Top Rates in Each State Under Joe Biden’s Tax Plan

October 20, 2020

Democratic presidential nominee Joe Biden’s tax plan would yield combined top marginal state and local rates in excess of 60 percent in three states: California (62.64 percent), Hawaii (60.34 percent), and New Jersey (60.09 percent). Marginal rates would also exceed 60 percent in New York City (62.03 percent).

Calculating Top Marginal Rates Under the Biden Plan
Examples from California, New Jersey, New York, and New York City

Federal

Top Rate

39.6%

Social Security Payroll Tax Above Donut Hole*

6.2%

Medicare Payroll Tax*

1.45%

Additional Medicare Tax (HI)

0.9%

Pease Limitation

1.188%

* Employee-side only

 

State

CA

NJ

NY

NYC

State Top Marginal Rate

13.30% 10.75% 8.82% 12.696%

SALT Deduction Capped at 28%

-3.724% -3.010% -2.470% -3.555%
 

Combined Top Rate without SALT Cap

58.91% 57.08% 55.69% 58.48%

Combined Top Rate with SALT Cap

62.64% 60.09% 58.16% 62.03%

Combined Top Rate including Employer-Side*

65.29% 62.92% 61.10% 64.73%

* Uses broader base of compensation to include employer-side contributions in both numerator and denominator

(Table 2 at the bottom of this post shows combined top rates in all 50 states and the District of Columbia under the Biden plan.)

Under current law, the top combined marginal rate on income is comprised of the top federal rate (37 percent); the Medicare payroll tax (1.45 percent employee-side); and the additional Medicare tax created by the Affordable Care Act (0.9 percent)—plus the top state rate, the highest of which is 13.3 percent in California. Elements of the Biden proposal that would impact combined marginal rates include:

  1. Raising the top marginal individual income tax rate to 39.6 percent, a restoration of the pre-Tax Cuts and Jobs Act (TCJA) rate;
  2. Creating a payroll tax “donut hole” where the Social Security tax (6.2 percent each for employer and employee), currently only imposed on the first $137,700 of wage income and therefore not part of a marginal rate, is restored above $400,000 of income;
  3. Restoring the so-called Pease Limitation, which reduces the value of itemized deductions by 3 percent of every dollar of taxable income above a certain threshold (which can be expressed as a 1.118 percent marginal rate under a 39.6 percent top rate tax); and
  4. Capping all itemized deductions at 28 percent.

Only a small percentage of taxpayers will see any of their income exposed to these combined top marginal rates, and effective rates are lower than marginal rates, which are the rates imposed on the last dollar of a taxpayer’s income.

Biden’s published tax plan does not include the repeal of the state and local tax (SALT) deduction cap, which is a priority of some leading congressional Democrats, though the Biden campaign has indicated at times that this would be part of the tax package and has more recently suggested that this may be left to the discretion of Congress. Table 2 shows top marginal rate calculations with and without the elimination of the SALT deduction cap. In the former scenario, the 28 percent overall deduction cap is applied.

Payroll taxes are imposed on both employers and employees, but public finance scholars generally agree that the burden of both sides of the tax is borne by employees, the employer side contribution in the form of lower wages. While wage stickiness would likely mean that it would take several years for employees to bear the full burden of a newly-imposed donut hole payroll tax (wages would grow more slowly until this was accomplished), this would be the long-run result. So we have calculated an all-in marginal rate inclusive of employer-side payroll tax payments as well. In this scenario, we have included those employer contributions in both the numerator (tax liability) and the denominator (compensation).

Top Marginal Rates Exceed 60 Percent in Three States Under the Biden Tax Plan
Combined State and Local Top Marginal Rates in Each State Under Biden’s Tax Plan
State SALT Cap Repealed SALT Cap Retained With Employer Contributions

Alabama

52.94% 54.34% 57.58%

Alaska

49.34% 49.34% 52.94%

Arizona

52.58% 53.84% 57.12%

Arkansas

54.09% 55.94% 59.07%

California

58.91% 62.64% 65.29%

Colorado

52.67% 53.97% 57.24%

Connecticut

54.37% 56.33% 59.43%

Delaware

54.09% 55.94% 59.07%

Florida

49.34% 49.34% 52.94%

Georgia

53.48% 55.09% 58.28%

Hawaii

57.26% 60.34% 63.16%

Idaho

54.33% 56.27% 59.38%

Illinois

52.90% 54.29% 57.54%

Indiana

51.66% 52.57% 55.94%

Iowa

55.48% 57.87% 60.86%

Kansas

53.44% 55.04% 58.23%

Kentucky

52.94% 54.34% 57.58%

Louisiana

53.66% 55.34% 58.51%

Maine

54.49% 56.49% 59.58%

Maryland

53.48% 55.09% 58.28%

Massachusetts

52.94% 54.34% 57.58%

Michigan

52.40% 53.59% 56.89%

Minnesota

56.43% 59.19% 62.09%

Mississippi

52.94% 54.34% 57.58%

Missouri

53.23% 54.74% 57.95%

Montana

54.31% 56.24% 59.35%

Nebraska

54.26% 56.18% 59.29%

Nevada

49.34% 49.34% 52.94%

New Hampshire

49.34% 49.34% 52.94%

New Jersey

57.08% 60.09% 62.92%

New Mexico

52.87% 54.24% 57.49%

New York

55.69% 58.16% 61.13%

   New York City

58.48% 62.03% 64.73%

North Carolina

53.12% 54.59% 57.82%

North Dakota

51.43% 52.24% 55.63%

Ohio

52.79% 54.14% 57.40%

Oklahoma

52.94% 54.34% 57.58%

Oregon

56.47% 59.24% 62.13%

Pennsylvania

51.55% 52.41% 55.79%

Rhode Island

53.65% 55.33% 58.50%

South Carolina

54.38% 56.34% 59.44%

South Dakota

49.34% 49.34% 52.94%

Tennessee

49.34% 49.34% 52.94%

Texas

49.34% 49.34% 52.94%

Utah

52.90% 54.29% 57.54%

Vermont

55.64% 58.09% 61.07%

Virginia

53.48% 55.09% 58.28%

Washington

49.34% 49.34% 52.94%

West Virginia

54.02% 55.84% 58.98%

Wisconsin

54.85% 56.99% 60.04%

Wyoming

49.34% 49.34% 52.94%

District of Columbia

55.78% 58.29% 61.25%

Notes: Includes top federal and state income tax rate, employee-side payroll taxes, Medicare (HI) tax, and Pease limitation. The SALT deduction cap repeal scenario applies the 28 percent cap on itemized deductions. The employer contribution scenario includes employer-side payroll taxes in calculations of both tax liability and taxable income, and assumes an uncapped SALT deduction.

These combined rates would be the highest since the Tax Reform Act of 1986, which reduced the top marginal individual income tax rate from 50 to 28 percent over two years, and the all-in federal rates would be the highest since 1981. In 1986, before the provisions of the Tax Reform Act of 1986 went into effect, seven states and the District of Columbia featured combined top marginal rates higher than California’s under the Biden plan, led by New York at a combined 63.9 percent.

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