New Federal-State Rate Calculation in Full Fiscal Cliff/Obamacare Scenario

December 07, 2012

An excellent new paper finds that if we go off the Fiscal Cliff, the average top marginal effective tax rate on wage income will increase by six percentage points from 41.8 percent to 47.8 percent, while taxes on dividend income will more than double from 19 percent to 47.9 percent. Top marginal effective rates would exceed 50 percent in Hawaii, New York City, and California. The scenario, which includes new Obamacare taxes slated to begin in 2013, also assumes that the 2001 and 2003 tax cuts (EGTRRA and JGTRRA) will be allowed to fully expire. For a full primer on all elements of the Fiscal Cliff that will need to be addressed by lawmakers before January, click here.

The paper, by my former colleague Gerald Prante, now of Lynchburg College, shows the potential top marginal effective tax rates in each of the fifty states under scheduled law come January 1, 2013. The measure that Prante uses is the top “marginal effective tax rate,” which is the amount of each additional dollar earned that is taken in taxes. This measure differs from other widely used metrics like the marginal statutory tax rate, which is simply which bracket you fall in (not accounting for credits and deductions). It is also different than the often quoted total effective tax rate, which is a measure of how much income you pay in taxes in a year.

But this measure is precisely the one that economists most care about, because it tells the story of what costs people face when deciding whether to embark on a new business venture, make a new investment, or seek a promotion.

If each new dollar is taxed at close to (or over) 50 percent, economic logic and good empirical evidence suggest that all else equal, people will engage in less of that value-creating activity. Below is the state by state breakdown for wages and dividends, a more comprehensive table is available in the paper here:

Top Marginal Effective Tax Rates by State, 2012 vs. 2013 Fiscal Cliff Scenario
  Wages Dividends
State 2012 2013 2012 2013
U.S. 41.8% 47.8% 19.0% 47.9%
AL 39.5% 45.7% 17.8% 46.4%
AK 37.4% 42.8% 15.0% 43.4%
AZ 40.3% 46.7% 18.0% 47.3%
AR 41.8% 48.1% 19.6% 48.8%
CA 45.9% 51.9% 23.6% 52.6%
CO 40.3% 46.7% 18.0% 47.4%
CT 41.7% 47.9% 19.4% 48.6%
DE 41.8% 48.0% 19.4% 48.7%
FL 37.4% 42.8% 15.0% 43.4%
GA 41.2% 47.5% 18.9% 48.2%
HI 44.4% 50.5% 22.2% 51.2%
ID 42.4% 48.6% 20.1% 49.3%
IL 40.6% 45.7% 18.3% 46.4%
IN 40.4% 46.7% 18.0% 47.4%
IA 41.4% 47.4% 20.3% 48.1%
KS 41.5% 46.9% 19.8% 48.2%
KY 42.1% 48.4% 18.9% 48.2%
LA 39.9% 46.1% 18.4% 46.8%
ME 42.8% 49.0% 20.5% 49.7%
MD 43.0% 49.2% 20.7% 49.9%
MA 40.8% 47.1% 18.4% 47.8%
MI 40.3% 46.6% 17.9% 47.3%
MN 42.4% 48.6% 20.1% 49.3%
MS 40.6% 46.9% 18.3% 47.6%
MO 41.3% 47.6% 18.9% 48.2%
MT 41.8% 48.1% 19.5% 48.8%
NE 41.7% 48.0% 19.4% 48.7%
NV 37.4% 42.8% 15.0% 43.4%
NH 37.4% 42.8% 18.3% 46.4%
NJ 43.1% 49.3% 20.8% 50.0%
NM 40.5% 46.9% 18.2% 47.5%
NY 44.2% 50.3% 21.9% 51.0%
NC 42.3% 48.6% 20.0% 49.3%
ND 39.9% 46.3% 16.8% 46.3%
OH 42.2% 48.5% 18.9% 48.3%
OK 40.7% 47.1% 18.4% 47.8%
OR 43.8% 49.9% 21.4% 50.6%
PA 40.3% 46.7% 17.0% 46.4%
RI 41.2% 47.5% 18.9% 48.2%
SC 41.8% 48.1% 19.6% 48.8%
SD 37.4% 42.8% 15.0% 43.4%
TN 37.4% 42.8% 18.9% 47.0%
TX 37.4% 42.8% 15.0% 43.4%
UT 40.6% 46.9% 18.3% 47.6%
VT 43.1% 49.3% 20.8% 50.0%
VA 41.0% 47.4% 18.7% 48.1%
WA 37.4% 42.8% 15.0% 43.4%
WV 41.5% 47.8% 19.2% 48.5%
WI 42.3% 48.6% 20.0% 49.3%
WY 37.4% 42.8% 15.0% 43.4%
         
NYU 43.0% 49.2% 20.7% 49.9%
NYC 45.7% 51.7% 23.3% 52.3%
DC 43.1% 49.3% 20.8% 50.0%

Notes:
(a) Top marginal effective tax rate includes the combined effects of federal income taxes, state and local income taxes where local taxes are weighted averages across the state, federal Medicare taxes including those in PPACA, and the interaction between taxes for deductibility purposes.
(b) Capital gains rate refers to assets held between 1 and 5 years. Scheduled tax law for 2013 calls for capital gains to be taxed at an 18% rate for sales of assets held longer than 5 years and 20% for assets held between 1-5 years. In 2012, the rate is 15% for any asset held longer than 1 year.
(c) U.S. refers to weighted average of all states, weighted by each state’s share of that income source earned by tax returns with AGI greater than $500,000.
(d) NYU refers to “New York Upstate,” referring to the average for the state of New York excluding New York City. NYC refers to New York City. Due to the significant local income tax rate in New York City and its magnitude within the state, this break out provides a more accurate picture of the top marginal effective tax rates across New York.

Source: Gerald Prante and Austin John, Top Marginal Effective Tax Rates by State and by Source of Income, 2012 Tax Law vs. 2013 Scheduled Tax Law, November 2012.

Follow Scott Drenkard on Twitter @ScottDrenkard.

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