How Would the Fiscal Cliff Affect Typical Families Across the Country?

December 10, 2012

Recently, we released an analysis looking at the potential total tax increase on the median four-person family in each state.[1] We found that higher income and lower states tended to be affected more than middle income states—higher income states from AMT changes and lower income states from the Bush tax cuts. Sufficient data exists for us to repeat this analysis based on Census MSAs (metropolitan statistical areas) using the IRS’s income tax by ZIP code information.[2]

We used this data to estimate itemized deductions as a percentage of household income for all income groups in each MSA, using national aggregates to adjust for family size. We then used American Community Survey data on median household incomes by family size,[3] looking specifically at four-person families, and applied the deduction percentages for the income group into which the median family would fall to that family’s household income.[4]

The final step was to take these numbers and run them through our Fiscal Cliff tax calculator, which is available online at www.mytaxburden.com. We calculated tax liability under 2011 law (the most recent year that an AMT patch was in effect) and 2013 law assuming full expiration of all expiring tax cuts. We assume each family takes the standard deduction unless our predicted deduction amount exceeds it.[5]

Table 1. Most Affected Metropolitan Areas

City

State

Median Household Income for 4-Person Family

Tax Increase

As % of Income

Rank

McAllen-Edinburg-Mission

TX

$36,104

$2,938

8.14%

1

College Station-Bryan

TX

$38,292

$3,091

8.07%

2

Brownsville-Harlingen

TX

$38,808

$3,127

8.06%

3

Laredo

TX

$39,062

$3,145

8.05%

4

Hinesville-Fort Stewart

GA

$39,183

$3,153

8.05%

5

Corvallis

OR

$39,775

$3,195

8.03%

6

Lake Havasu City-Kingman

AZ

$39,802

$3,197

8.03%

7

Hot Springs

AR

$42,648

$3,396

7.96%

8

Visalia-Porterville

CA

$43,554

$3,338

7.67%

9

Danville

VA

$43,838

$3,291

7.51%

10

Trenton-Ewing

NJ

$110,065

$7,729

7.02%

11

Bridgeport-Stamford-Norwalk

CT

$115,121

$7,803

6.78%

12

San Francisco-Oakland-Fremont

CA

$110,431

$7,424

6.72%

13

Poughkeepsie-Newburgh-Middletown

NY

$101,197

$6,754

6.67%

14

Baltimore-Towson

MD

$105,055

$6,927

6.59%

15

Boston-Cambridge-Quincy

MA-NH

$106,326

$6,905

6.49%

16

Spartanburg

SC

$45,747

$2,930

6.40%

17

Washington-Arlington-Alexandria

DC-VA-MD-WV

$115,519

$7,370

6.38%

18

Carson City

NV

$46,019

$2,872

6.24%

19

Madera-Chowchilla

CA

$46,366

$2,875

6.20%

20

 

Table 2. Least Affected Metropolitan Areas

City

State

Median Household Income for 4-Person Family

Tax Increase

As % of Income

Rank

Charlotte-Gastonia-Rock Hill

NC-SC

$76,547

$3,261

4.26%

347

Detroit-Warren-Livonia

MI

$76,894

$3,268

4.25%

348

Kankakee-Bradley

IL

$79,777

$3,389

4.25%

349

Iowa City

IA

$77,078

$3,272

4.24%

350

San Luis Obispo-Paso Robles

CA

$77,164

$3,273

4.24%

351

Indianapolis-Carmel

IN

$77,474

$3,279

4.23%

352

York-Hanover

PA

$77,505

$3,280

4.23%

353

Birmingham-Hoover

AL

$77,538

$3,281

4.23%

354

Colorado Springs

CO

$78,523

$3,300

4.20%

355

Mount Vernon-Anacortes

WA

$78,569

$3,301

4.20%

356

Fort Collins-Loveland

CO

$79,470

$3,319

4.18%

357

Virginia Beach-Norfolk-Newport News

VA-NC

$79,762

$3,325

4.17%

358

Santa Rosa-Petaluma

CA

$80,146

$3,333

4.16%

359

San Diego-Carlsbad-San Marcos

CA

$80,323

$3,336

4.15%

360

Grand Junction

CO

$80,491

$3,340

4.15%

361

Palm Coast

FL

$80,998

$3,350

4.14%

362

Dover

DE

$81,634

$3,363

4.12%

363

Santa Cruz-Watsonville

CA

$81,694

$3,364

4.12%

364

Napa

CA

$83,025

$3,391

4.08%

365

Bremerton-Silverdale

WA

$84,692

$3,434

4.05%

366

The results confirm the same pattern we found in our state-by-state analysis. The twenty hardest hit metropolitan areas are a mixture of very low-income and high-income areas of the country; the list includes both McAllen, Texas (with a median four-person household income of $36,104) as well as the Washington, DC metro area (with a median four-person household income of $115,519.) Low income families are affected by a number of targeted refundable tax credits that are set to be dramatically reduced should the Bush tax cuts expire, primarily the Earned Income Tax Credit (where a significant marriage penalty is set to return) and the Child Tax Credit (which will be cut in half and made mostly nonrefundable, meaning the credit value cannot exceed income tax liability.) Higher income families should pay attention to what happens with the AMT—if there is no patch for this year or next, the AMT exemption will revert to levels originally set in 1993, and the resulting large tax increase will catch many taxpayers by surprise. The AMT is not well reflected in the IRS’s withholding tables, and many of these families have never had to worry about the AMT before.

The full results are shown in the accompanying table and can be downloaded in Excel format here.

 



[1] Nick Kasprak, How Would the Fiscal Cliff Affect Typical Families in Each State?, Tax Foundation Fiscal Fact No. 341 (Nov. 12, 2012), http://taxfoundation.org/article/how-would-fiscal-cliff-affect-typical-families-each-state.

[2] Internal Revenue Service, SOI Tax Stats – Individual Income Tax Statistics – ZIP Code Data (SOI), http://www.irs.gov/uac/SOI-Tax-Stats---Individual-Income-Tax-Statistics---ZIP-Code-Data-(SOI).

[3] American Community Survey, 2011 1-Year Estimates, Table B19119.

[4] One caveat with this method is that a significant number of MSAs include areas from multiple states, which could have differing local tax rates. In these cases, deduction amounts (particularly for state and local income taxes) could differ significantly from state to state, and our estimate is somewhat of an average.

[5] Some families would take the standard deduction in 2011 but would itemize under a 2013 fiscal cliff scenario since the standard deduction for married filers would be reduced.

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