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A State-by-State look at Rangel’s “Mother of All Tax Reforms” Bill

2 min readBy: Gerald Prante

The TaxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. Foundation has released a new report estimating the change in tax burden by state for tax year 2008 from Charlie Rangel’s new “Mother of All Tax Reforms” bill that was released last Thursday. The study looks only at the individual tax side, which includes repeal of the alternative minimum tax (AMT) and a new surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on high-income earners, among other provisions. The story is that there is relatively little variation among the states with regard to Rangel’s bill as most of the redistribution is merely super-rich to moderately rich (see below). Vermont, Ohio, and Wisconsin appear to be the biggest winners, while Connecticut, Nevada, and Florida appear to be the biggest losers.

To see the complete table, click here.

Tax Policy Center has released early numbers on the distributional effect (across income groups) of Rangel’s bill. Of the $63 billion in net tax cuts for each of the income groups below $500,000, about 70 percent of the tax savings for those income groups flow to those tax units making between $100,000 – $500,000 in cash income (as defined by TPC). So basically Rangel is taxing the super-rich; and then of those who are then left, giving the bulk of the tax cuts to the richest tax units by repealing AMT. (Note: These numbers do not include the impact of the carried interest provision, which is also a tax increase that would hit very high income earners, albeit its justification is somewhat different than a mere surtax.)

If one defines middle class as the middle 20 percent of the income spectrum, this is a relatively small tax cut for them. The average tax unit in the middle 20 percent would save $71 in 2008 as a result of Rangel’s bill. If one defines the middle class as the middle 80 percent, that average savings is $134.

Now fast forward to 2011 when the Bush tax cuts expire. Using TPC numbers, if the Bush tax cuts are allowed to expire, the average tax unit in the middle 20 percent would pay $7,286 in federal taxes. Under Rangel’s plan, that tax unit in 2011 would pay $7,000. However, assume that the Bush tax cuts are extended without Rangel’s plan. According to the most recent TPC estimate, the average tax unit in the middle 20 percent would then pay $6,506 in federal taxes. Therefore, the savings associated with the Bush tax cuts in 2011 relative to current law for the middle 20 percent of tax units are about three times as much as the savings they would receive from Rangel’s bill. That’s why the issue of the expiring tax cuts overshadows this relatively minor bill by Rangel.

Democrats like Rangel are inconsistent if they claim the Bush tax cuts did not help the middle, while claiming their even smaller tax cut for the middle was significant. If they want to criticize the Bush tax cuts, they should do so on the question of how extending the tax cut would be financed, not be engaging in rhetoric that may come back to haunt them.