Tax Cut Expiration Would Impact States Unevenly

Download Fiscal Fact No. 320: Tax Cut Expiration Would Impact States Unevenly

President Obama recently called for letting the Bush tax cuts expire for people who make more than $250,000 a year. Senator Chuck Schumer and Representative Nancy Pelosi had previously called for an extension of 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. cuts for those earning up to $1 million dollars, only to abandon that position in favor of President Obama’s proposal.

Recently, and for the first time, the IRS published state-level data on tax returns with adjusted gross incomes over $1 million for tax year 2010. Together with data on incomes over $200,000, we can finally take a look at who might win and who might lose as a result of President Obama’s tax proposal.[1]

Fact #1: Returns with 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.” over $1 million a year were only 0.19% of total tax returns but 22% of total taxes paid. Those making over $200,000 were 3% of returns but nearly 50% of income tax paid.

At the national level, almost half of all income tax paid is paid by high income earners. Letting the Bush tax cuts expire only for individuals above this income level would push these ratios higher. Without more recent and better public data from the IRS, however, it is difficult to say exactly how much higher.

Fact #2: 86% of returns with income over $200,000 and 84% of millionaire returns filed jointly compared to just 37% of returns at all income levels.

Perhaps not surprisingly, most high income returns are much more likely to be jointly filed returns. There are two reasons why most high income returns are from joint returns. First, there are two earners in the household, and two incomes mean more overall household income. Second, joint filers are older. Older filers are more likely to be both married and in the high-income stage of their life. Accordingly, taxes on high income earners are also more likely to be taxes on married, older Americans.

Fact #3: Strong “Blue” states likely to be hit hardest by Obama’s tax proposal

Five states and the District of Columbia currently have more than 56% of their total federal personal income tax paid by high income earners compared to 50% nationally. High income earners in these states will likely see their personal income tax burden increase under President Obama’s tax plan. As a result, a higher proportion of new tax dollars will come from these states, likely impacting local economies.

State	Income Tax Paid by Returns with AGI over $200,000	Income Tax Paid by Returns with AGI over $1,000,000
Connecticut	66.01%	37.32%
New York	61.35%	34.10%
New Jersey	56.85%	21.92%
Massachusetts	56.81%	25.52%
District of Columbia	56.76%	23.88%
California	56.12%	25.33%

Appendix: State by State data on Taxpayers with Incomes over $200K and $1M

Related: Map: Percentage of Federal Income Tax Revenue from Filers Making Over $200K

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