How Would the Fiscal Cliff Affect Typical Families in Each State?

November 12, 2012

New Jersey, Maryland, Connecticut Hardest Hit

Washington, D.C., November 12, 2012—Dramatic changes to both tax and spending policy at the federal level are scheduled to take place at the end of the current year unless Congress acts. On the tax side, the biggest potential change is the expiration of all Bush-era and Obama tax cuts, which will increase tax liabilities nationwide. Typical families in high-income and low-income states would be hit harder than typical families from middle-income states, with taxpayers in New Jersey, Maryland, and Connecticut seeing the largest jump in their tax bills, but with residents of Arkansas, Mississippi, and West Virginia also among the top ten states, according to a new analysis by the Tax Foundation.

Additionally, the Alternative Minimum Tax (AMT) has yet to be patched for the current tax year. Congress could pass a retroactive patch, as it has done in the past, which would apply to the current year as well as next year. If it does not, however, the AMT exemption level would revert to what it was twelve years ago, and certain credits (such as the Child Tax Credit) would no longer be allowed. If this were to happen, millions of middle-class taxpayers could see a substantial tax increase, which for some could be even larger than the change from the end of the Bush-era tax cuts.

Finally, the 2% temporary cut to employee-side social security payroll taxes is also scheduled to expire at the end of this year—a potential third tax increase that would affect the vast majority of taxpayers.

To illustrate the potential impact on typical families, the Tax Foundation has used U.S. Census and Internal Revenue Service data to estimate income and deductions for the median two-child family in each of the fifty states. That data is processed using the MyTaxBurden Tax Policy Calculator under two scenarios—2011 tax law (chosen because it is the latest year that an AMT patch was in effect), and 2013 law, assuming all Bush-era and Obama tax cuts expire and AMT remains unpatched.

While there are exceptions, the general pattern is median families in high-income and low-income states are more affected than those in middle-income states. Higher-income families would be disproportionately affected by the imminent AMT changes. At the opposite end, low-income states are disproportionately affected because the two tax increases from the end of the Bush-era tax cuts—the reduction in the child tax credit, the elimination of the 10% bracket, and the reduced standard deduction for married filers—represent fixed increases that do not depend on income.

Tax Foundation Fiscal Fact No. 341, “How Would the Fiscal Cliff Affect Typical Families in Each State?” by Nick Kasprak is available here.

The Tax Foundation is a nonpartisan research organization that has monitored fiscal policy at the federal, state and local levels since 1937. To schedule an interview, please contact Richard Morrison, the Tax Foundation’s Manager of Communications, at 202-464-5102 or morrison@taxfoundation.org.

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