What is a Regressive Tax?

Regressive taxes are kind of like the weights in the gym…

Suppose that you and a few of your friends head to the gym to lift weights. Even though you’re all using the same weights, it’s more difficult for some of you based on your levels of strength. For example, lifting 25 pounds might seem pretty easy to you if you work out regularly, but it’s a lot more difficult for your friend who has never lifted weights before. Regressive taxes are like those weights — Everyone may pay the same amount, but it’s a heavier burden for those with lower income.

A regressive tax is one that affects low-income individuals at a higher degree than high-income individuals. These taxes represent a greater percentage of a low-earning individual’s income. Generally, transaction taxes and other taxes that are not imposed as a percentage of income are regressive.

For people who already pay a more significant portion of their income just to survive, these taxes add an extra burden. Because of this, many governments (including the US), use a combination of both regressive and progressive taxes to balance the scales.

There are several taxes in the United States that are regressive, meaning they impact low-income individuals to a greater degree than high-income individuals.

A sales tax is applied to consumer purchases. You usually pay these taxes at the cash register when you’re buying consumer goods. Sales tax rates vary depending on where you live, but everyone in that area pays the same percentage regardless of their income. However, some items may be exempt from sales tax (such as medicines) which reduces their regressive nature.

Property taxes are those that you pay each year on property that you own. They’re fundamentally regressive in the sense that if two people of different incomes get the same tax bill, the tax will make up a higher percentage of the income of the lower earner.

That being said, it isn’t often the case that two people of vastly different incomes would have the same property tax bill in the same location, since they’re unlikely to purchase homes with identical market values. Wealthier people tend to own more expensive property, meaning they would also have higher property tax bills.

The government charges sin taxes on items it considers to be harmful. These items include tobacco products and alcohol and are regressive because low-income and high-income purchasers pay the same amount. Tobacco tax in particular impacts low-income individuals to a greater degree because they’re statistically more likely to smoke than people with higher incomes.

User fees are a type of regressive tax that the government (usually states) charges individuals when they use specific items or resources. For example, the cost you pay for your driver’s license or your car’s annual registration is a user fee. Everyone pays the same amount regardless of their income, which makes them regressive.

Similar to the United States, many other countries in the world have a combination of progressive and regressive taxes that make up their tax revenue. In the United States and most other countries, income taxes are intended to be progressive — Higher earners pay a more significant percentage of their income in taxes.

But consumption taxes, meaning those you pay based on things you buy, tend to be regressive across the board. In the United States, these taxes include sales and excise taxes. In Western Europe, the primary regressive tax is their value-added tax (VAT).

We don’t have VAT in the United States, but in Europe, they use VAT to charge a consumption tax on products at each step of the supply chain when any value is added.

When you account for both the progressive and regressive taxes in the major Western countries, the United States has a particularly progressive tax system. But the tax structure also varies by state, which can look far more regressive at local levels.

State and local taxes often result in low-income earners paying a significantly higher percentage of their income in taxes. This trend is especially true in states that don’t have state income taxes, and instead rely more heavily on regressive taxes like sales and property taxes.

The three most regressive tax states in the country are Washington, Texas, and Florida — None of these states have a state income tax (meaning states rely on sales and property taxes), and the poorest in the state pay 10% to 15% more of their income in taxes than the richest.

As with other tax systems, regressive taxes have both advantages and disadvantages.

Pros:

One benefit of regressive taxes is that they may be easier to apply.

For example, everyone pays the same sales tax rate regardless of their income. Can you imagine if store clerks had to ask each customer how much they earn and calculate their sales taxes based on that information? It would be far too complicated.

Regressive taxes also ensure that those who use a product or service more frequently pay the most taxes on it. In some cases, this might incentivize people to stop purchasing those products. For example, items such as tobacco or alcohol have extra taxes added to them because they’re considered harmful.

Some people argue regressive taxes also help to balance out progressive ones. High-income earners already pay a greater percentage of their income in other areas, so these types of taxes may help to level the playing field.

Cons:

Regressive taxes are not without their downsides, though. One concern is that they impact the poor far more than anyone else. If you have one individual earning $20,000 per year and another earning $200,000, a $2,000 property tax bill is going to hurt the first person a lot more. The people who are most likely to be able to afford more in sales tax are those who are paying the smallest percentage of their income.

Regressive taxes make up one of the three primary tax structures in the United States. The other two types of taxes are progressive taxes and proportional taxes.

Progressive taxes are those that result in the percentage of your income that you pay in taxes increasing as your income increases. Federal income taxes (and most state income taxes) are the best example of progressive taxes in the United States.

In the US, your tax bracket increases with your income. For individuals who earn less than $11,000 in taxable income, the tax rate is 10% in 2023. On the other end of the spectrum, individuals with a taxable income of $578,125 or more pay a marginal tax rate of 37% in 2023.

The benefit of a progressive tax system is that it puts the more substantial tax burden on those who can most afford to pay it. Low-income individuals need more of their money just to survive, and progressive taxes help to keep more of their money in their pockets.

However, some people believe that progressive taxes force high-income individuals to pay more than their fair share in taxes and penalize them for their success.

Another type of tax rate is the proportional tax, more commonly referred to as a flat tax. A flat tax applies to all taxpayers at the same percentage of their income. So if there were a flat income tax at a rate of 15%, all taxpayers would owe 15% of their income in taxes.

The United States does not have a flat income tax system, but some states do, including Pennsylvania and Illinois. But there are other taxes at the federal level that are flat.

The Social Security tax, for example, is flat for everyone who makes less than $160,200 in 2023 (an increase from $147,000 in 2022). Up until that income, the tax applies to everyone’s income at a rate of 6.2%. It is not until someone’s income exceeds that $160,200 threshold that they no longer pay the tax. If you compare someone who makes more than that amount to someone who makes less, then the tax is actually regressive, as the lower income individual pays a higher rate.