Report

Raising Revenue from High-Income Households: Should States Continue to Place the Lowest Tax Rates on Those with the Highest Incomes?

Last updated: January 03, 2025

State and local tax systems are regressive, placing higher tax rates on low-income households than on high-income households. Responding to the collapse in tax revenue, and the resulting budget shortfalls following the “Great Recession,” a number of states used tax increases targeted at high-income households (alongside the budget cuts that were adopted by every state) to help sustain public spending on vital services, including education, public safety, and infrastructure.

These new taxes on affluent households have generated a considerable amount of debate over whether states should continue to maintain tax systems that place the least burden on the richest households. Arguments in favor of shifting that burden have been  defended on grounds of ‘fairness’: high-income households, after all, reaped the lion’s share of economic growth in recent decades and have also benefitted disproportionately from large tax reductions at the federal level. A case has also been made that taxing wealthy households is the least economically damaging way for states to address their budget shortfalls, because it results in smaller reductions in consumer spending than the feasible alternatives.

 

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