Thinking about taxes seems complicated; but in its basic form, taxes raise the money we need to pay for and upkeep the services we depend upon daily. On the state level, we use these dollars to fund our schools, roads and bridges, and public safety officers, among other things. On the federal level, our taxes pay for national security (or the military), social security, healthcare, and safety net programs – like school meals and food and housing assistance.
Taxes can be progressive or regressive. So what are we talking about when we use those terms?
A progressive tax is one that is based on based on someone’s financial ability to pay. And we consider this to be a more “fair” tax. A classic example of a progressive tax is the income tax. Earners pay on a tiered system where those with higher incomes pay a higher percentage in taxes while lower earners pay a lower amount.
We think regressive taxes are less fair because they place a greater burden on low- and moderate-income families. State and local taxes in Arkansas are regressive. In fact, the poorest 20 percent of Arkansas taxpayers (those making less than $15,000 a year) pay 12 cents on every dollar they earn in state and local taxes. Those at the top, (those making above $311,00 per year), pay only six cents on the dollar. WalletHub, a personal finance website, ranks Arkansas 48th nationwide in tax fairness and places Arkansas within the top 10 states that overtax middle- and lower-income residents.
In our guide, “Rules of the Game: How to Navigate the Arkansas Tax and Budget System,” we outlined four things to consider when thinking about how our tax system should work. It should be:
- Balanced (collecting money through multiple, reliable sources – like fees, income, goods, and services – so that we don’t overly rely on one thing to generate money)
- Adequate (bringing in enough money to pay for the things we need each year)
- Transparent and accountable (making sure that people who pay taxes can see where their money is coming from and where it’s going)
- Fair (paying only what you are able to pay)
Clearly, our tax system is “out of shape.” Placing a heavy tax burden on middle- and lower-income Arkansans creates problems not only for Arkansas families, but also the fiscal strength of our state. But, there is a solution to fixing these issues. Click here and read the recommendations we provide in our analysis entitled, “A Better Foundation: Building a Tax System That Works for Arkansas Families.”