The fiscal cliff deal is done and the question on everyone’s mind: What about the states? Okay, so only a handful of us are actually asking this question. But there are some important provisions that will matter to states still woozy from the Great Recession.
The good news for states is that American Tax Relief Act of 2012 will end much of the uncertainty that has plagued the income tax code in recent years. No longer will states have to guess what will happen to many provisions of the federal revenue code that were set to expire. The bad news is some states will lose revenue they were counting on from scheduled changes in the federal estate tax that won’t happen.
The federal credit for state estate and inheritance taxes is gone for good. The 25 dormant states that had an estate tax only when the federal credit existed will continue to not collect estate taxes. (My brief on state estate taxes and the fiscal cliff has more details but ATRA is the nail in the coffin on the state death tax credit.) Twenty states and the District of Columbia, because they either have an inheritance tax or an estate tax independent of the current federal law, will continue to collect the tax that can still be deducted on the federal return. Five states completely repealed the estate tax. Those states with zombie estate taxes still on their books, knowing the credit is not coming back, may choose one of these options. Or some may just wait to see if Congress changes its mind again.
By engaging in a bit of wishful thinking that the credit would be revived, a few states included revenues from a resurrected estate tax in their latest budget forecasts. Now, with the credit gone for good, those states will have to hope for additional revenue from other taxes to avoid having to revise their projections downward. California used a projected—and now gone—$45 million in new estate tax revenue to help balance its 2012-2013 budget.Wisconsin’s executive budget office included it in its November 2012 forecast. The Colorado Legislative Council Staff was more prescient, revising its revenue forecast in December, eliminating estate tax revenue that had been previously included. ( Continue… )
I spent lunchtime Tuesday moderating a thoroughly discouraging Urban Institute panel discussion on the fiscal cliff. The consensus of the speakers—all highly-regarded budget experts—was that the New Year’s cliff deal was pretty lame and the coming round of self-imposed budget crises will be even worse.
My Urban Institute colleagues Donald Marron, Rudy Penner, and Bob Reischauer—each of whom has directed the Congressional Budget Office—saw little good coming from the recent fiscal cliff drama. Bob scored the deal a paltry two out of a possible 10. Rudy felt little could come out of the next round of budget deadlines that will hit in February and March. Donald saw some benefit in the decision by Congress to make most of the tax code permanent, largely ending its recent practice of temporarily extending big chunks of the law a year or two at a time.
Donald even saw some slight prospects for corporate tax reform that raises the same amount of money as the current code, but brings rates more in line with the rest of the world. But the chances of broad-based individual tax reform in 2013 seem to be slipping by the day.
A big part of the problem is the vast gulf between Democrats and Republicans over how much revenue any new tax code should raise. The GOP insists it should be no more than 18 or 19 percent of the Gross Domestic Product, and the fiscal cliff deal already would raise that level to about 19.4 percent. Thus, it is no surprise to hear Senate Minority Leader Mitch McConnell say he is done talking about tax increases. ( Continue… )
I increased donations to charity in 2012. This deal limits my deductions so I, & many others, will likely donate less in 2013.
Mr. Fleischer is referring to the phaseout of itemized deductions, which had temporarily expired but was reinstated by the Tax Relief Act of 2012 (the official name for the deal that averted the fiscal cliff). Fleischer expanded on this point in an op ed in the Wall Street Journal.
Fleischer is wrong, but it’s easy to understand why he might be confused since the phaseout is designed to obfuscate. Here is the main point: Even though it is called a phaseout of deductions, it’s really just a sneaky way to raise marginal tax rates by a little over 1 percentage point on high-income people.
The phaseout works this way. Singles with incomes over $250,000 and couples with incomes over $300,000 lose 3 cents of itemized deductions for every dollar of income above the threshold. If Mr. Fleischer is married and makes $500,000, his itemized deductions are reduced by $6,000 (3% of the $200,000 of income above $300,000). If he earns more money, his deductions will continue to be reduced. The law limits the phaseout to 80% of deductions, but almost nobody hits that limit because deductions tend to increase with income. Think state and local taxes and charitable donations, which are much more than 3% of income for almost everyone with higher income. ( Continue… )
Everyone trying to sort out the fiscal cliff deal is getting hopelessly tangled in budget baselines. Are taxes going up? Or are they going down? There is an easier way: Forget the multiple baselines. Just look at what is happening to total spending and total revenues.
The policy story is simple: The cliff deal (plus expected economic growth) does begin to reduce the deficit to levels approaching sustainability, though the red ink begins to flow faster after about five years. And since TPC’s projections include some optimistic assumptions about both spending and tax revenue, deficits could be even higher than the estimates.
The political picture is even more challenging. Under the agreement, revenues in 10 years will reach about 19.4 percent of Gross Domestic Product, and that is at the very high end of what most Republicans say is tolerable. Spending will exceed 22 percent, at the low end of what many Democrats think is acceptable given the aging of the population. Looking at taxes and spending as a share of GDP shows just how tough it will be for the parties to reach a fiscal compromise. ( Continue… )
Suppose someone proposed a special tax on businesses that make their ownership shares publicly available in affordable, easy-to-sell units. Such an idea would probably generate a lot of push-back. Efficiency advocates might complain that it taxed the very attributes that make equity markets efficient. Progressivity advocates might object on the grounds that it taxed those who have no alternative to publicly available investment opportunities.
In fact we already have such a tax. We call it the corporate income tax.
In what sense is the corporate tax a special levy on being publicly traded? And what do we know about the policy implications of such a charge?
Corporate earnings are taxed twice: First at the corporate level, then again as dividends when they are distributed to shareholders or as capital gains when those investors sell their shares. ( Continue… )
TaxVox proudly presents its 2012 Lump of Coal awards, Thelma and Louise edition, for the worst fiscal policy ideas of the year. The winners are:
10. California. The Golden State probably deserves a lifetime achievement Lump of Coal Award for its inability to balance its budgets, its government-by-initiative, and its endless bouts of fiscal wishful thinking. What, that bump in capital gains tax revenue won’t go on forever?
9. President Obama for proposing to pay for major corporate tax reform by eliminating a handful of minor tax preferences, including subsides for the purchase of corporate jets. Nothing wrong with corporate reform or with ditching the airplane subsidy. The problem is Obama had already pledged to use the same tax break to help reduce the deficit. Physics question: Can a jet flying at the speed of light pay for two things at once?
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8. Congress’ decades-long inability to require online retailers to collect sales taxes, just as their bricks-and-mortar competitors must. C’mon gang, even Amazon says it will start collecting sales taxes for online sales. Maybe lawmakers are waiting for free shipping. ( Continue… )
Somehow, the fiscal cliff tax debate has taken a truly weird turn. No, not the politics, which long ago became a parody of Washington deal-making at its worst. It is the policy that has gotten strange: Democrats and Republicans seem hell-bent on protecting millions of high-income people from deficit-cutting tax hikes.
President Obama started all this four years ago when he redefined the middle class as individuals making $200,000 or less and couples making up to $250,000, and vowing they would never, ever pay a penny more in taxes. This promise exempts 98 percent of households from paying higher taxes to reduce the deficit—a goal most of them say they support.
But that was just the start. Earlier this week, pressured by House Speaker John Boehner, Obama reportedly agreed to define the protected middle class as those making as much as $400,000, and the gossip around town is that he might even up the bidding to $500,000. All this seems to be headed in exactly the wrong direction.
For his part, the speaker has taken an even stranger turn by going rogue with his Plan B. He’d raise taxes on those making $1 million or more, who account for only about 0.2 percent of households. And he’d raise taxes on those making $50,000 or less. The result: Working families would help cover some of the revenue that’s lost from protecting those making between $200,000 and $1 million. ( Continue… )
The 2001-10 tax cuts placed substantial emphasis on “pro-family” tax reform. The more prominent features favoring families with children included a doubling of the Child Tax Credit (CTC) to $1,000 per child and making it broadly refundable, increasing the Earned Income Tax Credit (EITC) for families with at least 3 children, increasing the point at which the EITC starts to phase out for married couples, increasing the credit rate of the Child and Dependent Care Tax Credit (CDCTC) for some families, and increasing the expenses eligible for a CDCTC for all families.
If left in place, in 2013 families with children would see over $43 billion in benefits from these provisions. But absent Congressional action, these expanded benefits will disappear over the cliff. Should the EITC, CTC, and CDCTC revert to their pre-2001 form, the Tax Policy Center estimates nearly three-quarters of all families with children will see their taxes rise or net rebates decline by an average of almost $1,200, compared with what they would pay if the provisions were extended. Keep in mind those changes would be in addition to the broad tax hikes that would affect nearly all working families such as the expiration of the payroll tax cut and any increase in marginal tax rates for all families with income above the tax entry thresholds.
Most low income and middle income families with children will see their taxes rise (almost 72 percent of families in the lowest 20 percent of incomes and 89 percent of families in the second income quintile), in many cases by a substantial share of their income. Among families whose taxes go up, the average increase will exceed $1,400 for families in the lowest quintile and $1,600 for families in the second quintile (see chart). Most of this increase comes from the reduction in the CTC to pre-2001 levels. Although the child credit phases out and the EIC is unavailable at higher incomes, even families in the top quintile are not immune to tax increases stemming from these three provisions. Just over one-third of families with children in the highest income quintile will see their taxes rise in 2013 by an average of about $600. ( Continue… )
President Obama and House Speaker John Boehner may be close to agreeing on a plan that, among other things, would revise the way government programs are adjusted for inflation. Most attention is focused on what this means for Social Security recipients. But the Tax Policy Center estimates that changing the cost-of-living measure would also result in a gradual tax increase for many households that would average about $140 a decade from now.
Before delving into the substance, I can’t help but note one delicious irony. Three decades ago, Ronald Reagan fundamentally changed the nature of the income tax by mostly ending what was called bracket creep—the phenomenon where people would slip into higher tax brackets as their incomes rose with inflation. Reagan convinced Congress to stop this by indexing tax brackets by the Consumer Price Index (CPI). Now, at the insistance of Republicans, Obama seems to have agreed to open the door to a bit more bracket creep.
So what’s this all about? At its heart is a technical argument about what measure of inflation best captures the fact that people respond to price changes. The model that Congress may adopt assumes that people adjust their behavior when prices rise (or fall). So, if beef gets more expensive, they buy chicken.
By buying the less expensive fowl, a shopper’s cost of food does not go up as much as it would if he stuck with beef. As a result, the rate of food inflation is a bit less than otherwise. While the traditional CPI reflects some of this, another version, called chained CPI, may do a better job. ( Continue… )
Yesterday, I described President Eisenhower’s remarkable success in turning a large deficit in fiscal 1959 into a balanced budget in 1960. It was one of the biggest fiscal consolidations since World War II.
Although it was a very different time, there are lessons relevant to today’s fiscal challenges. One is that a president need not lose popularity just because he fights hard to impose a responsible, austere budget. Another is that Congress and the president can have intense ideological battles without paralyzing government.
But the biggest difference may be in the nature of government spending. In 1959, Medicare and Medicaid did not exist. Today, nearly half of noninterest spending is in just two areas: Social Security and health. Almost all this spending is on entitlements. ( Continue… )