Introduction

The 1980s have been a time of considerable change for state and local tax systems. In particular, the Tax Reform Act of 1986 (TRA) had a substantial effect on state and local taxes, both directly and indirectly. Directly, the deduction for general sales taxes was eliminated and the fall in federal marginal tax rates reduced the value of the remaining deductions for taxpayers. In addition, states that based their tax systems on the federal income tax had unintended windfall revenue gains and losses as the tax base broadened and rates fell. Indirectly, the tax-reform spirit spread, sparking tax-reform efforts in many states. Many of the state tax changes were a combination of an effort to reform taxes to increase progressivity as well as an effort to undo any windfall gains and losses. One goal of this paper is to measure how effective state and local governments were at altering the progressivity of their tax systems.

A second goal of this paper is to re-examine some commonly held beliefs about the relative progressivity of different state and local taxes. The tax-reform debate at the state level has operated from a pair of simple received truths: income taxes are progressive; sales taxes are regressive. The prescription for increasing progressivity, it is thus argued, is to move from sales to income taxation. One consequence of this belief is that politicians who have tried to raise sales taxes to cope with the fiscal crisis facing their states in the early 1990s have been attacked for increasing a regressive tax.