The Center's work on 'Taxes' Issues


Americans Take Pride in Paying Taxes

April 17, 2015 at 3:27 pm

Forget the conventional wisdom.  Americans overwhelmingly take pride in paying their taxes, recent IRS Oversight Board survey data show.

Our country’s tax system functions largely on a voluntary basis, albeit with significant third party information and a backstop of enforcement.  Its proper functioning, therefore, depends on a high level of civic duty and responsibility, and that’s exactly what exists.  Some 94 percent of Americans believe it’s their civic duty to pay their fair share of taxes.

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In a piece in The Atlantic, Vanessa Williamson highlighted some interview anecdotes that hint at the reasons behind these strong survey results:

  • A 28-year-old from Utah: “It feels good to contribute.”
  • A former Marine: “[It’s] the cost of being an American.”
  • A woman from Kansas: “[T]he country has to be taken care of.”

Beyond the pride of fulfilling a fundamental civic obligation, Americans can take pride in where their tax dollars are going (see here for state tax dollars and here for federal), whether it’s to pay for health care for an elderly person, a soldier’s gear, diabetes research, or helping a working class kid go to college.  As one woman from Florida told Williamson, “maybe my little bit of money that I’m putting in is paying somebody else’s Social Security or Medicare.”

Exactly.

Undocumented Immigrants Pay Larger Share of Income in State and Local Taxes Than Top Earners

April 17, 2015 at 2:30 pm

Undocumented immigrants pay a larger share of their income in state and local taxes than the nation’s top earners and immigration reform would improve state and local finances across the country, a new report from the Institute on Taxation and Economic Policy (ITEP) shows.

Undocumented immigrants pay sales taxes when they buy goods and services; property taxes (mostly through their rent); and income taxes through their paychecks — even those who don’t file income tax returns, although as many as three-quarters do.

Among the report’s key findings:

  • Undocumented immigrants paid about $11.8 billion in state and local taxes in 2012.
  • They pay about 8 percent of their income, on average, to state and local taxes, significantly higher than the 5.4 percent that the average taxpayer in the top 1 percent pays. (See chart.)

  • President Obama’s executive actions providing a temporary reprieve from deportation and a three-year, renewable work permit to some undocumented immigrants will boost state and local tax revenues by as much as $845 million a year when fully implemented, and it will raise the effective state and local tax rate that undocumented immigrants pay to 8.7 percent from 8 percent. That’s mainly because the temporary reprieve and work permits both raise these immigrants’ wages, on average, and increase the share who file income taxes.
  • Comprehensive immigration reform would further boost the state and local taxes that these immigrants pay, for similar reasons. ITEP estimates that granting lawful permanent residence to all undocumented immigrants now in the country would lift state and local tax collections by about $2.2 billion a year.

Top 5 (+1) State Tax Charts

April 14, 2015 at 3:00 pm

As we approach Tax Day, these six charts put state taxes — and the programs those taxes fund — into context.

More than half of state tax dollars go to fund education (K-12 and higher education) and health care, as the chart below shows.  State tax dollars also fund other critical services such as transportation, corrections, public assistance, care for residents with disabilities, police, state parks, and general aid to local governments.

State revenue losses from the Great Recession were both deeper and longer lasting than in previous recessions, as the chart below shows.  Not until the end of 2013 did revenues finally return to pre-recession (2007) levels.  Since then, the gradual improvement has stalled, leaving state revenues roughly where they were when the recession hit, after adjusting for inflation.

While state revenues have improved since the depths of the recession, they have a long way to go.  As revenues have stagnated, state needs have increased.  For instance, the number of students in public elementary and secondary schools has risen by about 485,000 since the fall of 2008, the first full school year after the recession started — but school districts nationally employ 288,000 fewer workers.

While most states have used their gradually improving revenues to help their schools recover from cuts imposed after the recession hit, some states have made it more difficult for their schools to recover by sharply cutting income taxes.  Six of the seven states that have made the deepest cuts in general funding for K-12 education since the beginning of the recession have also enacted major income tax cuts, as the chart below shows.  These tax cuts eliminated revenue that could have helped states reverse the deep funding cuts from the recession and invest in promising education reforms.

As the chart below shows, low-income families pay significantly more of their income in state and local taxes than very wealthy families.  State and local taxes push many families into — or deeper into — poverty.

A state Earned Income Tax Credit (EITC) is a powerful tool to prevent state and local taxes from pushing low-income working families deeper into poverty.  Twenty-five states and Washington, D.C., have their own EITCs, as the map below shows.  A state credit builds on the federal EITC’s proven effectiveness in helping low-income working families make ends meet.  States looking to encourage work and reduce poverty, especially among children (the federal EITC lifts millions of children out of poverty), should consider enacting or expanding an EITC.

Case for “Single Sales Factor” Tax Cut Now Much Weaker

April 1, 2015 at 10:39 am

Lawmakers in North Carolina, North Dakota, and Tennessee are considering a costly corporate tax giveaway in hopes of attracting or retaining manufacturing jobs.  But a new study casts serious doubt on the research that has long served as the main justification for this tax break.

Called the “single sales factor formula,” the tax break enables multistate corporations to pay income taxes based only on their sales to consumers in that state.  In states without this tax break, a corporation’s taxes typically reflect the shares of its property and payroll, as well as sales, located in the state.

The single sales factor formula usually results in a sharp drop in state revenue.  North Carolina, for example, stands to lose more than $75 million a year.

Single sales factor proponents often cite a 2000 study by economists Austan Goolsbee and Edward Maydew finding that states can attract manufacturing jobs by giving more weight to companies’ sales — and less weight (or none) to their property and payroll — in determining their taxes.  But economist David Merriman has just published a study that largely undermines that finding.  When Merriman updated the 1978-1994 results in the Goolsbee-Maydew study through 2010, he found that giving extra weight to sales created many fewer jobs than Goolsbee and Maydew had found — so few, in fact, that the gains weren’t statistically significant.

Both studies used sophisticated statistical techniques to examine the relationship between manufacturing jobs and state tax formulas.  The table below shows what Merriman found in a more understandable way.  It ranks the states with corporate income taxes by their success in retaining manufacturing jobs from December 2000 through December 2014.  (All but two states had a net loss of manufacturing jobs in this period.)

If giving extra weight to companies’ sales in determining their taxes helped a state attract or retain manufacturing jobs, the eight states with a single sales factor formula throughout this period would be clustered toward the top of this ranking, while the seven states that gave no extra weight to sales would be clustered toward the bottom.  But the table doesn’t show that; in fact, closer to the reverse is true.

Even over the shorter December 2009-December 2014 period, when more states (14) had the single sales formula, none were in the top five states in manufacturing job growth.

States should reject this misguided job-creation strategy, which loses substantial revenue that states could better use to create a more educated workforce, higher quality infrastructure, and other building blocks of a healthy economy.

States Looking to Strengthen Earned Income Tax Credits

March 30, 2015 at 10:56 am

As states continue to turn the corner on the Great Recession, policymakers in a number of states are looking to help low-paid working families by creating or expanding refundable state earned income tax credits (EITCs). These credits build on the federal EITC, which promotes work, helps families make ends meet, lifts them out of poverty, and yields lasting benefits for kids, studies show.

States considering EITC expansions include:

  • Illinois, where lawmakers have proposed doubling the size of the EITC to 20 percent of the federal credit, helping around 1 million working households.
  • Massachusetts, where Governor Charlie Baker has proposed doubling the EITC to 30 percent of the federal credit, helping more than 400,000 working households. Meanwhile, bills proposed in both houses of the state legislature would boost the EITC to 50 percent of the federal credit.
  • Minnesota, where Governor Mark Dayton has proposed a new EITC expansion — on top of the large increase enacted last year — that would make another 30,000 working Minnesotans eligible and boost the credit for more than four in five current recipients.
  • Rhode Island, where Governor Gina Raimondo has proposed building off of last year’s EITC changes (which cut the credit to 10 percent of the federal EITC but made it fully refundable, producing a net gain for most recipients) by increasing the credit to 15 percent of the federal EITC.
  • Washington State, where Governor Jay Inslee has proposed funding the EITC, which the state enacted in 2008 but has never funded due to the recession, helping over 400,000 working households.

States considering new EITCs include:

  • California, which has the nation’s highest poverty rate under a poverty measure that accounts for taxes and non-cash benefits as well as cash income; a recent proposal to create an EITC would benefit around 3 million working households.
  • Montana, where families with poverty-level wages pay some of the nation’s highest state income taxes; a proposed EITC would benefit 80,000 working families.

A number of states improved their credits in 2014, as our updated paper explains.  Most notably, the District of Columbia expanded the EITC for workers without dependent children in the home, an idea with bipartisan support at the federal level.  Twenty-five states plus the District of Columbia have EITCs (see map).

States are smart to use one of our most effective tools to ensure working families recover along with the economy.  State EITCs allow state lawmakers to leverage the power of the federal credit at a relatively low cost.