Category Archives: Taxation

Who Pays: A Distributional Analysis of the Tax Systems in All 50 States

Source: Meg Wiehe, Aidan Davis, Carl Davis, Matt Gardner, Lisa Christensen Gee, Dylan Grundman, Institute on Taxation and Economic Policy (ITEP), October 2018

From the summary:
Who Pays: A Distributional Analysis of the Tax Systems in All 50 States (the sixth edition of the report) is the only distributional analysis of tax systems in all 50 states and the District of Columbia. This comprehensive report assesses tax fairness by measuring effective state and local tax rates paid by all income groups. No two state tax systems are the same; this report provides detailed analyses of the features of every state tax code. It includes state-by-state profiles that provide baseline data to help lawmakers and the public understand how current tax policies affect taxpayers at all income levels.
The report includes these main findings:

– The vast majority of state and local tax systems are inequitable and upside-down, taking a much greater share of income from low- and middle-income families than from wealthy families. The absence of a graduated personal income tax in many states and an overreliance on consumption taxes contribute to this longstanding problem.

– The lower one’s income, the higher one’s overall effective state and local tax rate. On average, the lowest-income 20 percent of taxpayers face a state and local tax rate more than 50 percent higher than the top 1 percent of households. The nationwide average effective state and local tax rate is 11.4 percent for the lowest-income 20 percent of individuals and families, 9.9 percent for the middle 20 percent, and 7.4 percent for the top 1 percent.

– Tax structures in 45 states exacerbate income inequality. Most state and local tax systems worsen income inequality by making incomes more unequal after collecting state and local taxes. Five states and the District of Columbia somewhat narrow the gap between lower- and middle- income taxpayers and upper-income taxpayers, making income slightly more equitable after collecting state and local taxes.

– In the 10 states with the most regressive tax structures (The Terrible 10), the lowest-income 20 percent pay up to six times as much of their income in taxes as their wealthy counterparts. Washington State is the most regressive, followed by Texas, Florida, South Dakota, Nevada, Tennessee, Pennsylvania, Illinois, Oklahoma, and Wyoming.

– Heavy reliance on sales and excise taxes are characteristics of the most regressive state tax systems. Six of the 10 most regressive states derive roughly half to two-thirds of their tax revenue from sales and excise taxes, compared to a national average of about one-third. Seven of these states do not levy a broad-based personal income tax while the remaining three have a personal income tax rate structure that is flat or virtually flat. A calculation of effective sales and excise tax rates finds that, on average, the lowest-income 20 percent pay 7.1 percent, the middle 20 percent pay 4.8 percent and the top 1 percent pay a comparatively meager 0.9 percent rate.

– A progressive graduated income tax is a characteristic of the least regressive state tax systems. States with the most equitable state and local tax systems derive, on average, more than one-third of their tax revenue from income taxes, which is above the national average of 27 percent. These states promote progressivity through the structure of their income taxes, including their rates (higher marginal rates for higher-income taxpayers), deductions, exemptions, and use of targeted refundable credits.

States commended as “low-tax” are often high-tax for low- and middle-income families. The 10 states with the highest taxes on the poor are Arizona, Florida, Hawaii, Illinois, Indiana, Iowa, Oklahoma, Pennsylvania, Texas, and Washington. Six of these are also among the “terrible ten” because they are not only high-tax for the poorest, they are also low-tax for their richest residents.

Related:
Data Available for Download
State-by-State Data and ITEP Tax Inequality Index Map

Why the 2018 Midterms Matter for the U.S. Economy

Source: Bernard Yaros, Regional Financial Review, Vol. 29 no. 2, October 2018
(subscription required)

Though midterms do not have much of an economic impact via policy uncertainty, they can still affect the economy by altering the course of federal fiscal policy. This is exactly what we expect to happen after the 2018 midterms. This article discusses how tax legislation, annual appropriations, and other areas of fiscal policy could change depending on the composition of the next Congress.

The Interaction Between the Minimum Wage and the Federal EITC

Source: Andrew P. Schaefer, Jessica A. Carson, Marybeth J. Mattingly, Andrew Wink, University of New Hampshire, Carsey School of Public Policy, November 13, 2018

Increases in the minimum wage are widely assumed to be beneficial for low-income workers, but it is important to consider the effect an increase might have on eligibility for other benefits, particularly the federal Earned Income Tax Credit (EITC). This fact sheet examines the interaction between the minimum wage and the EITC to determine whether a minimum wage increase would produce gains in the sum of earnings plus EITC dollars for low-income workers

Key Findings:

For workers earning the minimum wage, an increase would result in higher income; none would experience a lower net income due to changes in the federal EITC credit (though this may be offset by loss of other safety net program benefits).

For some family types, increased income would come primarily from a higher minimum wage; for others, gains would also come from the higher-value federal EITC triggered by their higher earnings.

EITC Continues to Reach Families in Poor Places

Source: Andrew Schaefer, Beth Mattingly, Kennedy Nickerson, Jessica Carson, Carsey School of Public Policy at the University of New Hampshire, Data Snapshot, October 9, 2018

From the summary:
Recent proposals in the House and Senate (for example, the Grow American Incomes Now Act) focus on amplifying the Earned Income Tax Credit (EITC)—a refundable tax credit for low-income workers—to compensate for growing wage inequity. We find that the share of EITC filers who are families with children is especially high in the poorest counties (those counties outlined in black on Map 1), including many places throughout the South.

Key Findings:
The Earned Income Tax Credit provides tax relief to working people with low to moderate income, with much larger credits for tax filers with children. The credit is refundable, meaning that the EITC reduces the amount of tax owed, and any amount above that may be issued as a refund.

FactCheck: have the Trump tax cuts led to lower unemployment and higher wages?

Source: Fabrizio Carmignani, Saul Eslake, The Conversation, September 2, 2018

….Minister for Finance Mathias Cormann’s statement that corporate tax cuts in the US had “led to stronger investment, stronger growth, lower unemployment rate and higher wages” is not supported by evidence.

Cormann pointed to US economic data from the second quarter of 2018 (shortly after the US corporate tax cuts were enacted) to support his statement.

Cormann correctly quoted the figures about GDP growth and the unemployment rate. His statement on wage growth is debatable, and there are qualifications to be made about his interpretation of the capital investment data.

But the simple observation that some US economic indicators improved in the second quarter of 2018 does not imply that those improvements were caused by the tax cuts.

Even if causation could be established, one quarter of data tells us very little about the effect of tax reform. It takes time for companies and workers to adjust to changed taxation environments. These adjustments happen progressively over time, and this can lead to significant differences in the short term and long term responses.

It’s worth noting that the improvement in economic conditions in the US started in mid-2016, around 18 months before the tax reform…..

Trump Tax Cut Truths

Source: Americans for Tax Fairness, 2018

Claims that corporations are sharing a big slice of their huge Trump tax cuts with employees through bonuses and wage hikes are mostly hype, the “Trump Tax Cut Truths” website of Americans for Tax Fairness (ATF) shows.

The data on this website primarily covers Fortune 500 companies, whose revenues are two-thirds of the entire U.S. economy (GDP). But the universe is all Fortune 1000 corporations and businesses not on the Fortune 1000 that are included in the List of Tax Reform Good News maintained by Americans for Tax Reform.

Data estimates are based on information from corporations, the media, independent analysts or ATF research and cover activities since the tax law was passed on December 20, 2017. Sources for the data below can be found here or on the separate spreadsheets found here. See the Methodology explanation for more details.

How Trump’s tax cuts favor whites over minorities

Source: Alexis Gravely, Center for Public Integrity, August 21, 2018

Data analysis shows people of color will get much smaller tax breaks over time. ….

…. Starting next year, every income group will see their average tax rates drop. But rates for the super wealthy, those earning more than $200,000 a year, will decrease between 2.1 and 3.1 percent of their income, compared to half a percent for those earning less than $30,000, according to the Joint Committee on Taxation, a nonpartisan congressional panel that analyzes the effect of proposed tax changes in bills.

For later years, the disparities only become greater.

Between 2019 and 2025, many Americans earning less than $30,000 will see their taxes increase until their effective rates are actually higher, as much as 0.7 percentage points more than if the new tax law had not passed, according to the JCT. The wealthy will continue to pay at lower rates, as much as 1.5 percentage points lower.

That’s not only a bad deal for the poor; it has a disproportionate impact on blacks and Hispanics. Nearly 40 percent of black households earn less than $30,000, followed by 30 percent of Hispanic households, according to the Center’s analysis. Only 22 percent of white households earn less than $30,000. ….

IRS Will No Longer Require Disclosure of Certain Nonprofit Donor Information

Source: David H. Carpenter, Congressional Research Service, Legal Sidebar, LSB10187, August 14, 2018

In July 2018, the Internal Revenue Service (IRS) announced that certain organizations that are exempt from paying federal income tax (tax-exempt organizations or EOs) under the Internal Revenue Code (IRC), including social welfare organizations, labor unions, and trade associations, will no longer be required to disclose the names and addresses of their “substantial” donors in Schedule B of their annual Form 990 returns to the IRS. Charitable tax-exempt organizations described in IRC Section 501(c)(3), which are statutorily required to disclose certain donor information, were not impacted by the July 2018 policy.

The IRS noted several reasons for making the change, including reducing administrative burdens and protecting sensitive, nonpublic personal information. In opposition, some have argued that the IRS’ policy change will reduce transparency over the funding sources of EOs’ political activities and make it more difficult for the IRS to enforce tax laws. At least one state has filed a lawsuit seeking to have the new policy set aside, alleging that the IRS implemented the policy in violation of the Administrative Procedure Act (APA).

This Sidebar will first provide background on the statute and regulations regarding EOs’ disclosure of contributor information. Next, the Sidebar will discuss the justifications of and reactions to the new policy, including the views of proponents and opponents of the new policy. The Sidebar will then discuss the litigation Montana has filed against the policy. Finally, the Sidebar will provide considerations for Congress…..