In general, state and local taxes are:
a) Progressive.
b) Proportional.
c) Flat.
d) Regressive.
The correct answer and explanation is:
The correct answer is d) Regressive.
State and local taxes are typically considered regressive because the tax rate tends to take a larger percentage of income from lower-income individuals than from higher-income individuals. This happens because many state and local taxes, such as sales taxes and excise taxes, are levied as a flat rate on purchases, regardless of the buyer’s income. As a result, low-income individuals end up paying a higher proportion of their income in taxes compared to high-income individuals.
For example, a person with a lower income spends a higher percentage of their earnings on goods and services that are subject to sales tax. On the other hand, wealthier individuals spend a smaller proportion of their income on taxable goods and services, and they can also afford to buy higher-priced items that may not be as heavily taxed relative to their overall wealth.
Additionally, many states and localities rely heavily on sales taxes, property taxes, and sometimes even flat taxes on income. While these taxes are not progressive (meaning they do not increase as income increases), they disproportionately affect people with lower earnings. This means that for lower-income groups, the tax burden is heavier compared to higher-income groups.
In contrast, a progressive tax system (such as the federal income tax in many countries) is one where the tax rate increases as income increases, thus placing a heavier burden on wealthier individuals. A proportional or flat tax system applies the same tax rate across all income levels, meaning every taxpayer pays the same percentage of their income, regardless of how much they earn. Therefore, state and local taxes are generally classified as regressive because they place a higher relative burden on lower-income citizens.