California is not an easy place to do business. Our taxes and regulations are legendary.

But the nonpartisan Institute on Taxation and Economic Policy this month released its fifth “Who Pays?” report. And the Golden State ends up nearly on top when it comes to the fairness of taxes for a state's residents.

The report says it measures “the state and local taxes that will be paid in 2015 by different income groups as a share of their incomes.”

The institute gives high scores for states with progressive taxes—”as incomes go up, effective tax rates go up”—and low scores for those with regressive systems—those where taxes hit lower-income folks harder.

An example of a regressive tax is at the grocery store. If you're poor, that extra few dollars tacked onto your grocery bill might have been your lunch money. For the rich, not so much.

The institute discounts the theory of trickle-down economics, by which the rich get richer via tax breaks but invest that cash in businesses and jobs. 

California makes the list of seven states with the most fair taxes across the land.

“California has one of the least regressive tax systems due to its heavy reliance on a very progressive income tax,” the institute says.

It ranks next to last on an “tax inequality index” (49th)—beat out only by Delaware and the District of Columbia. That makes us second best, in terms of states.

Among the strong points here, according to the institute, is our “graduated personal income tax structure” that includes a much higher rate on millionaires. 

Still, even the most “progressive” states in the nation like California end up taxing the poor more than the rich, overall, the analysis found:

Credit: Institute on Taxation and Economic Policy

Credit: Institute on Taxation and Economic Policy

The bottom line is that every state fails the basic test of tax fairness.

… Unfair tax systems not only exacerbate widening income inequality in the short term, but they also will leave states struggling to raise enough revenue to meet their basic needs in the long term. 

In California, members of the lowest 20 percent of earners pay 10.5 percent of their income to Sacramento, the institute found. Those in the top 1 percent of earners pay 8.7 percent.

The study found that even property taxes tended to hit poorer folks harder.

In California, Proposition 13 protects the old couple in Beverly Hills who bought their home in the 1960s from taxes that would be based on today's much higher property values while younger couples who just purchased homes in much worse neighborhoods sometimes end up paying more than that Westside pair.

Interestingly, it was often Southern, pro-business, “low-tax” states that seemed to be the most unfair when taxing citizens, the report concluded.

Many of those states have no personal income taxes or so-called “flat-rate” taxes, the report says. Some also offer tax breaks, including capital gains discounts, for the wealthy:

Credit: Institute on Taxation and Economic Policy

Credit: Institute on Taxation and Economic Policy

Many of the most regressive states have another trait in common: they are frequently hailed as “low-tax” states, often with an emphasis on their lack of an income tax. But this raises the question: “low tax” for whom?

Feeling better about living here? Thought so.

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