Fiscal Fact No. 178
Introduction
New taxes to fund the federal government’s plan for higher health insurance spending continue to be debated in Washington. According to a new Bloomberg report, the top 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.
rate will be 5.4 percent in the House plan.[i] That will be the top rate in a three-tiered surtax aimed at high-income 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.
returns:
1 percent surtax on AGI between $350,000 and $500,000 (singles between $280,000 and $400,000)
1.5 percent surtax on AGI between $500,000 and $1,000,000 (singles between $400,000 and $800,000)
5.4 percent surtax on AGI beyond $1,000,000 (singles beyond $800,000)
States have been raising taxes on this same group, leading to concern over how high the combined tax rates would be in each state, especially in the growing number of states with double-digit tax rates. Some commentators merely sum the rates at the federal, state and local level to give a statutory total tax rate. A more accurate method is to calculate the effective marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. , which takes into consideration deductions and adjustments. For a description of the difference between effective marginal tax rates and effective average tax rates, see Average vs. Marginal Tax Rates Revisited.
In Table 1 below we present calculations of the effective marginal tax rate on top earners. We use assume that the 2008 weighted local average for each state applies to 2011, the top federal 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. rate will rise as scheduled to 39.6 percent, the top state tax rate in each state will follow current 2011 scheduled law, and a new House plan for 5.4 percent surtax on AGI earned at very high-income levels will become law.
Table 1
Top Effective Marginal Rates under Proposed Health Care Surtax by State
Sorted by Combined Top Tax Rate in 2011
|
State |
Avg. Local Rate |
Top |
Top Federal Ordinary Rate |
New |
Medicare |
Combined |
Rank |
|
Oregon |
0.36% |
11.00% |
39.6% |
5.4% |
2.9% |
57.54% |
1 |
|
Hawaii |
0.00% |
11.00% |
39.6% |
5.4% |
2.9% |
57.22% |
2 |
|
New York^ |
1.70% |
8.97% |
39.6% |
5.4% |
2.9% |
56.92% |
3 |
|
California |
0.00% |
10.30% |
39.6% |
5.4% |
2.9% |
56.58% |
4 |
|
Rhode Island |
0.00% |
9.90% |
39.6% |
5.4% |
2.9% |
56.22% |
5 |
|
Maryland |
2.98% |
6.25% |
39.6% |
5.4% |
2.9% |
55.61% |
6 |
|
New Jersey |
0.00% |
8.97% |
39.6% |
5.4% |
2.9% |
55.46% |
7 |
|
Vermont |
0.00% |
8.95% |
39.6% |
5.4% |
2.9% |
55.36% |
8 |
|
Minnesota |
0.00% |
7.85% |
39.6% |
5.4% |
2.9% |
54.36% |
9 |
|
Idaho |
0.00% |
7.80% |
39.6% |
5.4% |
2.9% |
54.32% |
10 |
|
North Carolina |
0.00% |
7.75% |
39.6% |
5.4% |
2.9% |
54.27% |
11 |
|
Wisconsin |
0.00% |
7.75% |
39.6% |
5.4% |
2.9% |
54.27% |
11 |
|
Ohio |
1.82% |
5.93% |
39.6% |
5.4% |
2.9% |
54.27% |
13 |
|
Delaware |
0.16% |
6.95% |
39.6% |
5.4% |
2.9% |
53.69% |
14 |
|
Arkansas |
0.06% |
7.00% |
39.6% |
5.4% |
2.9% |
53.65% |
15 |
|
South Carolina |
0.00% |
7.00% |
39.6% |
5.4% |
2.9% |
53.59% |
16 |
|
Maine |
0.00% |
6.85% |
39.6% |
5.4% |
2.9% |
53.46% |
17 |
|
Nebraska |
0.00% |
6.84% |
39.6% |
5.4% |
2.9% |
53.45% |
18 |
|
Kentucky |
0.76% |
6.00% |
39.6% |
5.4% |
2.9% |
53.37% |
19 |
|
West Virginia |
0.00% |
6.50% |
39.6% |
5.4% |
2.9% |
53.14% |
20 |
|
Kansas |
0.00% |
6.45% |
39.6% |
5.4% |
2.9% |
53.09% |
21 |
|
Missouri |
0.12% |
6.00% |
39.6% |
5.4% |
2.9% |
52.79% |
22 |
|
Georgia |
0.00% |
6.00% |
39.6% |
5.4% |
2.9% |
52.69% |
23 |
|
Virginia |
0.00% |
5.75% |
39.6% |
5.4% |
2.9% |
52.46% |
24 |
|
Oklahoma |
0.00% |
5.50% |
39.6% |
5.4% |
2.9% |
52.23% |
25 |
|
Massachusetts |
0.00% |
5.30% |
39.6% |
5.4% |
2.9% |
52.05% |
26 |
|
Connecticut |
0.00% |
5.00% |
39.6% |
5.4% |
2.9% |
51.78% |
27 |
|
Mississippi |
0.00% |
5.00% |
39.6% |
5.4% |
2.9% |
51.78% |
27 |
|
Utah |
0.00% |
5.00% |
39.6% |
5.4% |
2.9% |
51.78% |
27 |
|
New Mexico |
0.00% |
4.90% |
39.6% |
5.4% |
2.9% |
51.69% |
30 |
|
North Dakota |
0.00% |
4.86% |
39.6% |
5.4% |
2.9% |
51.65% |
31 |
|
Iowa |
0.30% |
8.98% |
39.6% |
5.4% |
2.9% |
51.61% |
32 |
|
Michigan |
0.44% |
4.35% |
39.6% |
5.4% |
2.9% |
51.59% |
33 |
|
Colorado |
0.00% |
4.63% |
39.6% |
5.4% |
2.9% |
51.44% |
34 |
|
Indiana |
1.16% |
3.40% |
39.6% |
5.4% |
2.9% |
51.38% |
35 |
|
Arizona |
0.00% |
4.54% |
39.6% |
5.4% |
2.9% |
51.36% |
36 |
|
Pennsylvania |
1.25% |
3.07% |
39.6% |
5.4% |
2.9% |
51.16% |
37 |
|
Montana |
0.00% |
6.90% |
39.6% |
5.4% |
2.9% |
50.48% |
38 |
|
Louisiana |
0.00% |
6.00% |
39.6% |
5.4% |
2.9% |
50.05% |
39 |
|
Illinois |
0.00% |
3.00% |
39.6% |
5.4% |
2.9% |
49.97% |
40 |
|
Alabama |
0.19% |
5.00% |
39.6% |
5.4% |
2.9% |
49.67% |
41 |
|
Alaska |
0.00% |
0.00% |
39.6% |
5.4% |
2.9% |
47.25% |
42 |
|
Florida |
0.00% |
0.00% |
39.6% |
5.4% |
2.9% |
47.25% |
42 |
|
Nevada |
0.00% |
0.00% |
39.6% |
5.4% |
2.9% |
47.25% |
42 |
|
New Hampshire |
0.00% |
0.00% |
39.6% |
5.4% |
2.9% |
47.25% |
42 |
|
South Dakota |
0.00% |
0.00% |
39.6% |
5.4% |
2.9% |
47.25% |
42 |
|
Tennessee |
0.00% |
0.00% |
39.6% |
5.4% |
2.9% |
47.25% |
42 |
|
Texas |
0.00% |
0.00% |
39.6% |
5.4% |
2.9% |
47.25% |
42 |
|
Washington |
0.00% |
0.00% |
39.6% |
5.4% |
2.9% |
47.25% |
42 |
|
Wyoming |
0.00% |
0.00% |
39.6% |
5.4% |
2.9% |
47.25% |
42 |
|
District of Columbia |
0.00% |
8.50% |
39.6% |
5.4% |
2.9% |
54.95% |
|
|
New York City^ |
3.65% |
8.97% |
39.6% |
5.4% |
2.9% |
58.68% |
|
|
Source: Tax Foundation calculations, State Individual Income Tax Rates Note: The rightmost column, Combined Top Rate, is the top effective marginal rate, taking into account deductions and adjustments, and therefore does not equal the sum of the first four rates. |
Technical Notes
To calculate marginal effective tax rate, we add the weighted average of local tax rates in the state based upon 2009 State Business Climate Index to top state tax rate and to the top federal rate as scheduled to be in effect in 2011 under current law and under Obama’s budget (39.6 percent), plus a 5.4 percent surtax and the top Medicare tax rate for the self-employed. We allowed for a deduction of the state and local tax rate (20 percent thereof assuming limitation on 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.
returns and taxpayer is outside the phase-out range) and the adjustment allowed against income from 1/2 self-employment tax (on both state/local and federal returns). For those few states that allow federal deductibility at high income levels, such a deduction was included in the calculation as well. New York City’s rate merely includes the state rate plus the city rate. Maine, New Jersey, Vermont and California currently have top state tax rates higher than the 2011 scheduled rate in the table above. For some other states that have recently enacted temporary increases to the top rate (e.g. Oregon), the rate would fall after 2011.
The Joint Committee on Taxation has verified that the thresholds for singles and heads of household returns would be 80% of the married threshold.
These are not the highest possible marginal tax rates that a taxpayer can face. Our local rates are weighted averages, so in some towns and counties, the local rates can be significantly higher. Also, at some income levels for different types of taxpayers, due to the phase-outs of various tax credits, exemptions or deductions, effective marginal tax rates can be extremely high. Also, if one wanted to include the fact that many low-income transfer programs are means-tested and have phase-out ranges (or in some cases mere cliffs), the marginal disincentive to work can be very high. For more on this issue, see Kotlikoff and Rapson
[i] The Tax Foundation released an initial Fiscal Fact on Friday, July 10, using a 4% surtax rate, which would have put 33 states over the 50% total tax rate threshold. A revision late Friday used a 3% rate, per an announcement by the Ways and Means CommitteeThe Committee on Ways and Means, more commonly referred to as the House Ways and Means Committee, is one of 29 U.S. House of Representative committees and is the chief tax-writing committee in the U.S. The House Ways and Means Committee has jurisdiction over all bills relating to taxes and other revenue generation, as well as spending programs like Social Security, Medicare, and unemployment insurance, among others. , which put 24 states over the 50% level.
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