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The Tax Increase No One’s Talking About
Posted by: | CommentsCongress and the administration have been arguing for months over extension of the Bush tax cuts: Should we extend them for everyone or only for the poorest 98.3 percent of Americans (which would also maintain some tax cuts for the rich)? Disagreement revolves around roughly $68 billion: the cost of covering the last 1.7 percent vs. the government pulling that much money out of the private sector and squelching economic recovery. But nobody’s talking about the nearly $80 billion hit that expiration of the 2009 stimulus bill will inflict.
The stimulus bill (the American Recovery and Reinvestment Tax Act of 2009) provided $287 billion in tax cuts for 2009 and 2010 but most provisions expire at the end of this year. (Congress extended some of the business tax cuts during the summer.) The big kahuna is the Making Work Pay credit—nearly $60 billion a year going to most workers—but partial exemption of unemployment compensation, expansion of EITC and education credits, and greater refundability of the child credit deliver nearly $20 billion more. Taxes will jump for more than 95 percent of Americans when those cuts evaporate come January.
Why does a $68 billion tax increase on wealthy taxpayers throw Congress into total gridlock but no one mentions a tax hike almost 20 percent bigger? Partly it’s that the stimulus was designed as temporary; Congress may have made the Bush tax cuts temporary to avoid a filibuster but proponents always meant them to last forever. However, it’s also a triumph of politics over economics: stimulus is a dirty word in Washington these days, even though most economists agree that the economy still needs a strong boost. And maybe “economist” is a dirty word too.
Arguably taking $80 billion away from all but the richest Americans would hurt spending more than pulling $68 billion out of fat wallets. Low- and moderate-income households save less of their income than do wealthier people, so raising their taxes causes a bigger drop in consumer demand.
Deficit hawks worried about running up more red ink should oppose extending either set of tax cuts. But people worried about what a tax rise will do to the economy should quit fretting about higher taxes on the rich and focus on the other 98 percent of Americans.
Rising Federal Revenues—But Only from Firms and the Fed
Posted by: | CommentsFederal revenues rose nearly 3 percent from fiscal year 2009 to FY2010. But virtually the whole increase came from higher corporate income taxes and a more than doubling of Federal Reserve earnings. Preliminary data in the Congressional Budget Office’s October Monthly Budget Review reveal that revenue climbed $57 billion to $2.16 trillion in the fiscal year that ended last month (see graph). Combined with a $67 billion fall in outlays, that revenue gain cut the federal deficit by $125 billion to a still astronomical $1.3 trillion, or 8.9 percent of GDP. Bad as that is, it’s well below 2009’s deficit of 10 percent of GDP.
Year-over-year revenue changes were highly uneven, however. Corporate income taxes jumped about 40 percent to $192 billion—up $54 billion from 2009—largely because profits rose but also because temporary provisions allowing firms to depreciate assets more rapidly expired. (Congress extended accelerated depreciation retroactively in September, but any tax savings won’t come until FY2011.) Federal Reserve receipts jumped more than 120 percent ($42 billion) on the Fed’s greatly expanded investment portfolio, mostly acquired to boost the economy and prop up the ailing housing market.
But both individual income and social insurance taxes fell in FY2010– fallout from continuing high unemployment. Income tax receipts were down 1.6 percent ($14 billion) and the taxes supporting Social Security and Medicare dropped more than 3 percent ($28 billion). Had these revenue sources held constant, the deficit would have shrunk another 0.3 percent of GDP.
Revenues are still far shy of their 2007 peak, down more than $400 billion. But the past year’s increase is encouraging. Now all we need is a return to full employment, even stronger corporate profits, and a healthy housing market. It could be a long wait.
State Estate Taxes: Windfall Gold in Expiring Tax Cuts
Posted by: | CommentsAs Congress delays action on extending the 2001-03 tax cuts, state revenue officers may be secretly hoping for continued legislative paralysis. Why? Because the federal estate tax, repealed for this year, will be back in January —and many states are in line for a windfall if the levy returns to its pre-2001 form. It’s not that states want to tax estates per se, but they wouldn’t mind getting some easy revenue.
Until 2001, every state had a “pick-up” tax that piggybacked on the federal levy. Estates could claim a credit of up to 16 percent of their federal tax for estate taxes paid to states, so it was no surprise that states typically set their estate taxes at that maximum 16 percent rate. It was “free” money—the state got the tax revenue but estates paid nothing extra.
The 2001 tax act that phased down and eventually repealed the estate tax for this year didn’t just raise the tax threshold and cut the rate. It also replaced the credit with a deduction starting in 2005. As a result, states that relied on pick-up taxes tied to the repealed federal credit lost their windfall. Some passed new laws to decouple their taxes from the credit. A few enacted new taxes. But this year only 15 states and the District of Columbia will collect any estate taxes. (Five more levy inheritance taxes on heirs and two—Maryland and New Jersey—impose both.)
But nearly all of the 30 states that have no estate or inheritance tax in 2010 stand to collect estate taxes again if Congress allows the federal tax to return to its 2000 form in January. Since those states never changed their estate tax laws, the resurrection of the credit would also automatically resuscitate the pick-up taxes.
From the states’ perspective, what’s not to like? Without having to take the politically risky step of raising taxes, a few billion dollars will flow into depleted state accounts. And governors can blame it all on Congress.