Which Places Benefit Most From State and Local Tax Deductions?

Which Places Benefit Most From State and Local Tax Deductions?

Which Places Benefit Most From State and Local Tax Deductions?

One of the most substantial changes in President Trump’s most recent tax plan is the elimination of many itemized deductions, including those for state and local taxes. This map shows the variation, by county, in the amounts of these deductions. The measurement used here is mean deduction amount taken per return: in other words, the total of all of the deductions for state and local taxes, divided by number of returns filed. The results show that the benefits of these deductions vary substantially from county to county.

This map is interactive—hover the mouse over a given county to find out its average amount of state and local deduction claimed. Click here for a larger version.

There are two factors contributing to this regional variation. The first is that higher-income taxpayers tend to take larger deductions. People with very high incomes tend to have very high levels of sub-federal taxes paid, and furthermore, they’re more likely to itemize generally. Lower-income taxpayers tend to opt for the standard deduction instead. Consequently, the itemized deductions in this map are most valuable in counties where incomes are high.

The second factor for county-by-county variation is that state and local tax regimes differ substantially. The places that benefit most from this federal deduction tend to have high state and local taxes overall. The border becomes clearly noticeable between California and Nevada, for example, simply by looking at data from federal tax returns. The ten counties benefiting most from these deductions are all located in four states—ones that, like California, are known to have high tax burdens generally:

Top Ten Counties for State and Local Deductions (2014)
Source: IRS SOI Tax Stats – County Data

New York County, NY

$24,898

Marin County, CA

$16,956

San Mateo County, CA

$15,405

Westchester County, NY

$14,784

Fairfield County, CT

$14,262

Santa Clara County, CA

$12,562

San Francisco County, CA

$12,116

Nassau County, NY

$11,624

Morris County, NJ

$11,440

Somerset County, NJ

$11,267

It is unclear which kinds of taxpayers would see their tax bills increase or decrease as a result of the president’s plan. There are many tax cuts in the plan, some of them for the same kind of wealthy filers these deductions typically benefit. However, it is clear that the distribution of this particular tax change would vary with geography.


Source: Tax Policy – Which Places Benefit Most From State and Local Tax Deductions?

To What Extent Does Your State Rely on Sales Taxes?

To What Extent Does Your State Rely on Sales Taxes?

To What Extent Does Your State Rely on Sales Taxes?

Sales taxes are one of the largest sources of state and local tax revenue. On average, 23.3 percent of state and local tax revenues came from sales taxes in fiscal year 2014.

Combined state and local sales tax rates vary across states, with combined rates ranging from 9.98 percent in Louisiana to 5.4 percent in Wyoming. Local sales taxes are collected in 38 states. Five states do not have statewide sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. However, Alaska and Montana do allow localities to levy local sales taxes.

Today’s map shows what percentage of state and local tax collections derive from the sales tax. Washington depends most heavily on the sales tax (45 percent of total tax collections) due to the lack of a corporate or individual income tax rate (although they do levy a harmful gross receipts tax in lieu of the corporate income tax). Tennessee comes in second (41 percent), again because the state does not levy an individual income tax (except on interest and dividends). South Dakota is the third most heavily dependent (40 percent). It also does not impose a corporate or individual income tax.

Sales tax collections

While some think the sales tax rate is the only consideration in the sales tax code, the tax base is equally important. The economy is moving away from goods and toward services, but the sales tax is levied mostly on goods and less on services. Because of this, and exemptions of certain goods (such as groceries and prescription drugs) in the tax base for political reasons, the sales tax base is narrowing. This is harmful because as the sales tax is applied to less of the economy, the sales tax rate must increase to produce the same amount of revenue.

When the first sales tax was created in Mississippi in 1930, the state’s economy lacked a notable service sector, so the tax was levied on most tangible goods. As more states adopted their own sales tax, they used language similar to Mississippi’s code. That is how the exemption of services from the sales tax base is, in part, a historical accident.

A properly structured sales tax code should have a broad base and apply to all final consumption. If states can apply these basic principles, it will result in stable revenue and allow for a low rate that brings in ample tax revenue.

Note: This is the first in a four-part map series in which we will examine the primary sources of state and local tax collections. Other maps in this series are linked below.


Source: Tax Policy – To What Extent Does Your State Rely on Sales Taxes?

Details of the Trump Administration Tax Proposal Released Today

Details of the Trump Administration Tax Proposal Released Today

Details of the Trump Administration Tax Proposal Released Today

Earlier today, Trump administration officials released a document with a set of proposed goals for an overhaul of the federal tax code:

Changes to the Individual Income Tax

  • Consolidates the current seven tax brackets into three, with rates on ordinary income of 10 percent, 25 percent, and 35 percent. The administration did not specify the income thresholds to which these brackets would apply.
  • Doubles the standard deduction, from $6,350 to $12,700 for single filers, and from $12,700 to $25,400 for married filers.
  • Provides “tax relief” to households with child and dependent care expenses, the form of which is not specified.
  • Eliminates all itemized deductions, except for the charitable deduction and the mortgage interest deduction.
  • Eliminates “targeted tax breaks that mainly benefit the wealthiest taxpayers,” which are not specified.
  • Eliminates the Alternative Minimum Tax.
  • Eliminates the 3.8 percent Net Investment Income Tax.

Changes to Business Income Taxes

  • Reduces the “business tax rate” to 15 percent. This presumably implies that the corporate income tax rate would be reduced from 35 percent to 15 percent, as well as creating a maximum tax rate of 15 percent.
  • Reduces the maximum tax rate on pass-through business income to 15 percent.
  • Moves to a territorial tax system, which would exempt foreign-source income from U.S. tax.
  • Enacts a deemed repatriation, at an unspecified rate, of currently deferred foreign-source income.

Other Changes

  • Eliminates the federal estate tax.

All in all, the document does not present many details about the administration’s intentions regarding tax reform; in fact, it is less specific than the tax proposal released by the Trump campaign in September 2016. However, the document does indicate some of the administration’s central priorities for tax reform: large rate cuts for U.S. business income, substantial individual income tax reductions, and the curtailment of certain tax preferences.


Source: Tax Policy – Details of the Trump Administration Tax Proposal Released Today

Tampon Taxes: Do Feminine Hygiene Products Deserve a Sales Tax Exemption?

Tampon Taxes: Do Feminine Hygiene Products Deserve a Sales Tax Exemption?

Tampon Taxes: Do Feminine Hygiene Products Deserve a Sales Tax Exemption?

Key Findings

  • In 2016, at least 13 states and the District of Columbia considered proposals to exempt feminine hygiene products from the state sales tax. Ultimately, Connecticut, Illinois, New York, and the District of Columbia adopted the proposed exemptions.
  • Ideally, sales tax should apply to all final consumer purchases, without regard for whether a product is a “necessity” or “luxury.”
  • Of the 45 states which impose statewide sales taxes, seven—Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, and Pennsylvania—specifically exempt feminine hygiene products from the sales tax base.
  • No state assesses a special or unique tax on feminine hygiene products.
  • Exempting feminine hygiene products is part of a broader trend of shrinking state sales tax bases. Smaller sales tax bases lead to higher overall sales tax rates.

Introduction

Over the last two years, a number of states have considered bills to exempt tampons and other feminine hygiene products from their sales tax bases. Supporters of “tampon tax” repeal bills argue that women face an injustice when buying these necessity items, but that argument doesn’t hold water. First, it’s factually inaccurate—no state subjects tampons to a special or unique tax. Second, the solution—exempting tampons and other feminine hygiene products from the sales tax—violates the principles of sound tax policy. Ideally, sales taxes should tax all final consumer purchases, without regard to whether items are classified as necessities or luxuries.

Exempting feminine hygiene products from the sales tax base results in less revenue for the state, leading to higher overall rates in the long run.

The Ideal Sales Tax

An ideal sales tax should apply to all final consumer purchases, without regard to whether items are classified as “necessities” or “luxuries.” Sales taxes “should apply to all consumption expenditures… at a uniform rate.”[1]

First, this allows for the lowest possible rate.[2] The broader the base, the lower the rate can be to generate a given amount of revenue. Second, a broad sales tax does not distort preferences or production across items or services. Third, it does not favor one type of consumption over another, meaning that a consumer does not have to choose between one item that is taxed versus another item that isn’t taxed.

While ideally, the sales tax should apply to all final consumer purchases of goods and services, states have exempted many goods, such as groceries and prescription drugs, from their sales tax base, in many cases for political reasons. Sales taxes, as applied to goods, tend to be viewed as regressive.[3] Low-income households as a general rule spend more of their income on consumption than high-income households do, and so a tax on consumption like a sales tax tends to encompass more of this group’s spending as a percentage of their income.

However, this idea of exempting necessities is a political one, not an economic one. “Most [exemptions] accomplish little in the terms of usual standards of taxation. Unfortunately, there is a tendency in some states to add exemptions, one by one, in every legislative session, often with complications for operation of the tax and little gain in terms of principle.”[4]

Viewed through this lens, attempts to exempt feminine hygiene products from the sales tax are part of a broader trend in sales tax policy toward a narrowing tax base.

The Taxation of Feminine Hygiene Products

During the last two years, a number of states have considered removing feminine hygiene products from their sales tax bases. In some cases, arguments have focused on equity concerns, arguing that feminine hygiene products are necessities and should be exempt.

States That Exempt Feminine Hygiene Products

There are 12 states where feminine hygiene products are not taxed under a state’s sales tax. Five states—Alaska, Delaware, New Hampshire, Montana, and Oregon[5]—do not have sales tax. Seven states specifically exempt feminine hygiene products—Illinois, Maryland, Massachusetts, Minnesota, New Jersey, New York, and Pennsylvania.[6]

In some states, such as Maryland[7] and Massachusetts,[8] feminine hygiene products are exempt because they are considered medical products. In other states, they are specifically exempted, meaning tampons (or feminine hygiene products) are enumerated in statute as being exempt. Pennsylvania, for instance, exempts “toilet paper, sanitary napkins, tampons, or similar items used for feminine hygiene.”[9] Typically, the statutory language is broad enough to include a number of feminine hygiene products, not just tampons.

The District of Columbia will exempt tampons from the sales tax starting on October 1, 2017, and Connecticut’s exemption will start July 1, 2018.

(a) Exemption effective July 1, 2018.
(b) Exemption effective October 1, 2017.
Source: State statutes, forms, and instructions.
Table 1. Sales Tax Treatment of Feminine Hygiene Products As of January 1, 2017
State State General Sales Tax Feminine Hygiene Treatment
Alabama 4.00% Included in Base
Alaska 0.00% n/a
Arizona 5.60% Included in Base
Arkansas 6.50% Included in Base
California 7.25% Included in Base
Colorado 2.90% Included in Base
Connecticut (a) 6.35% Included in Base
Delaware 0.00% n/a
Florida 6.00% Included in Base
Georgia 4.00% Included in Base
Hawaii 4.00% Included in Base
Idaho 6.00% Included in Base
Illinois 6.25% Exempt
Indiana 7.00% Included in Base
Iowa 6.00% Included in Base
Kansas 6.50% Included in Base
Kentucky 6.00% Included in Base
Louisiana 5.00% Included in Base
Maine 5.50% Included in Base
Maryland 6.00% Exempt
Massachusetts 6.25% Exempt
Michigan 6.00% Included in Base
Minnesota 6.875% Exempt
Mississippi 7.00% Included in Base
Missouri 4.225% Included in Base
Montana 0.00% n/a
Nebraska 5.50% Included in Base
Nevada 6.85% Included in Base
New Hampshire 0.00% n/a
New Jersey 6.875% Exempt
New Mexico 5.125% Included in Base
New York 4.00% Exempt
North Carolina 4.75% Included in Base
North Dakota 5.00% Included in Base
Ohio 5.75% Included in Base
Oklahoma 4.50% Included in Base
Oregon 0.00% n/a
Pennsylvania 6.00% Exempt
Rhode Island 7.00% Included in Base
South Carolina 6.00% Included in Base
South Dakota 4.50% Included in Base
Tennessee 7.00% Included in Base
Texas 6.25% Included in Base
Utah 5.95% Included in Base
Vermont 6.00% Included in Base
Virginia 5.30% Included in Base
Washington 6.50% Included in Base
West Virginia 6.00% Included in Base
Wisconsin 5.00% Included in Base
Wyoming 4.00% Included in Base
D.C. (b) 5.75% Included in Base

Of the states that exempt tampons or other feminine hygiene products from their sales tax, three states (Connecticut, Illinois, and New York) and the District of Columbia adopted their exemptions in 2016. At least 10 other states considered such proposals.[10]

It is worth noting that some arguments regarding the taxation of feminine hygiene products seem to imply[11] that tampons are subject to a specific type of tax. That is not correct. In no state are tampons subject to a special or unique tax, or a “tampon tax.” Rather, the question is whether feminine hygiene products are included in a state’s sales tax base. Traditionally, we don’t discus sales tax as being a tax on a specific item, as it is misleading.

Losses in Revenue

In addition to all of the arguments regarding sound sales tax policy, states should also be hesitant to exempt items such as feminine hygiene products from their sales tax base because they continue to erode the revenue productivity of these taxes. As the sales tax base gets smaller, states must raise tax rates on the remaining items to generate the same amount of revenue.

In 2016, California considered a bill to remove feminine hygiene products from its sales tax base. The California Board of Equalization estimated that California would lose $20 million in state and local revenue from this one change.[12] New York estimated that it would lose $10 million in revenue from its feminine hygiene exemption.[13] While these exemptions are a small part of California’s and New York’s total state and local revenues, the exemption of feminine hygiene products is part of a broader trend to continue to shrink the state’s sales tax base. Over time, these small changes lead to large losses of revenue.

This is particularly troubling for the exact reason why proponents suggest exempting feminine hygiene products: they are necessities for some individuals. Other items that are still included in the sales tax base could be “necessities” for other individuals. Exempting one item from the sales tax base puts all the remaining items at risk of a higher rate. Unfortunately, this is the trade-off that exists within sales taxes. Moves to exempt items from the sales tax base are moves to tax the remaining goods (and sometimes services) at a higher rate.

Conclusion

Advocates continue to push states to remove feminine hygiene products from their state sales tax bases, calling the sales taxation a “tampon tax.” Tampons and other feminine hygiene products are not subject to a special or unique tax in any state. Currently, 12 states do not include feminine hygiene products in their sales tax base for a variety of reasons, but moves to exempt these goods from taxation violate the principles of sound sales tax policy.


[1] John F. Due and John L. Mikesell, Sales Taxation: State and Local Structure and Administration, (Washington, D.C., Urban Institute Press, 1994), 2nd ed., 15.

[2] Due and Mikesell actually point out that for full economic efficiency, the rate wouldn’t be uniform, but rather inelastically demanded goods would have a higher rate than those with elastic demands, but it is too difficult to truly know the elasticities of demand for every product. Under this argument, necessities would actually be taxed at a higher rate than luxury goods.

[3] John F. Due and John L. Mikesell, Sales Taxation: State and Local Structure and Administration, (Washington, D.C., Urban Institute Press, 1994), 2nd ed., 9.

[4] Ibid, 88.

[5] Alaska and Montana have some local sales taxes.

[6] The California legislature passed a bill in 2016 to remove feminine hygiene products from their sales tax base, but Governor Jerry Brown (D) vetoed the measure.

[7] Comptroller of Maryland, “Taxability of Medical Equipment,” Bulletin 01-1, March 2001, http://taxes.marylandtaxes.com/Resource_Library/Tax_Publications/Tax_Bulletins/Sales_and_Use_Tax_Bulletins/su_bul01-1.pdf

[8] Massachusetts Department of Revenue, “A Guide to Sales and Use Tax,” http://www.mass.gov/dor/individuals/taxpayer-help-and-resources/tax-guides/salesuse-tax-guide.html#home.

[9] Pennsylvania Code, P.L. 97 No. 22 §9.2(4).

[10] These states are California, Michigan, Mississippi, Missouri, Rhode Island, Tennessee, Utah, Virginia, Washington, and Wisconsin.

[11] Julia Craven, “GOP Governor Brings Illinois Into the 21st Century By Nixing Antiquated Tampon Tax,” The Huffington Post, August 21, 2016, http://www.huffingtonpost.com/entry/illinois-tampon-tax_us_57ba0bdbe4b0b51733a4267d.

[12] California Assembly Committee on Revenue and Taxation, Assembly Bill 1561 Bill Analysis, March 31, 2016, https://leginfo.legislature.ca.gov/faces/billAnalysisClient.xhtml?bill_id=201520160AB1561#.

[13] Governor Andrew Cuomo, “Governor Cuomo Signs Legislation to Exempt Sales and Use Taxes on Feminine Hygiene Products,” July 21, 2016, https://www.governor.ny.gov/news/governor-cuomo-signs-legislation-exempt-sales-and-use-taxes-feminine-hygiene-products.


Source: Tax Policy – Tampon Taxes: Do Feminine Hygiene Products Deserve a Sales Tax Exemption?

Could Trump’s Corporate Rate Cut to 15 Percent be Self-Financing?

Could Trump’s Corporate Rate Cut to 15 Percent be Self-Financing?

Could Trump’s Corporate Rate Cut to 15 Percent be Self-Financing?

Spurred by some recent remarks from the Treasury Secretary, many tax policy analysts have been talking once again about how much economic growth can offset revenues lost from tax cuts. If a policy improves economic growth substantially, then it should increase tax revenue collections by increasing the incomes of individuals and corporations.

One question I’ve answered a number of times since this discussion began has been, what kind of growth would be necessary for a tax cut to be completely self-financing? So let’s take President Trump’s stated goal of a 15 percent corporate income tax cut as an example and run some quick back-of-the-envelope math with round numbers to illustrate the basics of how this might work.

How Much Growth is Needed?

The short answer is you’d need about 0.9 percent additional growth over the 10-year budget window that is commonly used in Washington D.C. for budget bills. By “additional growth,” I mean over and beyond what forecasters typically predict. The Congressional Budget Office’s baseline projections are that growth will average about 1.9 percent over the next ten years. In order for a corporate income tax cut to 15 percent to be self-financing, it would have to raise the level of growth to 2.8 percent on average.

The federal government raises about $40 trillion in revenue over the 10-year budget window, according to the Congressional Budget Office’s projections. A corporate income tax rate cut to 15 percent would reduce federal revenues by about $2 trillion over the same time period, according to the Tax Foundation model. In other words, it would reduce federal revenue by about 5 percent.

One way to make up for this loss of revenue would be by having an economy about 5 percent larger. A 5 percent larger economy would have 5 percent more income, which would be taxed and increase tax revenues approximately proportionally. (This isn’t precisely true, but it’s true enough for our purposes. More on this later.)

None of this is particularly complex so far: if an economy is 5 percent larger, it can reduce its tax-to-GDP ratio by 5 percent and raise the same amount of revenue. Simple.

However, a scenario in which the economy immediately becomes 5 percent larger is probably not the right idea to be discussing. Most developments that generate growth do so in a more gradual way. For the sake of keeping the example simple, let’s consider the case of straight-line growth throughout the budget window, an amount we add to the baseline growth projection each year.

To get an economy 5 percent larger, on average, throughout the budget window, you need additional growth of about 1 percentage point per year. This means the economy will be 1 percent larger in the first year, 4 percent larger in the fourth year, 8 percent larger in the eighth year, 10 percent larger in the 10th year, and so on. While the GDP won’t reach the “5 percent larger” target in the early years, it will exceed it in the later years, and on the whole that will balance out. Bear in mind that even though the economy is 10 percent larger in the 10th year in this hypothetical, this does not imply 10 percent GDP growth; it’s accumulated slowly over time.

In short, the basic back-of-the-envelope math tells you that the corporate income tax cut would need to add about 1 percentage point to growth for 10 years to be self-financing during the 10-year budget window. However, there are a few caveats and adjustments that need to be made. The first of these is something called “real bracket creep.” If people’s incomes go up, they get pushed into higher tax brackets, so taxes as a percentage of national income go up. The other caveat here is that we didn’t consider compound growth in the simple example. Both of these reduce the amount of growth needed, and collectively they mean you don’t actually need 1 percent, you need something more like 0.9 percent.

Is That Growth Target Realistic?

Tax Foundation’s Taxes and Growth model would not predict 0.9 percent added growth over the budget window from a corporate rate cut to 15 percent. We’ve run this particular scenario before as Option #51 in our book, Options for Reforming America’s Tax Code. The model predicts something more like 0.4 percent over the budget window: a sustained period of 2.3 percent growth instead of 1.9 percent growth, until the economy is eventually about 4 percent larger.

Other macroeconomic models used for tax policy, such as those used at Tax Policy Center or at the Joint Committee on Taxation, would also not likely predict that much growth from that 15 percent tax cut. Here’s why most models are likely to show more modest results from that policy.

The country is reasonably close to full employment. Most Americans who want to be working currently are working. There’s some potential for adding more workers to the economy, to be sure, but most of the people who aren’t working right now are retired, or in school, or otherwise not interested in joining the labor force.

Growth, instead, would mostly have to come from finding better jobs for the workers we have. Imagine businesses, spurred by their lower tax rate, start ordering new expensive buildings with new expensive equipment in them. These would generate higher revenues on a per-worker basis, increasing incomes across the board. This is an ordinary concept called “productivity growth,” and it certainly could be the result of well-crafted policy.

Unfortunately, productivity growth has relatively low variance, historically. It usually grows between 1 and 2 percent per year. Policy can probably help us stay towards the higher end of that range, but a single policy is unlikely to move productivity growth for the whole economy by a whole percentage point. The Committee for a Responsible Federal Budget, among others, have discussed how both population and productivity are limiting factors on what kind of growth is possible.

This largely explains why most models of U.S. labor and productivity would not expect any single policy change to boost growth by 0.9 percent. In order to make a deficit-neutral cut in the corporate income tax rate, other deficit-reducing policies would be necessary.


Source: Tax Policy – Could Trump’s Corporate Rate Cut to 15 Percent be Self-Financing?

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