How Would the Fiscal Cliff Affect Typical Families Across the Country?

Download Fiscal Fact No. 346: How Would the Fiscal Cliff Affect Typical Families Across the Country?

Recently, we released an analysis looking at the potential total 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. increase on the median four-person family in each state.[1] We found that higher income and lower states tended to be affected more than middle income states—higher income states from AMT changes and lower income states from the Bush tax cuts. Sufficient data exists for us to repeat this analysis based on Census MSAs (metropolitan statistical areas) using the IRS’s income tax by ZIP code information.[2]

We used this data to estimate itemized deductions as a percentage of household income for all income groups in each MSA, using national aggregates to adjust for family size. We then used American Community Survey data on median household incomes by family size,[3] looking specifically at four-person families, and applied the deduction percentages for the income group into which the median family would fall to that family’s household income.[4]

The final step was to take these numbers and run them through our Fiscal Cliff tax calculator, which is available online at www.mytaxburden.com. We calculated tax liability under 2011 law (the most recent year that an AMT patch was in effect) and 2013 law assuming full expiration of all expiring tax cuts. We assume each family takes the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act (TCJA) as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. unless our predicted deduction amount exceeds it.^[5]

Table 1. Most Affected Metropolitan Areas
City	State	Median Household Income for 4-Person Family	Tax Increase	As % of Income	Rank
McAllen-Edinburg-Mission	TX	$36,104	$2,938	8.14%	1
College Station-Bryan	TX	$38,292	$3,091	8.07%	2
Brownsville-Harlingen	TX	$38,808	$3,127	8.06%	3
Laredo	TX	$39,062	$3,145	8.05%	4
Hinesville-Fort Stewart	GA	$39,183	$3,153	8.05%	5
Corvallis	OR	$39,775	$3,195	8.03%	6
Lake Havasu City-Kingman	AZ	$39,802	$3,197	8.03%	7
Hot Springs	AR	$42,648	$3,396	7.96%	8
Visalia-Porterville	CA	$43,554	$3,338	7.67%	9
Danville	VA	$43,838	$3,291	7.51%	10
Trenton-Ewing	NJ	$110,065	$7,729	7.02%	11
Bridgeport-Stamford-Norwalk	CT	$115,121	$7,803	6.78%	12
San Francisco-Oakland-Fremont	CA	$110,431	$7,424	6.72%	13
Poughkeepsie-Newburgh-Middletown	NY	$101,197	$6,754	6.67%	14
Baltimore-Towson	MD	$105,055	$6,927	6.59%	15
Boston-Cambridge-Quincy	MA-NH	$106,326	$6,905	6.49%	16
Spartanburg	SC	$45,747	$2,930	6.40%	17
Washington-Arlington-Alexandria	DC-VA-MD-WV	$115,519	$7,370	6.38%	18
Carson City	NV	$46,019	$2,872	6.24%	19
Madera-Chowchilla	CA	$46,366	$2,875	6.20%	20

Table 2. Least Affected Metropolitan Areas
City	State	Median Household Income for 4-Person Family	Tax Increase	As % of Income	Rank
Charlotte-Gastonia-Rock Hill	NC-SC	$76,547	$3,261	4.26%	347
Detroit-Warren-Livonia	MI	$76,894	$3,268	4.25%	348
Kankakee-Bradley	IL	$79,777	$3,389	4.25%	349
Iowa City	IA	$77,078	$3,272	4.24%	350
San Luis Obispo-Paso Robles	CA	$77,164	$3,273	4.24%	351
Indianapolis-Carmel	IN	$77,474	$3,279	4.23%	352
York-Hanover	PA	$77,505	$3,280	4.23%	353
Birmingham-Hoover	AL	$77,538	$3,281	4.23%	354
Colorado Springs	CO	$78,523	$3,300	4.20%	355
Mount Vernon-Anacortes	WA	$78,569	$3,301	4.20%	356
Fort Collins-Loveland	CO	$79,470	$3,319	4.18%	357
Virginia Beach-Norfolk-Newport News	VA-NC	$79,762	$3,325	4.17%	358
Santa Rosa-Petaluma	CA	$80,146	$3,333	4.16%	359
San Diego-Carlsbad-San Marcos	CA	$80,323	$3,336	4.15%	360
Grand Junction	CO	$80,491	$3,340	4.15%	361
Palm Coast	FL	$80,998	$3,350	4.14%	362
Dover	DE	$81,634	$3,363	4.12%	363
Santa Cruz-Watsonville	CA	$81,694	$3,364	4.12%	364
Napa	CA	$83,025	$3,391	4.08%	365
Bremerton-Silverdale	WA	$84,692	$3,434	4.05%	366

The results confirm the same pattern we found in our state-by-state analysis. The twenty hardest hit metropolitan areas are a mixture of very low-income and high-income areas of the country; the list includes both McAllen, Texas (with a median four-person household income of $36,104) as well as the Washington, DC metro area (with a median four-person household income of $115,519.) Low income families are affected by a number of targeted 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 (EITC). s that are set to be dramatically reduced should the Bush tax cuts expire, primarily the Earned Income 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. (where a significant marriage penaltyA 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. is set to return) and the Child Tax Credit (which will be cut in half and made mostly nonrefundable, meaning the credit value cannot exceed income tax liability.) Higher income families should pay attention to what happens with the AMT—if there is no patch for this year or next, the AMT exemption will revert to levels originally set in 1993, and the resulting large tax increase will catch many taxpayers by surprise. The AMT is not well reflected in the IRS’s withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. tables, and many of these families have never had to worry about the AMT before.

The full results are shown in the accompanying table and can be downloaded in Excel format here.

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[1] Nick Kasprak, How Would the Fiscal Cliff Affect Typical Families in Each State?, Tax Foundation Fiscal Fact No. 341 (Nov. 12, 2012), https://taxfoundation.org/article/how-would-fiscal-cliff-affect-typical-families-each-state.

[2] Internal Revenue Service, SOI Tax Stats – Individual Income TaxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. Statistics – ZIP Code Data (SOI), http://www.irs.gov/uac/SOI-Tax-Stats—Individual-Income-Tax-Statistics—ZIP-Code-Data-(SOI).

[3] American Community Survey, 2011 1-Year Estimates, Table B19119.

[4] One caveat with this method is that a significant number of MSAs include areas from multiple states, which could have differing local tax rates. In these cases, deduction amounts (particularly for state and local income taxes) could differ significantly from state to state, and our estimate is somewhat of an average.

[5] Some families would take the standard deduction in 2011 but would itemize under a 2013 fiscal cliff scenario since the standard deduction for married filers would be reduced.

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