Fiscal Fact No. 95
Throughout the debate over the alternative minimum 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. and tax reform in general, many politicians and spokespersons for special interest lobbies have misled the public about the number of Americans who benefit from preferences in the tax code. Fewer than two in five tax returns claim deductions such as those for mortgage interest and state and local taxes and, in fact, most Americans owe more tax as a result of these deductions being in the tax code. Not only do these preferences benefit fewer taxpayers then lawmakers would have us believe; they also drive up tax rates for everyone else.
The table below shows the frequency of itemization by state and income group for tax year 2005. Only one state, Maryland, has an itemization rate over 50 percent, albeit just barely above 50 percent. This may seem surprising given the rhetoric we hear so often on tax preferences such as the mortgage interest deductionThe mortgage interest deduction is an itemized deduction for interest paid on home mortgages. It reduces households’ taxable incomes and, consequently, their total taxes paid. The Tax Cuts and Jobs Act (TCJA) reduced the amount of principal and limited the types of loans that qualify for the deduction. , which is portrayed as a way to help families achieve their dreams of home-ownership. But the rhetoric on this tax preference doesn’t match the reality: in the long run, the home mortgage interest deduction tends to merely provide windfalls to real estate agents and homebuilders, and in the short run it benefits mostly high-income households—those who itemize, and those who need it least.
Table 1
In All but One State, Fewer than 50 Percent of Tax Returns Itemize (Tax Year 2005)
|
State |
Overall Itemization Rate (Percentage of Returns that Itemize) |
Rank |
Itemization Rate by Income Group (AGI) |
Per Capita Income (2006) |
||||
|
Under $50,000 |
$50,000- $74,999 |
$75,000- $99,999 |
$100,000- $199,999 |
$200,000 and above |
||||
|
United States |
35.61% |
|
17.92% |
58.31% |
76.27% |
89.51% |
93.34% |
$38,376 |
|
Alabama |
30.83% |
38 |
17.10% |
53.74% |
71.49% |
86.03% |
92.63% |
$32,599 |
|
Alaska |
25.39% |
46 |
10.26% |
42.75% |
57.54% |
71.28% |
71.16% |
$39,499 |
|
Arizona |
38.60% |
15 |
20.92% |
63.52% |
79.43% |
90.46% |
94.02% |
$33,156 |
|
Arkansas |
24.96% |
47 |
12.38% |
45.67% |
69.67% |
88.10% |
93.85% |
$29,999 |
|
California |
39.94% |
11 |
19.43% |
63.01% |
81.44% |
92.79% |
97.42% |
$41,022 |
|
Colorado |
42.31% |
5 |
22.17% |
65.95% |
80.97% |
91.15% |
94.52% |
$41,987 |
|
Connecticut |
44.97% |
3 |
20.08% |
64.19% |
81.91% |
94.31% |
98.05% |
$53,152 |
|
Delaware |
37.17% |
19 |
17.36% |
58.85% |
76.13% |
89.70% |
94.68% |
$40,964 |
|
D.C. |
42.65% |
4 |
22.43% |
65.35% |
85.55% |
94.52% |
98.45% |
$63,044 |
|
Florida |
33.01% |
27 |
19.73% |
54.05% |
66.73% |
80.03% |
83.15% |
$36,734 |
|
Georgia |
39.61% |
12 |
21.94% |
68.83% |
84.31% |
94.13% |
96.79% |
$34,327 |
|
Hawaii |
33.50% |
26 |
16.81% |
55.08% |
72.40% |
86.32% |
92.96% |
$38,269 |
|
Idaho |
35.34% |
24 |
19.63% |
62.46% |
81.20% |
90.80% |
90.93% |
$31,031 |
|
Illinois |
36.57% |
21 |
17.99% |
56.97% |
73.55% |
87.84% |
94.25% |
$39,902 |
|
Indiana |
30.91% |
37 |
14.73% |
51.33% |
71.32% |
87.68% |
95.05% |
$34,647 |
|
Iowa |
31.90% |
31 |
16.80% |
48.47% |
71.94% |
89.32% |
94.71% |
$35,807 |
|
Kansas |
31.31% |
33 |
14.52% |
49.72% |
73.59% |
90.58% |
96.16% |
$36,209 |
|
Kentucky |
31.13% |
34 |
15.48% |
56.74% |
78.32% |
90.86% |
95.20% |
$31,639 |
|
Louisiana |
26.19% |
43 |
14.44% |
45.14% |
59.87% |
77.99% |
89.47% |
$31,358 |
|
Maine |
31.68% |
32 |
15.86% |
54.85% |
79.02% |
93.04% |
95.94% |
$34,935 |
|
Maryland |
50.03% |
1 |
26.39% |
73.97% |
88.56% |
96.54% |
98.25% |
$46,562 |
|
Massachusetts |
41.77% |
8 |
19.32% |
59.95% |
79.23% |
92.96% |
97.14% |
$49,203 |
|
Michigan |
37.15% |
20 |
18.40% |
60.87% |
77.52% |
90.53% |
95.84% |
$36,751 |
|
Minnesota |
42.26% |
6 |
20.98% |
65.36% |
83.86% |
95.19% |
97.57% |
$41,363 |
|
Mississippi |
26.48% |
42 |
14.64% |
52.70% |
71.45% |
86.33% |
93.58% |
$28,591 |
|
Missouri |
31.91% |
30 |
15.60% |
54.70% |
75.90% |
90.64% |
95.72% |
$35,408 |
|
Montana |
31.12% |
35 |
18.04% |
56.37% |
74.38% |
87.95% |
92.12% |
$32,719 |
|
Nebraska |
31.02% |
36 |
14.91% |
51.76% |
76.05% |
91.13% |
95.54% |
$36,999 |
|
Nevada |
37.28% |
17 |
21.14% |
59.76% |
74.23% |
85.07% |
84.17% |
$39,683 |
|
New Hampshire |
36.56% |
22 |
17.28% |
53.59% |
71.35% |
84.90% |
84.89% |
$42,707 |
|
New Jersey |
45.23% |
2 |
21.78% |
64.25% |
81.33% |
93.62% |
97.82% |
$48,590 |
|
New Mexico |
26.90% |
41 |
13.36% |
49.59% |
68.53% |
86.42% |
92.84% |
$30,642 |
|
New York |
38.80% |
13 |
18.57% |
64.35% |
82.35% |
94.30% |
98.10% |
$44,571 |
|
North Carolina |
36.50% |
23 |
19.28% |
64.56% |
83.44% |
94.04% |
96.94% |
$33,732 |
|
North Dakota |
19.00% |
50 |
9.36% |
29.01% |
46.32% |
68.04% |
86.00% |
$34,808 |
|
Ohio |
34.57% |
25 |
18.01% |
60.68% |
79.19% |
92.46% |
97.28% |
$36,054 |
|
Oklahoma |
30.74% |
39 |
15.78% |
57.47% |
77.87% |
91.03% |
94.71% |
$32,661 |
|
Oregon |
41.84% |
7 |
22.77% |
71.75% |
87.97% |
95.36% |
96.08% |
$35,300 |
|
Pennsylvania |
32.36% |
29 |
14.97% |
52.95% |
73.04% |
89.09% |
95.19% |
$38,849 |
|
Rhode Island |
38.16% |
16 |
17.69% |
63.60% |
82.53% |
94.27% |
96.86% |
$40,331 |
|
South Carolina |
32.96% |
28 |
17.12% |
62.13% |
81.70% |
92.55% |
95.77% |
$31,480 |
|
South Dakota |
19.16% |
49 |
10.09% |
31.36% |
47.12% |
63.48% |
69.93% |
$34,647 |
|
Tennessee |
25.84% |
45 |
13.49% |
44.67% |
61.34% |
77.91% |
82.67% |
$34,568 |
|
Texas |
25.99% |
44 |
11.92% |
44.57% |
61.38% |
78.52% |
82.57% |
$35,913 |
|
Utah |
40.44% |
10 |
21.08% |
73.33% |
87.75% |
94.29% |
95.07% |
$30,917 |
|
Vermont |
30.61% |
40 |
14.79% |
49.14% |
71.42% |
90.55% |
95.17% |
$37,025 |
|
Virginia |
41.13% |
9 |
19.39% |
60.46% |
79.19% |
92.70% |
97.11% |
$42,642 |
|
Washington |
37.20% |
18 |
18.47% |
57.75% |
72.52% |
83.86% |
84.88% |
$39,705 |
|
West Virginia |
18.02% |
51 |
7.25% |
31.11% |
52.97% |
79.57% |
93.93% |
$30,317 |
|
Wisconsin |
38.61% |
14 |
18.75% |
63.88% |
84.80% |
94.54% |
96.14% |
$37,115 |
|
Wyoming |
22.66% |
48 |
11.34% |
35.38% |
46.42% |
59.93% |
64.13% |
$40,912 |
|
Source: IRS Statistics of Income, Table 2; Tax Foundation calculations |
The table shows that there are only 10 states where more than 40 percent of tax returns itemize. At the top of the list is Maryland, where slightly over half of all returns itemize. One of the reasons for the relatively high rate of itemization in Maryland is the high state and local tax burden, which tends to push taxpayers over the threshold for itemizing—that is, the point where they benefit more from itemizing than from taking 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. . Also, Maryland is one of the highest-income states, so its residents tend to gain the most in tax savings from provisions like state and local tax deductionA tax deduction is a provision that reduces taxable income. A standard deduction is a single deduction at a fixed amount. Itemized deductions are popular among higher-income taxpayers who often have significant deductible expenses, such as state and local taxes paid, mortgage interest, and charitable contributions. s, the charitable deduction, and the mortgage interest deduction. Second on the list is New Jersey, which also has a very high state and local tax burden, thanks in large part to its high property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. es. Connecticut ranks third, with 45 percent of its tax returns itemizing. The District of Columbia, Colorado, Minnesota, Oregon, Massachusetts, Virginia, and Utah round out the top 10.
At the bottom of the list is West Virginia, where only 18 percent of tax returns itemize. This is largely because the state has the lowest per capita income of any state, so its tax burden is relatively low. Also, West Virginia’s home values are well below the national average, which results in smaller mortgages. North Dakota is the second lowest, with 19 percent of tax returns itemizing, followed by South Dakota, also at 19 percent.
As the table shows, itemization rates rise as income rises. Only 7 percent of West Virginia tax returns with an adjusted gross incomeFor individuals, gross income is the total pre-tax earnings from wages, tips, investments, interest, and other forms of income and is also referred to as “gross pay.” For businesses, gross income is total revenue minus cost of goods sold and is also known as “gross profit” or “gross margin.” of less than $50,000 itemized, and nationwide, less than 20 percent of returns with an AGI of less than $50,000 itemized. However, over 93 percent of tax returns with an AGI greater than $200,000 itemized. The dramatic difference in itemization rates between the two ends of the income spectrum suggests that future tax reform policies that seek to end most itemized deductionItemized 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. s while lowering tax rates across the board would result in a more progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. system and greater economic efficiency.
Some policymakers may think that the itemization rates for the bottom two income groups—18 percent and 58 percent—are high enough to justify keeping all the deductions in the tax code, but the amount that taxpayers in the bottom two income groups save from these deductions is fairly small, for two reasons. First, these taxpayers are likely just barely over the itemization threshold, meaning their deduction amounts wouldn’t fall much if itemization were eliminated. Second, these taxpayers are in lower taxable incomeTaxable 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. brackets, meaning that their deductions are typically worth only 15 percent or 25 percent of their total value, while for higher-income taxpayers, the same deductions lead to tax savings of 28, 33, and 35 percent of their value.
Conclusion
The data in the table above show that itemization is highest among high-income taxpayers, as well as in states with high home values and high state and local taxes. Therefore, the tax savings associated with most itemized deductions tend to be distributed rather narrowly, both across geographic areas and across the income spectrum. As members of Congress begin to ask what’s next with regard to the expiration of the Bush tax cuts in 2011, those who seek to make the tax code more progressive should find common ground with those who seek to make it more economically efficient. Both groups can realize their goals by eliminating tax preferences that mostly flow to higher-income taxpayers while also lowering marginal rates for all taxpayers.