New CTJ Numbers: How Many People in Each State Pay More in Taxes after the Fiscal Cliff Deal?

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The expiration of parts of the Bush-era income tax cuts under the fiscal cliff deal affects just under one percent of taxpayers this year, while the expiration of the payroll tax cut affects over three-fourths of taxpayers this year, according to a new CTJ report that includes state-by-state figures.

The fiscal cliff deal (the American Taxpayer Relief Act of 2012), which was approved by the House and Senate on New Year’s Day and signed into law by President Obama, extended most of the Bush-era income tax cuts but allowed all of the payroll tax cut in effect over the previous two years to expire.

The figures in the report show the percentage of taxpayers in each income group nationally and in each state who will pay higher income taxes or payroll taxes as a result in 2013.

Read the report

Coming to a State Near You: Tax Reform That Might Get It Wrong

Note to Readers: This is the first of a six part series on tax reform in the states.  Over the coming weeks, CTJ’s partner organization, The Institute on Taxation and Economic Policy (ITEP) will highlight tax reform proposals and look at the policy trends that are gaining momentum in states across the country.

Following an election that left half the states with veto-proof legislative majorities, 37 states with one-party rule and more than a dozen with governors who put tax reform high on their agendas, 2013 promises to be a big year for changes to state tax laws.

The scrutiny lawmakers will be giving to their state and local tax systems presents an extraordinary opportunity to assess and address structural flaws and ensure that states have the necessary revenue to provide vital public services now and in the future. Yet, it is already clear that “tax reform” for some state lawmakers may be little more than a vehicle for ideological goals like shrinking government spending or cutting taxes for profitable corporations and the wealthy.

Lawmakers in more than 30 states will take on taxes in some shape or form this year – at least 15 states are expected to consider a major tax overhaul (CA, IA, KS, KY, LA, MN, MO, NC, NE, NY, OH, OK, OR, VA, WI) and the list seems to grow by the week.

In the past week, Governors’ proposals in Louisiana, Kansas, Nebraska, Ohio and Wisconsin have been taking shape and what we are seeing is not pretty. Tax cutting and wholesale elimination of the progressive personal income tax is high on these governors’ agendas, and North Carolina is likely to be the next state to join this list.

As a historic number of states gear up for major tax changes, we know that Grover Norquist, Arthur Laffer, and other anti-tax advocates will be making their case for less taxes, smaller government and a higher reliance on the sales tax.  There needs to be a real policy discussion in the states that helps people understand there’s a smart way to do tax reform, that it can’t just mean cuts or eliminating revenue sources, and that reform has wide ranging, long term consequences.

Enter the Institute on Taxation and Economic Policy (ITEP), CTJ’s partner organization. ITEP is closely monitoring tax reform proposals as they develop and will run them through the microsimulation model to see how proposed changes get distributed across different groups of taxpayers – who benefits and who doesn’t and by how much.

ITEP has identified several emerging trends and this series will examine and explain these five major kinds of proposals anticipated this year:

1) Proposals that would sharply reduce or eliminate one or more taxes and replace some or all of the lost revenue by expanding or increasing another tax (“Tax Swaps”)

2) Proposals that would significantly reduce the personal income tax paid by individuals or businesses

3) Proposals to revamp gas taxes

4) Real tax reform- proposals that fix tax codes’ structural flaws rather than dismantling or eliminating taxes

5) Other tax reform ideas including reducing or eliminating property taxes and cutting business taxes

How Many People in Each State Pay More in Taxes after the Fiscal Cliff Deal?

January 17, 2013 11:34 AM | | Bookmark and Share

More Detailed Tables in Appendix in Full Report

Read the full report in PDF

The expiration of parts of the Bush-era income tax cuts under the fiscal cliff deal affects just under one percent of taxpayers this year, while the expiration of the payroll tax cut affects over three-fourths of taxpayers this year.

The fiscal cliff deal (the American Taxpayer Relief Act of 2012), which was approved by the House and Senate on New Year’s Day and signed into law by President Obama, extended most of the Bush-era income tax cuts but allowed all of the payroll tax cut in effect over the previous two years to expire.

The table to the right shows the percentage of taxpayers nationally and in each state who will pay higher income taxes or payroll taxes as a result in 2013.

Under the fiscal cliff deal, even the wealthiest Americans will continue to receive some of the tax cuts first enacted under President George W. Bush in 2001 and 2003. Under the new law, the Bush-era income tax rate reductions no longer apply to taxable income over $450,000 for married couples and over $400,000 for singles. But even multi-millionaires will still enjoy the rate reductions that apply for all taxable income below these levels. Also, many people have gross income exceeding $450,000 or $400,000 but will lose no part of their income tax cuts because their exemptions and deductions reduce their taxable income to a much lower amount.

The Bush-era income tax cuts also included the repeal of the personal exemption phase-out and the limit on itemized deductions (often called PEP and Pease). The fiscal cliff deal allows PEP and Pease to come back into effect (and therefore limits personal exemptions and itemized deductions), but only for married couples with adjusted gross income (AGI) exceeding $300,000 and singles with AGI exceeding $250,000.

The payroll tax cut in effect in 2011 and 2012 had reduced the Social Security payroll tax that employed people pay directly from 6.2 percent of earnings to 4.2 percent of earnings. (The Social Security payroll tax applies to earnings up to a maximum, which is $113,700 in 2013, and not to any earnings above that level.) The payroll tax cut benefited everyone with income in the form of wages or salary.

The appendix in the full report includes more detailed tables showing the percentage of taxpayers in each income group in each state who lose part of the income tax cuts or the payroll tax cut under the deal. Read the full report in PDF.  

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Tax Reform in Paradise: Ideas to Help Hawaii’s Poor

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Not only does Hawaii have the highest cost of living in the country, it also has some of the highest overall taxes on the poor. A new report from the Hawaii Appleseed Center, however, explains how to change the tax code to take some pressure off the state’s low-income families. Using data from the Institute on Taxation and Economic Policy (ITEP), the report proposes a new poverty tax credit that would eliminate state income taxes for any Hawaii family below the poverty line.  This change would end the state’s embarrassing distinction as one of just 15 states that actually taxes its poor deeper into poverty through the state income tax.

Rather than simply enacting the poverty credit in isolation, the report also recommends pairing it with a refundable Earned Income Tax Credit (EITC) equal to 20 percent of the federal EITC.  Together, these two reforms would both incentivize work and chip away at the regressivity of a state tax system that requires its poorest residents to pay more of their household budgets in taxes than any other group (PDF).  As the Appleseed report shows, these two credits would boost the after-tax income of Hawaii’s poorest families by 1.4 percent, while costing the state $47 million in foregone revenue.

Like many states, Hawaii has more than a few tax breaks on the books that are expensive and unjustified, and the Appleseed experts offer up five of them as suggestions for how the state could replace that foregone revenue (and then some) without compromising vital state services:

1- Repeal the state’s sharply regressive tax break (PDF) for capital gains income.

2- Phase-out the benefits of lower tax brackets for high-income taxpayers.

3- Pare back the state’s enormous tax breaks for wealthy retirees (PDF).

4- Eliminate the state’s nonsensical deduction for state income taxes paid.

5- Enact an “Amazon law” to require more online retailers to collect and remit the sales taxes currently due (PDF) on purchases made by Hawaii residents.

Taken together, the reforms in the Appleseed report could greatly reduce the unfairness built in to Hawaii’s tax code, and put it on a more sustainable footing for generating sufficient revenues in the years ahead.

Governor Jindal’s Bad Idea for Louisiana Attracts Scrutiny

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Late last week details emerged of Louisiana Governor Bobby Jindal’s plan to eliminate nearly $3 billion in personal and corporate income taxes and replace the lost revenue with higher sales taxes. Knowing that sales taxes take the biggest bite out of low-income family budgets, the Institute on Taxation and Economic Policy (ITEP) decided to issue an analysis to determine just how that tax change would affect all Louisianans. 

Though the governor indicated interest in some unspecified mechanism to mitigate the impact for the state’s poorest residents, he didn’t provide any details so ITEP couldn’t analyze it. But in any case, ITEP concluded that the “overall shift in tax liability is so dramatic that the plan is virtually guaranteed to have a regressive impact regardless of whether or not a low-income relief program is added to the package.”

In particular, ITEP found that the bottom 80 percent of Louisianans in the income distribution would see a tax increase. Specifically, the poorest 20 percent of taxpayers, those with an average income of $12,000, would see an average tax increase of $395, or 3.4 percent of their income. The middle 20 percent, those with an average income of $43,000, would see an average tax increase of $534, or 1.2 percent of their income. The largest beneficiaries of the tax proposal would be the top one percent, with an average income of well over $1 million, who’d see an average tax cut of $25,423.

You can read the 2-page analysis here.

The Governor said, “[e]liminating personal income taxes will put more money back into the pockets of Louisiana families and will change a complex tax code into a more simple system that will make Louisiana more attractive to companies who want to invest here and create jobs.” But this is doubly not the case. Far from putting more money back into the pockets of Louisiana families, his proposal would raise taxes on the poor and middle class. It would also threaten Louisiana’s ability to provide critical services (from schools to roads to a public health) in the future that are essential to the health of the state’s economy.

Fortunately, ITEP’s report is already helping inform the debate. Jindal tax reform proposal equates to increase for bottom 80%, Jindal tax plan draws mixed reviews and Cutting income tax is the easy part; filling the gap is trickier are a few of the news stories the report has generated.  If Governor Jindal offers more specifics or modifications, you will find updated analyses here and at

To see ITEP’s recent preview of state tax reform prospects nationwide, click here.


State News Quick Hits: Virginia’s Gas Tax & Vermont’s EITC on Chopping Block, and More

There’s no doubt the fiscal cliff compromise reached on New Year’s Day will impact state budgets in complex ways, as CTJ’s partner organization, the Institute on Taxation and Economic Policy (ITEP) will be explaining in the coming weeks.  In the meantime here’s an important blog post from the Wisconsin Budget Project on why extending the federal estate tax cut will actually reduce Wisconsin state tax revenues.

The Roanoke Times is wrong to call Virginia Governor Bob McDonnell’s plan to eliminate the gas tax “worth debate” (we explain why here), but the editors hit the nail on the head with this: “The component of McDonnell’s plan that does not merit consideration is his reliance on money plundered from education, health care, public safety and other programs to backfill transportation. The highway program is starved for money because the gas tax rate has not changed since 1987. Are teachers and their students to blame? No, they are not. Did doctors and mental health workers cause the problem? Absolutely not. Did sheriff’s deputies and police officers? No. Legislators themselves are at fault, and it is shoddy business for them to strangle other services rather than accept responsibility.”

Focus on State of the State: In his combined inaugural and state-of-the-state address last week, Vermont Governor Peter Shumlin proposed cutting his state’s refundable Earned Income Tax Credit (PDF) by more than half to pay for an expanded low-income child care subsidy.  The Public Assets Institute called the governor out, observing that his proposal “would take from the poor to give to the poor.”  Rather than supporting broad-based tax increases to boost available revenue to pay for state priorities such as affordable child care, Governor Shumlin’s plan will substantially raise taxes on the very families he purports to help. From the Public Assets Institute: “…if the governor is going to insist on a zero-sum game and take from one group of Vermonters in order to “invest” in another, he should look elsewhere for the child care money. Vermont’s business tax credits would be a good place to start. The EITC was created to reduce poverty, and it’s been a great success. The same can’t be said about business tax credits and jobs.”

Focus on State of the State: During his 2013 State of the State speech, Idaho Governor Butch Otter officially outlined his intention to eliminate the state’s personal property tax. The state policy team at ITEP recently previewed this proposal (among others), saying that Idaho’s “personal property tax raises 11 percent of property tax revenue statewide, and in some counties it raises more than 25 percent. Some legislative leaders in the Senate have expressed doubts about the affordability of repeal, especially on the heels of last year’s $35 million income tax cut for wealthy Idahoans—a change that put more than $2,600 in the pocket of each member of Idaho’s top one percent (PDF), while failing to cut taxes at all for four out of every five Idaho families.”

There’s No Excuse Not to Raise More Revenue

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Senator Minority Leader Mitch McConnell argued on Sunday that, with the passage of the fiscal cliff deal, the “tax issue is finished” and that instead of raising more revenue we need to confront our “spending addiction” in order to reduce the deficit. What McConnell failed to mention was that lawmakers in Washington have already passed trillions of dollars in deficit-reducing spending cuts, while at the same time enacting trillions of dollars in deficit-increasing tax cuts.

Perhaps the biggest flaw in McConnell’s logic is the idea that lawmakers have already raised a substantial amount of revenue. According to the Joint Committee on Taxation (JCT), the official revenue estimators for Congress, the fiscal cliff deal will actually reduce revenue by $3.9 trillion over the next decade. The deal raises revenue only if compared to what would happen if Congress had extended all the tax cuts (which were set to expire by law at the end of 2012).

If you accept this baseline as touted by the President and others who supported the deal, the fiscal cliff resolution can be said to be a $620 billion tax “increase” on the rich. But even if you accept that logic, it is nonetheless true that the substantial spending cuts already enacted in order to reduce the deficit justify raising a lot more revenue.

According to the Center for American Progress, since fiscal 2011 nearly $3 in spending cuts were enacted for every $1 in revenue raised. In other words, even under the artificial baseline that allows us to pretend Congress just raised revenue, we would need to raise roughly $1.2 trillion in additional revenue before even reaching parity with the level of spending cuts already implemented.

Anti-tax lawmakers like Senator McConnell claim that spending is so out of control that we can’t possibly raise enough revenue from taxes to reverse the growth of the debt. But, according to the non-partisan Congressional Budget Office (CBO), the long-term debt crisis is largely driven by the persistence of the Bush tax cuts, rather than spending. In fact, the CBO’s long term budget outlook found that had Congress done nothing and simply allowed all the Bush era tax cuts to expire, the debt would have been on track to begin dropping substantially starting in 2015 and over the coming decades.

There is also the related matter of fairness in our tax code. The reality is that the fiscal cliff deal did very little to change the tax rate paid by wealthy investors like Warren Buffett or Mitt Romney and actually included an extension of many of the corporate tax breaks that allow companies like General Electric to avoid taxes altogether. As we’ve explained, these corporate tax breaks are likely to be extended again and again and end up costing more than was saved by ending some of the tax cuts for the rich.

Considering it’s centrality to fixing the debt and improving fairness, the “tax issue” is certainly not finished. It’s really just getting started.

Provisions of the Fiscal Cliff Deal

January 10, 2013 01:56 PM | | Bookmark and Share

The fiscal cliff deal (the American Taxpayer Relief Act of 2012) makes permanent nearly all of the Bush tax cuts and extends many of the tax provisions from the 2009 economic recovery act. In fact, the only major provision of the tax breaks in effect in 2012 that was allowed to expire entirely was the 2 percent payroll tax holiday. This table explains the income and estate tax provisions in the major proposals and final deal that became law.

Read the fact sheet

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New Congress Wastes No Time Introducing Anti-Tax Bills

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In the first two days of the new Congress, 21 bills to amend the tax code were introduced in the House of Representatives. The 113th Congress officially convened at noon on January 3rd and by the end of the business day on January 4th, House members had introduced 218 bills and over 40 resolutions. (By way of comparison, the 112th Congress passed only 219 bills during its entire two-year session, making it the least productive Congress on record!)

Bills to reduce taxes and revenues outnumber other kinds of tax proposals. For example, there are two designed to abolish the estate tax forever. There are proposals to repeal the 16th amendment, (that allows Congress to collect taxes in the first place), and to eliminate the Internal Revenue Service. Subtler proposals are special interest giveaways.  For example, there’s one that would extend tax-free health savings accounts to church-based health insurance co-ops, another that would roll back transfer taxes on farmland and a couple designed to expand or entrench the obscenely expensive (PDF) research tax credit for business. And one more asks Congress to commit to protecting the tax break that experts across the ideological spectrum would like to see end: the mortgage interest deduction on second homes.

It’s worth mentioning that the anti-tax beast is not just a Beltway menace; similarly radical ideas are on the agenda in the states, too. As recently as November 2012, voters in 11 states faced 17 tax-related ballot initiatives, and most of them would have exacerbated income inequality and drained revenues.  (Some prevailed, some did not.) Looking ahead, some 30 states are looking at tax changes of some kind this year and 15 are likely to undertake a substantial overhaul of their tax codes. Only a few, however, will be doing it in a way that makes their tax systems more fair and sustainable, and too many proposals mimic the disastrous laws already passed in states like Kansas and Michigan.

The federal fiscal cliff deal that left 85 percent of the Bush era tax cuts in place indefinitely was a bad deal for most Americans; it raises too little revenue and leaves all of the same breaks and loopholes available to the very rich and the large corporations.  The lobbyists who brought you that stinker were back at work on January 2nd pushing for more, and their friends in the 113th Congress seem all too happy to help.  

After Fiscal Cliff Deal, Warren Buffett Still Pays Low Tax Rate, GE Still Avoids Taxes

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Perhaps the most striking thing about tax policy in 2012 is that it featured a presidential campaign focused on taxes and then ended with major legislation that resolved none of the issues raised in that campaign.

Even after the fiscal cliff deal (the American Taxpayer Relief Act of 2012) takes effect, Warren Buffett and Mitt Romney will still pay a lower effective federal tax rate than many relatively middle-income working people. Their effective tax rate may be five percentage points higher (since the capital gains and stock dividends that wealthy investors live on will be taxed at a top rate of 20 percent rather than 15 percent) but this does not eliminate the unfairness that Warren Buffett highlighted.

Meanwhile, the tax loopholes that allow profitable corporations like General Electric (GE) to avoid taxes were actually extended as part of the fiscal cliff deal. The law includes a package of provisions often called the “extenders” because they extend several special interest breaks for one or two years each. The extenders officially only add $76 billion to the costs of the law, but a recent CTJ report explains how their cost is likely to be far greater because Congress has shown a desire to extend these provisions again each time they expire.

One of the “extenders” is the one-year extension of “bonus depreciation,” which allows companies to write off the costs of equipment purchases far more quickly than those assets actually wear out. When these purchases are debt-financed, the result is that these investments have a negative effective tax rate, meaning the investments are actually more profitable after-tax than before tax. While corporations don’t usually reveal exactly which loopholes facilitate their tax avoidance, this one is certainly among those used effectively by GE and the other corporate tax dodgers identified in CTJ’s reports.

However, another tax break extended in the fiscal cliff deal actually has been identified by GE, in its public filings with the SEC, as having a significant effect in lowering its effective tax rate. This is the so-called “active financing exception,” which was extended through 2013 (and retroactively to 2012, since it had expired at the end of 2011). A CTJ report from 2012 explains that this break essentially makes it easier for U.S. corporations with income from financial activities to shift their profits to offshore tax havens.

The New York Times article from March 2011 that famously exposed GE’s tax avoidance explained that the head of GE’s 1,000-person tax department literally “dropped to his knees” in the House Ways and Means office as he begged for — and won — an extension of the active financing exception.

One thing is clear: Despite what Senator McConnell says, the tax debate is not over. There is a need for real tax reform, which means eliminating loopholes and ending the practice of extending “temporary” loopholes every couple years.