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. proposals contained in the Biden administration’s fiscal year 2022 budget, including the American Families Plan (AFP) and American Jobs Plan (AJP), would levy $2.3 trillion in new taxes on high-income earners and businesses and provide $998 billion in refundable tax creditA refundable tax credit can be used to generate a federal tax refund larger than the amount of tax paid throughout the year. In other words, a refundable tax credit creates the possibility of a negative federal tax liability. An example of a refundable tax credit is the Earned Income Tax Credit. s to low- and middle-income households, for a net tax increase of $1.3 trillion (conventionally estimated over the budget window, 2022 to 2031). The resulting redistribution of income would involve many winners and losers, not only across different types of taxpayers but also geographically across the country.
To illustrate the geographic distribution of these tax changes, the Tax Foundation has launched an interactive map that allows users to see average tax changes in their state and congressional district over the period 2022 to 2031. The analysis is based on our conventional revenue estimates at the national level mapped to congressional districts using IRS data on individual tax returns for 2018 (see the following methodology detail).
The map and Table 1 indicate Biden’s proposals would result in an average tax increase in most states throughout 2022 to 2031, with the largest average tax increases per filer occurring in the District of Columbia, Massachusetts, Connecticut, and New York, with tax increases exceeding $1,000 per filer in 2022 and $2,000 per filer in 2031. Several states would get a tax cut in the early part of the budget window, including Mississippi, Alabama, Oklahoma, and New Mexico, with tax cuts exceeding $400 per filer in 2022, due primarily to the proposed temporary expansions of the child tax credit (CTC)The federal child tax credit (CTC) is a partially refundable credit that allows low- and moderate-income families to reduce their tax liability dollar-for-dollar by up to ,000 for each qualifying child. The credit phases out depending on the modified adjusted gross income amounts for single filers or joint filers. through 2025. After 2025, every state and the District of Columbia would see a tax increase.
In terms of congressional districts, slightly more than half would see a tax cut in 2022 and 2023, again due primarily to the temporarily expanded CTC, but in the last half of the budget window more than 96 percent of congressional districts would see a tax increase. The largest tax increases on average per filer are in high-income districts in and around the San Francisco Bay Area, Los Angeles, and New York City, with tax increases exceeding $8,000 per filer in 2022 and $10,000 per filer in 2031. The largest tax cuts on average per filer are in majority-Hispanic districts in California, Texas, and Arizona, with tax cuts exceeding $1,500 per filer in 2022, due primarily to the expanded CTC. In the last half of the budget window, when the expanded CTC expires, the largest tax cuts on average per filer are in and around Miami, where tax cuts exceed $300 per filer in 2031, due primarily to expanded premium tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s.
|District of Columbia||1,497||1,660||1,888||2,124||2,243||2,386||2,499||2,554||2,683||2,835||22,386|
Source: Tax Foundation General Equilibrium Model, June 2021.
We estimate the geographic distribution of tax changes under Biden’s proposals using conventional revenue estimates at the national level generated by the Tax Foundation’s General Equilibrium Model which we then allocate to filers in congressional districts using data from the IRS Statistics of Income for individual tax returns in 2018. (Conventional revenue estimates do not include impacts on GDP and other economic aggregates.) The IRS data provides various tax characteristics broken down by congressional district (CD) and by nine classes of adjusted gross income (AGI)Adjusted gross income (AGI) is a taxpayer’s total income minus certain “above-the-line” deductions. It is a broad measure that includes income from wages, salaries, interest, dividends, retirement income, Social Security benefits, capital gains, business, and other sources, and subtracts specific deductions. , e.g., top category of $500,000 and above.
From the IRS data, certain tax characteristics are used to allocate to CDs the conventional national revenue estimates for each of Biden’s tax proposals, as described in Table 2, and then averaged by the number of filers in each CD. The accuracy of this analysis is limited by the extent of the IRS data at the CD level, particularly by the nine discrete AGI categories and top AGI category of $500,000 or more. For some of the proposals (for instance the increased capital gains taxA capital gains tax is levied on the profit made from selling an asset and is often in addition to corporate income taxes, frequently resulting in double taxation. Capital gains taxes create a bias against saving, leading to a lower level of national income by encouraging present consumption over investment. ), more accurate results could be reached by allocating the tax burden based on the earnings of those with an AGI of $1 million or more, but because the IRS groups everyone above $500,000 together, this is not possible. The impact of this approximation should not be significant as districts with a large number of taxpayers having an AGI of $500,000 or more are likely to have proportionally more taxpayers with an AGI of $1 million or more.
Most of the tax increases in Biden’s proposals are corporate tax increases, as specified in the American Jobs Plan, which we assume fall partly on capital income and partly on labor income, in accordance with several studies. In particular, we assume the corporate tax is initially borne mainly by capital income (90 percent in the first year), and over time the burden shifts to labor income until it is evenly split across capital and labor income in the long run (50 percent capital income and 50 percent labor income in the fifth year and beyond).
|Tax Proposals in Biden’s Fiscal Year 2022 Budget||Allocation Factor|
|Raise Top Individual Income Tax Bracket to 39.6 Percent||CD’s share of national taxable income reported by those with AGI of $500,000 and above|
|Tax Unrealized Capital Gains over $1M at Death and Impose a 39.6 Percent Tax Rate on Capital Gains on Income Earned over $1M||CD’s share of the national sum of capital gains and qualified dividends reported by those with AGI of $500,000 and above|
|Impose Net Investment Income Tax on Active Pass-through Income||CD’s share of national pass-through business income|
|Make the Active Pass-through Loss Limitation Permanent||CD’s share of national pass-through business income|
|Limit 1031 Exchanges to $500K in Gain||CD’s share of national capital gains reported by those with AGI of $500,000 and above|
|Tax Carried Interest as Ordinary Income||CD’s share of national capital gains reported by those with AGI of $500,000 and above|
|Permanent Full Refundability of Child Tax Credit (CTC) and Extend Expanded CTC Through 2025||CD’s share of national additional CTC claimed|
|Permanent Expansion of Earned Income Tax Credit (EITC)||CD’s share of national EITC claimed|
|Permanent Expansion of Child and Dependent Care Tax Credit (CDCTC)||CD’s share of national CDCTC claimed|
|Permanent Expansion of Premium Tax Credits||CD’s share of national premium tax credit claimed|
|Raise the Federal Corporate Tax Rate from 21 Percent to 28 Percent; Raise the Tax Rate on Global Intangible Low-Tax Income (GILTI) and Tighten GILTI Rules; Repeal the Foreign Derived Intangible Income (FDII) Deduction; and Impose a 15 Percent Book Minimum Tax||CD’s share of national labor income (wages and salaries) and capital income (capital gains, dividends, pass-through business income) weighted to reflect the economic incidence of the corporate tax, such that 90% of the incidence is on capital income (10% on labor income) in 2022; 80% is on capital income (20% on labor income) in 2023; 70% is on capital income (30% on labor income) in 2024; 60% is on capital income (40% on labor income) in 2025; and 50% is on capital income (50% on labor income) in 2026 and thereafter.|
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