians are likely to pay the highest share of their incomes in state and local taxes, despite the disproportionate impacts on their incomes and livelihoods.
There’s a constitutional amendment on the general elections ballot that threatens to lock in this inequality. Amendment 5, which would require a two-thirds (supermajority) vote of the state Legislature to raise state revenue, taxes and fees or eliminate tax breaks and loopholes, would make it nearly impossible for legislators to make changes to Florida’s tax system to reverse its inequities. Not only would Amendment 5 make disparities worse, it would also make it difficult to generate the revenue needed to adequately invest in education, housing, infrastructure, conservation, health care and other critical priorities. According to ITEP, “Research shows that when income growth concentrates among the wealthy, state revenues grow more slowly, especially in states that rely more heavily on taxes that disproportionately fall on low- and middle-income households.”