August 1, 2012

How the States Would Be Affected by Extension of the Bush Tax Cuts and Other Provisions

William McBride
Ed Gerrish

William McBride, Ed Gerrish

Download Fiscal Fact No. 325: How the States Would Be Affected by Extension of the Bush Tax Cuts and Other Provisions

With just five months to go until the largest tax increase since World War II, a.k.a. “Taxmageddon,”[1] some people are becoming concerned about the impact it will have on the economy.[2] This week, the House will vote on a Republican proposal to extend through 2013 the Bush tax cuts of 2001 and 2003 and the Alternative Minimum Tax (AMT) patch, two of the largest components of Taxmageddon.[3]

The larger of these is actually the AMT patch, which would save middle- and high-income taxpayers about $193 billion, according to the Joint Committee on Taxation (JCT).[4] Extension of the Bush tax cuts, which are more evenly distributed, would save taxpayers about $179 billion. The bill also extends estate and gift tax provisions for one year, saving taxpayers $31 billion, and small business expensing, worth $581 million.

The total tax relief is estimated at $403 billion, or about 2.7 percent of the economy, and almost all of it would be immediately felt in 2013. As such, it would forestall many of the economy-crushing aspects of Taxmageddon, while setting the stage for comprehensive tax reform next year.

All 50 states would benefit from this bill, though some more than others. Table 1 shows our estimates of the tax relief for each state, based on the latest IRS data on the distribution of income, tax credits, and deductions within each state.[5] The first column is total aggregate tax relief in millions of dollars, the next column is tax relief as a share of state income (AGI), and the last column is tax relief per tax filer.

Table 1. Tax Relief from a One-Year Extension of Bush Tax Cuts and AMT Patch
 

Extension with AMT Patch

Extension without AMT Patch
 

In Millions of Dollars

As a Share of Income

Per Tax Return

In Millions of Dollars

As a Share of Income

Per Tax Return

Alabama

$3,144

3.18%

$1,496

$2,250

2.27%

$1,070

Alaska

$603

2.80%

$1,613

$479

2.23%

$1,283

Arizona

$4,970

3.53%

$1,828

$3,302

2.35%

$1,215

Arkansas

$2,309

4.06%

$1,886

$1,480

2.60%

$1,209

California

$70,780

6.89%

$4,242

$28,440

2.77%

$1,705

Colorado

$6,139

4.31%

$2,590

$3,684

2.59%

$1,554

Connecticut

$9,990

6.86%

$5,783

$4,816

3.31%

$2,788

Delaware

$948

3.97%

$2,216

$526

2.20%

$1,230

DC

$1,583

6.66%

$4,902

$660

2.78%

$2,044

Florida

$20,028

4.29%

$2,079

$12,952

2.77%

$1,345

Georgia

$8,969

4.15%

$1,954

$5,065

2.34%

$1,104

Hawaii

$1,246

3.73%

$1,907

$726

2.18%

$1,111

Idaho

$1,209

4.09%

$1,823

$743

2.51%

$1,121

Illinois

$16,231

4.48%

$2,686

$9,568

2.64%

$1,583

Indiana

$4,814

3.36%

$1,615

$3,203

2.24%

$1,074

Iowa

$2,635

3.65%

$1,882

$1,633

2.27%

$1,167

Kansas

$3,071

4.34%

$2,350

$1,817

2.57%

$1,390

Kentucky

$3,384

3.90%

$1,823

$1,995

2.30%

$1,074

Louisiana

$3,519

3.59%

$1,767

$2,415

2.46%

$1,213

Maine

$1,265

4.22%

$2,024

$647

2.16%

$1,036

Maryland

$10,031

5.25%

$3,599

$4,279

2.24%

$1,535

Massachusetts

$13,700

5.87%

$4,277

$6,607

2.83%

$2,063

Michigan

$8,406

3.69%

$1,825

$5,228

2.30%

$1,135

Minnesota

$7,256

4.76%

$2,833

$3,775

2.48%

$1,474

Mississippi

$1,681

3.15%

$1,310

$1,208

2.26%

$941

Missouri

$5,586

4.12%

$2,077

$3,328

2.46%

$1,238

Montana

$935

4.34%

$1,969

$527

2.44%

$1,110

Nebraska

$1,954

4.32%

$2,288

$1,179

2.61%

$1,380

Nevada

$2,750

4.12%

$2,176

$1,998

2.99%

$1,580

New Hampshire

$1,610

3.89%

$2,425

$1,015

2.45%

$1,529

New Jersey

$21,555

6.99%

$5,030

$7,954

2.58%

$1,856

New Mexico

$1,338

3.23%

$1,465

$940

2.27%

$1,029

New York

$50,555

8.05%

$5,452

$19,472

3.10%

$2,100

North Carolina

$8,937

4.30%

$2,126

$4,750

2.29%

$1,130

North Dakota

$656

3.53%

$1,985

$458

2.46%

$1,384

Ohio

$11,252

4.21%

$2,069

$5,985

2.24%

$1,101

Oklahoma

$2,991

3.76%

$1,881

$1,974

2.48%

$1,241

Oregon

$4,301

4.86%

$2,467

$1,996

2.26%

$1,145

Pennsylvania

$14,618

4.30%

$2,385

$8,217

2.42%

$1,340

Rhode Island

$1,294

4.57%

$2,541

$644

2.28%

$1,265

South Carolina

$3,453

3.67%

$1,683

$2,085

2.22%

$1,016

South Dakota

$657

3.31%

$1,668

$512

2.58%

$1,300

Tennessee

$4,332

3.18%

$1,522

$3,296

2.42%

$1,158

Texas

$24,504

3.95%

$2,229

$17,062

2.75%

$1,552

Utah

$2,420

4.11%

$2,133

$1,574

2.67%

$1,387

Vermont

$749

4.78%

$2,357

$359

2.29%

$1,129

Virginia

$11,004

4.50%

$2,951

$5,840

2.39%

$1,566

Washington

$6,763

3.54%

$2,134

$4,709

2.47%

$1,486

West Virginia

$1,199

3.37%

$1,530

$756

2.12%

$965

Wisconsin

$6,021

4.19%

$2,196

$3,357

2.33%

$1,224

Wyoming

$886

5.01%

$3,205

$634

3.58%

$2,292

Source: JCT, IRS, Tax Foundation calculations

Generally, high-income states would receive the largest tax relief, because they pay the most taxes under our extremely progressive federal income tax code.[6] They are also the states most affected by the AMT. New York, for instance, would save about $51 billion in taxes, or 8.05 percent of income, if these tax cuts were extended, including the AMT patch. That amounts to $5,452 per tax filer. More than half of that (62 percent) is due to the AMT patch. California would save about $71 billion in taxes, or 6.89 percent of income, if all tax cuts were extended. That amounts to $4,242 per tax filer. Again, more than half of that (60 percent) is due to the AMT patch.

At the other end of the spectrum, Mississippi would save about $1.7 billion in taxes, or 3.15 percent of income, if all tax cuts were extended. That is $1,310 per filer. Less than one-third (28 percent) of that is due to the AMT patch. Tennessee would save about $4.4 billion in taxes, which is 3.21 percent of income or $1,533 per tax filer. Only about one-quarter of that is due to the AMT patch.

Appendix: Methodology

The table below shows each of the provisions scored by the JCT, and the rule we used to apportion the tax relief to the states. Most provisions can be directly tied to those who have taken them in the past in each state, based on IRS returns from 2010, such as the AMT and the child credit. However, the apportionment of the provisions related to the brackets is more error prone, due to the wide income intervals the IRS provides at the state level. For instance, the IRS provides data on those earning between $200,000 and $500,000, but the top rate applies to taxable income of $388,350 or more. As such, we estimated the share of income taxed at various rates based on the latest IRS data.

Table 2. JCT Estimate of Tax Cuts Contained in “The Job Protection and Recession Prevention Act of 2012″ and Tax Foundation Rules for Apportionment to the States
 

Tax Relief ($Millions)

  

Provision

2013

2013-2012

Rule for Apportionment

A1a – Retain 10% bracket

$30,723

$43,890

To all filers with positive AGI.

A1b – Retain 25% & 28% bracket

$12,731

$18,187

2/3rds to filers earning more than $50,000, 1/3rd to filers earning more than $100,000.

A1c – Retain 33% & 35% bracket

$22,350

$31,929

1/2 to filers earning more than $200,000, 1/2 to filers earning more than $500,000.

A1d – Repeal limitation on itemized deduction and the personal exemption phaseout

$5,664

$10,892

To all filers earning more than $200,000.

A2 – Child tax credit

$4,117

$35,632

To all filers taking the child credit, according to income.

A3a and A3b: Marriage penalty relief

$4,310

$9,239

To all joint filers, according to income.

A4 – Education

$360

$2,212

To all filers taking the tuition and fees deduction, according to income.

A5 – Dependent care tax credit

$62

$249

To all filers taking the dependent care tax credit, according to income.

A6 – Adoption credit

$154

$513

To all filers taking the adoption credit, according to income.

A7 – Employer-provided child care credit

$23

$23

Excluded.

A8 – Alaska Native Settlement Trusts

$4

$4

Excluded.

B1: Tax capital gains at 0%/15%

$14,172

$10,123

To all filers reporting capital gains, according to income.

B2: Tax dividends at 0%/15%

$5,406

$15,731

To all filers reporting dividends, according to income.

Extension of estate and gift tax provisions

$3,606

$31,207

To all filers earning more than $500,000.

Section 179 – Small business expensing

$2,109

$581

To all filers reporting business income, according to income.

AMT

$122,248

$192,734

To all filers who pay the AMT, according to income.

Total

$228,027

$403,147

  

[1] William McBride, Taxmageddon Looms, Potentially Pushing Tax Freedom Day Later than Ever, Tax Foundation Fiscal Fact No. 297 (Apr. 16, 2012), https://taxfoundation.org/article/taxmageddon-looms-potentially-pushing-tax-freedom-day-later-ever.

[2] Douglas Holtz-Eakin & Ike Brannon, American Action Forum, New Study Examines Economic Effects of the Fiscal Cliff (July 17, 2012), http://americanactionforum.org/topic/new-study-examines-economic-effects-fiscal-cliff.

[3] House of Representatives, Committee on Ways and Means, Democrats’ Ticking Time Bomb, Part I, June 11, 2012, http://waysandmeans.house.gov/News/DocumentSingle.aspx?DocumentID=299226.

[4] Joint Committee on Taxation, Estimated Revenue Effects of H.R. 8, The “Job Protection and Recession Prevention Act of 2012” (July 24, 2012), https://www.jct.gov/publications.html?func=download&id=4476&chk=4476&no_html=1.

[5] Internal Revenue Service, SOI Tax Stats – Historic Table 2, http://www.irs.gov/taxstats/article/0,,id=171535,00.html.

[6] William McBride, CBO Report Shows Increasing Redistribution in the Tax Code Despite No Long-term Trend in Income Inequality, Tax Foundation Fiscal Fact No. 322 (July 24, 2012), https://taxfoundation.org/article/cbo-report-shows-increasing-redistribution-tax-code-despite-no-long-term-trend-income-inequality.

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About the Authors

William McBride

Vice President of Federal Tax Policy & Stephen J. Entin Fellow in Economics

Dr. William McBride is Vice President of Federal Tax Policy & Stephen J. Entin Fellow in Economics at the Tax Foundation. Dr. McBride has more than ten years of experience analyzing a variety of economic and policy issues. Most recently, he served as a manager in the National Economic and Statistics (NES) group at PricewaterhouseCoopers where he worked on numerous projects, including economic impact analyses, industry surveys, U.S. federal and state tax revenue estimates, and general quantitative analyses. Dr. McBride holds a PhD in economics from George Mason University, where he specialized in macroeconomics and agent-based modeling. Read more.

Ed Gerrish

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A 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.

A gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax.

A recession is a significant and sustained decline in the economy. Typically, a recession lasts longer than six months, but recovery from a recession can take a few years.

Itemized deductions allow individuals to subtract designated expenses from their taxable income and can be claimed in lieu of the standard deduction. Itemized deductions include those for state and local taxes, charitable contributions, and mortgage interest. An estimated 13.7 percent of filers itemized in 2019, most being high-income taxpayers. 

A marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples.

Apportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders.

A 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.

Taxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.