The Heritage Foundation

Backgrounder Update #221

April 7, 1994

April 7, 1994 | Backgrounder Update on

The State and District Impact of the Clinton Tax Increase

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(Updadng Backgrosm&r Updae No. 2089 'ne States and Districts Hit Hard= by the 1"3 Tax bicrease:'November 24, 1993.) With April 15 just around the corner, many taxpayers are acutely aware tio the tax burden in America is at an all-titne high. This is due in part to President Clinton and Congress, who imposed on the American economy last year the largest tax in== in world history. While no region of the country was spared, the tax hike will have a particularly severe impm on certain states and districts. The state of Cali- fornia, for instance, will lose more thaii $37 billion over the next five years as a result of the new tam included in last year's leg- TEN HARDEST-HIT STATES islation. On a per capita basis, Connecticut is the hardest hiL Revenues Loss Per Capita The $5.8 billion impact of the'Clinton tax hike an Connecticut Arnount of Money equals $1,711 for every man, woman, and child in the state. Taken 6orn State Amazingly, all four U.S. Senators representing these two states voted for the tax bill. STATE my Per Capita The impact on al districts is even more pro- Connecticut $1,710.62 nounced. As detaileeinthe Appendix, 39 congressional districts Newlersey $1,429.09 will lose more than $1 billion apioce over the next: five years than to I= yeWs record tax hike. One district in Now York NewYork $1=.89 City will have more than $3A bdhon udwn out of ns economy Massachusetts $1,183.89 A dis= in southern California comes in second, losing nearly California $1.166.11 $2.8 billion. Surprisingly, the Members of Congress from these Florida $1,154.63 two districts voted in favor of the tax increase. Indeed, of the 39 Illinois $1,149.31 Members representing districts that will lose more than $1 bil- Maryland $1,138-57 lion, fourteen voted in favor of the tax increase. Hawaii. $1,09921 As the tables that follow indicate, no state or district will bene- Nevada $1,093.79 fit from the higher taxes. Thew figures notwithstanding, the Somr. U.S. Tna=ry. U.S. C@- wd White House still maintains that taxpayers come out ahead be- Connadonelludga Office _J cause higher taxes will stimulate economic growth, lower inter- est rates, encourage job creation, and reduce the budget deficit. it appears that none of thew goals win be met. hatted, by condnuing the high-tax policies of the BushWhite House, the current Ad- ministration is largely responsible for the emomy's continued -sub-par performance. Consider. V Economic growth, which historically has increased at an Unn"Al average Of more than five Pff=t the three years following a recession, has been averagirig barely half the levels normally achieved at this stage of a business cycle.

V Interest rates, which had been falling TEN HARDEST-HIT STATES continuously since 1989, have reversed Total Revenue Loss their downward trend since the tax bill was adopted. STATE Total Revenues Taken from V job creation, like economic growth, has State by 1993 Tax Bill been much weaker than normal. Net new job creation is running less than one-third California $37,315,505,015.23 the amounts normally seen three years af- New York $22,980,348,545.16 ter a recession ends. Texas $17.320,202,236.19 Deficit reduction, meanwhile, remains Florida $16,183,262,619.93 nothing more than a promise. The White Illinois $13,541,118,860.36 House claims the deficit will fall to less Pennsylvania $11,710,204,629.25 than $200 billion next year, but taxpayers New Jersey $11,564,226,325.96 may remember that supporters of the 1990 Ohio $9,666,090,477.70 tax increase promised there would be a Michigan $8,496,138,559.49 budget surplus this year if that tax bill Massachusetts $7,373,252,586.67 were enacted. The bill was approved, but the deficit this year is expected to be well Source: U.S. Treasury, U.S. Census and Congressional Budget above $200 billion. loffice. Higher Taxes Hurt Everyone. The Administration argues that voters should be happy because only the "rich" are paying the higher taxes. This is grossly inaccurate. Many of the bill's provisions, such as higher gas taxes and increased taxation of Social Security benefits, are paid directly by lower- and middle-income taxpayers. Moreover, these taxpayers also suffer as a result of the "soak-the-rich" taxes included in the tax bill.

The White House asserts that higher income tax rates are a way to make wealthy Americans like Donald Trump and Leona Helmsley pay "their fair share." Playing the "politics of envy" may get good headlines, but it is bad economics. In reality, higher tax rates will impose a very heavy cost on small businesses, sav- ings, and investment. Small businesses-partnerships. sole proprietorships, and subchapter S corporations -are affected because almost all of them file under the individual income tax code. To make matters worse, the higher income tax rates punish precisely those small businesses that become successful, earn some money, and would be in a position, were it not for higher taxes, to re-invest those earnings and create new jobs. Higher income tax rates on the "rich" also penalize lower- and middle-income taxpayers because of the negative impact on savings and investment. The White House's class warfare campaign conjures up images of corporate fat cats, but most of the income earned by the wealthy is not big salaries for Fortune 500 ex- ecutives. Instead, it is dividends, interest, capital gains, and other investment income. By dramatically boosting tax rates, politicians have sharply reduced incentives to save and invest. And as even the most lib- eral economist wM admit, job creation and rising incomes depend on savings and investment. Much like the luxury tax passed in 1990, which was designed to penalize wealthy yacht-buyers but wound up throw- ing thousands of middle-income boat builders out of work, higher income tax rates designed to punish rich people will backfire.

METHODOLOGY As Mustrated in the Appendix tables, the $262.5 bMion of revenue in last yeaes tax bin was divided into four parts: 1) taxes aimed at the rich, such as higher income tax rates, increased Medicare taxes, and the estate tax increase, which are projected to raise $146.8 biUion over the five-year period, 2) higher gas taxes, which are predicted to generate $32.1 b0on over the five-year period, 3) increased taxes on Social Security benefits, which are estimated to raise $24.6 billion over the five-year period, and 4) $59 bil- lion of other revenues included in the tax bill. The four separate numbers for each congressional district and state were produced as following: 1) The increased tax burden on the "rich" for each congressional district was calculat@d by taking the number of households in the nation affected by higher income tax rates, 1.4 million, and divid- ing that number into the $146.8 billion of projected revenue from taxes aimed at upper-income tax- payers. That figure, representing the average five-year tax increase for each "rich" household, was then multiplied by the number of rich households in each district. That number of affected house- holds in each district was obtained from the Treasury Department using the Freedom of Informa- tion Act. The figures for each state, of course, are the sum of the tax burden in each district in the state. For more detailed information, see "The States and Districts Hit Hardest by the 1993 Tax In- crease," Heritage Foundation Backgrounder Update No. 208, November 24, 1993. 2) The gas tax figures for each state were compiled using Federal Highway Administration data on driv- ing pattems, which allows the $32.1 billion in expected revenues to be allocated among the states. The congressional district data were developed by simply dividing the state total by the number of congressional districts. This calculation, it should be noted, will overstate the cost for urban dis- tricts and understate the impact on ruralIdistricts. For more detailed information, see "The Real Story on Gas Taxes," Heritage Foundation F.YL, July 21, 1993. 3) The state and congressional district numbers for the increased tax on Social Security benefits were calculated using Census Bureau data on the number of elderly households in each congres- sional district with incomes over $35,000. The state numbers, of course, are simply the total of each congressional district. For more detailed information, see "The Clinton Surtax on the Eld- erly's Savings," Heritage Foundation F. YL, August 18, 1993. 4) The remaining $59 billion of revenues in the tax bill is simply distributed evenly among all con- gressional districts. This calculation doubtlessly overstates the impact on poorer districts and un- derstates the revenue loss for wealthier districts, but given the wide range of revenue sources com- prising the $59 billion-everything from higher corporate income taxes and limits on deductions for business meals to "user fees" and moneys raised by auctioning off portions of the radio spec- trum-any attempt to be more specific would create the appeamnce of jiggling the numbers to generate pre-detemilned results.

Daniel J. Mitchell McKenna Senior Fellow in Political Economy

About the Author

Daniel J. Mitchell, Ph.D. McKenna Senior Fellow in Political Economy