Widely Touted Study on State and Local Taxes is a Sham
The Institute on Taxation and Economic Policy (ITEP) is a self-described “non-partisan research organization” dedicated to providing “accurate, timely, and straightforward information” about tax policies. In a new report on state and local taxes, ITEP declares that “virtually every state’s tax system is fundamentally unfair,” because they take “a much greater share of income from low- and middle-income families than from wealthy families.”
The findings of this study have been uncritically cited in prominent venues such as the Washington Post, CBS, the Daily Beast, Newsmax, the Providence Journal, and the New York Times. For instance, the Times reported that “according to the study, in 2015 the poorest fifth of Americans will pay on average 10.9 percent of their income in state and local taxes, the middle fifth will pay 9.4 percent and the top 1 percent will average 5.4 percent.”
Glaringly absent from the media coverage is how this study uses the same type of deceitful methodology behind claims that the middle class pays a higher federal tax rate than the top 1% of income earners, Warren Buffet pays a lower federal tax rate than his secretary, and Mitt Romney pays a lower federal tax rate than the middle class.
As Just Facts has documented in detail, all of those oft-repeated assertions are fraudulent, because they are based on calculations that exclude certain taxes, use partial measures of income, or employ both of these charades. The result is that the actual tax rates of the wealthy are understated, while those of others are progressively overstated as their income declines.
For example, Warren Buffett’s famous allegation that he pays a lower tax rate than his secretary is based upon the dishonest practice of using “taxable income” for his calculations. As the academic textbook Federal Taxation explains, using taxable income to calculate tax rates is “a bit misleading,” because this “is a very narrow measure of income” that says “little about the true impact of a tax on the taxpayer.”
Buffett and his secretary won’t release their tax returns, so there is no way to be exactly certain how this particular sleight-of-hand (they also use another) warps their true tax rates. However, a similar and less egregious ruse (using adjusted gross income) has the effect of artificially raising the average middle-class tax rate by at least 23% and Romney’s by less than 1%.
Similarly, ITEP uses a partial measure of income in virtually all of its studies, and moreover, it carefully guards this fact from the public. ITEP’s recent report on state and local taxes is 139 pages long, but the authors never bother to explain how they measure income. Instead, on page 135, they refer readers to the organization’s website for more details about how the study was conducted. The website contains a 17-page description of ITEPs “Tax Model,” which is used in most of its studies. Like the study, this lengthy description neglects to define how they measure income.
I first noticed this omission in 2012 and sent ITEP an email asking what measure of income they use in their tax model. When I didn’t receive a response, I followed up with a phone call, which they also failed to return. In other words, through both their publications and communications, ITEP has chosen to obscure how they arrive at one of the key variables used in nearly all of their tax rate calculations.
This led me to spot-check some of ITEP’s figures against those provided by the Congressional Budget Office (CBO). The results were appalling. For example, CBO’s comprehensive and transparent estimate of average income for the poorest fifth of Californians was at least 64% higher than ITEP’s ill-defined figure. This means that ITEP’s methodological ploy has the effect of inflating the tax rate for these people by at least 64%. Other ruses may be lurking in their tax model, because their description of it is vague on some key parameters like the incidence of corporate income taxes.
Nevertheless, the media has been reporting ITEP’s study without even a hint of skepticism, much less an investigation of how they arrive at their figures. That is not practicing journalism but doling out free publicity.
This kind of subterfuge has profoundly misinformed the American public. For instance, CBO’s latest estimates of effective federal tax rates show that the top 1% of income earners pay an average tax rate of 33% or 2.7 times more than the 12% rate paid by the middle class. Yet, for the third straight year, a scientific poll commissioned by Just Facts has found that roughly 80% of voters think the middle class pays a higher federal tax rate than the upper 1%.
Journalists, commentators, politicians, and organizations like ITEP have succeeded in manipulating the vast majority of Americans into believing the total opposite of reality about this and many other issues. This threatens harm to all Americans, regardless of their political inclinations, for as John F. Kennedy observed, “Only an educated and informed people will be a free people,” and “the ignorance of one voter in a democracy impairs the security of all.”
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