October 28, 1994

October 28, 1994 | FYI on

The State-By-State Impact of the White House Tax Memo

(Archived document, may contain errors)

October 28, 1994

THE STATE-BY-STATE IMPACT OF THE WHITE HOUSE TAX MEMO

By Daniel J. Mitchell McKenna Senior Fellow in Political Economy R=ently leaked budget documents, prepared for the President by his top budget aide, Office of Management and Budget Director Alice Rivlin, reveal that last year's record tax increase was a com- plete failure in curbing future deficits. The Administration now admits that the budget deficit will climb in eight out of the next ten years, rising to almost $300 billion after the end of the decade. This grim fiscal outlook-higher taxes followed by higher deficits, should come as no surprise. The same thing happened after Washington politicians imposed a large tax increase in 1990. Acknowledging this deteriorating fiscal condition, Budget Director Rivlin earlier this month pre- sented the President with a confidential memorandum outlining an extensive list of deficit reduction options. The preponderance of tax increases in this document indicates that the Clinton Administra- tion has failed to learn the lessons of history. Experience demonstrates that higher taxes simply en- courage more spending and reduce economic growth, the combination of which results in higher budget deficits. The "illustrative tax-related options" in the Rivlin memorandum include:

Five Year Impact X Limit mortgage deductions for second homes. $3 billion X Limit mortgage interest deductions for primary residence. $32 billion X Enact carryover basis for inherited capital assets. $9 billion X Tax capital gains at death. $35 billion X Tax high-cost employer-provided health benefits. $ 100 billion X Eliminate deduction of state and local taxes. $191 billion X Limit value of itemized deductions to 15 percent. $274 billion X Repeal bracket indexing. $130 billion X Suspend bracket indexing for one year. $46 billion X Correct for mismeasurement of inflation. N/A X 2.5 percent Value-Added Tax. $160 billion X Tax all entitlement benefits. $250 billion X Increase monthly Part B Medicare tax. $6-$ 10 billion

Since many of these tax increases overlap (such as limiting the value of itemized deductions and eliminating state and local tax deductions) or are mutually exclusive (such as a carryover for inher- ited capital gains and taxing capital gains at death), it is impossible to estimate the exact magnitude' of these tax increases now under White House review, although if all were enacted the total cer- tainly would exceed $1 trillion over the five-year period. STATES THAT WOULD BE The RivIin memorandum lays out options; it HARDEST HIT BY would be unfair to suggest that the Administration WHITE HOUSE TAX LIST plans to propose all the tax increases under consid- Average tax eration. But it is worth noting that the memoran- Increase for every dum does state explicitly that $399 billion of STATE man, woman, and deficit reduction would be needed to bring the child In the state deficit below $ 100 billion by the year 2000, and $689 billion of deficit reduction to achieve a bal- ...... . ....... New Jersey $4,701.94 7 F anced budget by the same year. But using tax 'in- creases of any amount in an attempt to achieve New York $4 282.88 either goal would be counterproductive and tax in- . . . ........ ...... creases of the magnitude being considered would Awwo have a catastrophic impact on the economy. Nor Ma la,@,d $4,249.63 9123 would the tax hikes affect all states equally. Using $ .............. Ki Census Bureau and Internal Revenue Service data, Rhode Island $4,138.27 the impact on each state of the White House tax ':Jk options can be calculated with a high degree of ac- Washin_qton $4,070.43 curacy. As seen in the accompanying table, certain' states, such as California and New York, would STATE Total Tax Increase, face huge tax increases. Measured on a per capita ......... . ........ $ Billions 13 Q- . . . .......... .... ............. . ... .... basis, the Northeast is particularly hard hit. The ....... . ......... tax increases being examined by the White House, New York $78.24 r ;... . I 5' " for instance, would drain more than $5,000 out of . ... . ...... . the Connecticut economy for every man, woman, Texas $49.70 and child in the state. Penn\u223\'a7ylvania $45.00 On the positive side, the White House memo ------- -..V- $39.3g," does include some proposals to rein in the growth New lersey $3.8.05 of entitlement programs. Unfortunately, the Presi V'$37.89 dent already has made clear that he has no inten- . . . ......... . .... ..... tion of implementing any money-saving reforms Massachusetts $28.55 in either Social Security or Medicare. At no time, however, has the President stated that the tax increases listed are "off the table." Less than six years ago, as Ronald Reagan was leaving office, the Congressional Budget Office projected that the budget deficit, which was only $150 billion at the time, would continue falling every year as long as Reagan's policies were left in place. Presidents Bush and Clinton, however, both chose economic policies very different from Reagan's, imposing large tax increases on the American people in 1990 and 1993. The result: A deficit that was $150 billion and falling is now $200 billion and rising, yet the tax burden is at an all-time high. If this confidential White House memorandum is any indication, however, things will get worse before they get better.

APPENDIX

The appendix lists the impact, on each state, of the tax hikes under White House review. Reliable statewide estimates for several of the tax increases, such as the increase in the monthly Medicare tax, could not be accurately estimated and are not included.

Methodology Repeal of Indexing. The IRS provides detailed state-by-state figures for the income tax. Using fig- ures provided in the Summer 1994 Statistics of Income Bulletin, each state's share of the nation's taxable income was calculated. These percentage shares were then used to allocate the $130 bil- lion of new revenues the White House estimates indexing repeal would generate. Example: Illi- nois has 5.22 percent of taxable income for the country, which means taxpayers in the state would face a tax increase of about $6.78 billion over the next five years if indexing were re- pealed. Limit itemized deductions to the 15 percent rate. The methodology was identical to the index- ing example. The IRS provides state-by-state data on the amount of itemized deductions. These numbers were used to calculate each state's share of the nation's total itemized deductions. Using these percentages, the $274 billion of estimated new revenues was allocated by state. Example: New Jersey has 4.86 percent of the itemized deductions in the country, which means taxpayers in the state would face a tax increase of about $13.30 billion if itemized deductions were limited to 15 percent. Tax capital gains at death. Again, IRS data were used to calculate statewide percentage shares of capital gains income. These percentages then were used to allocate the $35 billion of proposed new taxes in the Administration's plan. Example: Florida has 8.88 percent of the capital gains in- come in the country, which means taxpayers in the state would face a tax increase of about $3. 11 billion if capital gains were taxed at death. Tax high cost health plans. Census Bureau data were used to calculate the amount of affected health plans by state. These percentages were used to allocate the $ 100 billion the White House believes would be generated if these plans were taxed. Example: Michigan has 7.75 percent of the high-cost health plans in the nation, which means taxpayers in the state would face a tax in- crease of about $7.75 billion if these plans were taxed. Value-Added Tax. Statistics on state-by-state retail sales, taken from the 1994 Statistical Abstract, were used to obtain each state's share of the nation's total retail sales. These percentages were then used to calculate how much of the estimated $160 billion tax hike would come from each state. Example: California has 12.13 percent of the nation's retail sales, which means taxpayers in the state would face a tax increase of about $19.40 billion if a VAT was approved. Tax on Entitlements. The Census Bureau publishes a document entitled Federal Expenditures by Statefor Fiscal Year 1993, which breaks down federal spending by state. Since it includes per- centage breakdowns for entitlement programs, under the category "Direct Spending for Individu- als," these percentage figures were used to calculate the state-by-state burden of the proposed $250 billion tax hike on the value of entitlement benefits. I Example: Texas residents receive 5.90 percent of entitlement spending paid by the federal government, which means recipients would send $14.75 billion back to Washington if a tax on the value of benefits was approved.

1 These numbers do not include grants to state and local governments. Since the bulk of these dollars are for Medicaid and other welfare programs, the implications for tax liability are presumably minimal. Nonetheless, the figures presented should be viewed as approximations based on the government data available.

White House Tax Options: The Impact on the States.

Taxing Umit on Capital Tax on Billions of Dollars Total Tax Repealof Itemized Gains at Value- Health Tax on Increase Indexing Deductions Death Added Tax Benefits Entitlements California $134.15 $15.63 $50.68 $4.89 $19.40 $16.30 $27.25 New York $78.24 $10.62 $27.93 $3.10 $10.76 $7.10 $18.75 Florida $50.89 $6.95 $12.06 $3.11 $9.63 $2.40 $16.75 Texas $49.70 $8.30 $10.89 $2.06 $11.08 $2.62 $14.75 Illinois $46.18 $6.78 $11.61 $1.93 $7.44 $7.16 $11.25 . ... .... .. . .. ..... . ...... 4 4 10' '$530 $9 $0.916':. .0 46.6. $10.7t N.: ,W- ..... .... . ...... . erse -1' -30" 5:. It .::: . - . - -.93. $4.17 - $8.-. 5 TOO '2 ..y ....... 75 $9 .7 9. ::$:4 .:$7 -25 '54. .$6.50 -:'Massach :$ ? .:!.P . ... ::::.::: - - .. -.14. '-:34@25 . . ... ...... Virginia $24.08 $3.52 $8.20 $0.87 $4.02 $1.22 $6.25 Georgia $22.16 $3.12 $6.79 $0.74 $4.12 $1.89 $5.50 North Carolina $21.30 $3.01 $6.18 $0.71 $4D5 $1.35 $6.00 Maryland $21.29 $2.99 $8.47 $0.60 $3.20 $1.04 $5.00 ---Washington $20.97 $3.05 $5.00 $1.11 $3.31 $3.74 $4.75 r iana . ........ sup - .. ..... . ...... ....." I:X 4 -48 .50 ..... .. .. .. . .... .... "666 ecb cL4. -$233.-: '$110, $3.2.5 0 -V. 73 ':$'!'.93 .41 320 :15.25

.. . .... ...... .. ... ... .... -:30 3 .$3.75 N;' Tennessee $2.26 $2.72 $0.54 $2.9 .3 $0.86 $4.75 Arizona $12.68 $1.62 $3.82 $0.45 $2.36 $0.68 $3.75 Colorado $12.63 $1.90 $4.11 $0.64 $2.22 $1.02 $2.75 Alabama $12.08 $1.64 $2.67 $0.38 $2.30 $0.84 $4.25 . .. .... $11.97.. 36 $3.64 0 iana'' :::.:v.47 $17-5 $3.0

"$25J $2.12 .40.6 .0. '3 '$35 na Sout hCarol'i,:' 3035 3113, $3.25 . ........... '30-41 $3.25 J QkJa 3948:,", $227- ji: Q. 8: L22:::-%" '75 JI. -0.32 ..$0.93.:. $1 Kansas $8.53 $1.20 $2.D4 $0.27 $1.51 $1.01 $2.50 Arkansas $6.71 $0.83 $135 $0.21 $1.37 $0.20 $2.75 Mississippi $6.16 $0.78 $1.18 $0.19 $1.20 $0.30 $2.50 Utah $5.10 $0.69 $1.76 $0.17 $0.92 $0.3 1 $1.25 Nebraska $5.10 $0.71 $1.29 $0.21 $0.94 $0.44 $1.50 .......... ',,:$Of63 N 67 .30 8:::.:. '::-'$0.86' ---V39 1 IS S035 .'$0.65 'H "h' -$4 2., .0.2 .89.. '$0:28- v -25 W'sev" 44 161 .!q irghia $2 :5:" ..@::$030:- $1.50 co 4:01 Rhode Island $4.31 $0.50 $1.18 $0.11 $0.59 $0.68 $125 Maine $4.30 $0.51 $1 D3 $0.12 $0.89 $0.50 $1.25 Idaho $3.23 $0.42 $0.92 $0.19 $0.54 $0.17 $1.00 Delaware $2.89 $0.40 $0.89 $09 $0.53 $0.23 $0.75 Montana $2.41 $0.31 $0.63 $0.13 $0.48 $0.11 $0.75 ... ...... ... .. 30; $0.75 $0; 18 - V. .$0.54. $0.28 $0.50 ..$0.39 :.....'$0.0 30-42 $0.38 $025 . .. . ..... .::--$Q.33 Nofth.@DakDia 4169: $0.13 $0.50 '-$ 0.25 $0.43 $9.50

United States $949.00 $130.00 $274.00 $35.00 $160.00 $100.00 $250.00

White House Tax Options: The Impact per Person

Taxing Limit on Capital Tax on Dollars Per Capita Repeal of Itemized Gains at Value- Health Tax on Tax Hike Indexing Deductions Death Added Tax Benerits Entitle ents Connecticut $5,192.60 $763.40 $1,685.90 $192.84 $685.01 $910.69 $954.76 New Jersey $4,701.94 $684.79 $1,644.21 $127.17 $6B6.20 $540.04 $1,019.53 Massachusetts $4,583.42 $595.31 $1,358.21 $169.11 $734.72 $682.40 $1,043.67 New York $4,282.88 $581.08 $1,528.65 $169.42 $588.77 $388.64 $1.026.33 Hawaii $4,268.98 ...$137.46 $841.01 $838193 $551,69 $1,371.35 $528.52 Maryland $4,249.63 $597.56 $1.689.46 $119.42 $637.85 $207.54 $997.80 California $4,192.23 $48835 $1,583.84 $152.77 $606.33 $50938 $851.56 Rhode Island $4,138.27 $48026 $1,131.20 $101.78 $570.45 $653.22 $1200n New Ham*ire -6.08.... $189.49 $823.05 $553.19 $851.06 ,M2.96 $560.'08.: $IJI $4,070.43 $592V $9.71..03 $215.79.. $643.10 $725.93' $92 Washinglon..'.'.. 1.07 Delaware $4,062.35 $563.88 $1,246.32 $125.08 $748.72 $323.49 $1,054.85 Oregon $4,010.68 $455.40 $1,220.08 $179.22 $684.80 $465.82 $1,005.36 Michigan $3,984.77 $501.88 $977.12 $91.75 $626.05 $815.10 $972.86 Illinois $3,919.41 $575.82 $985.58 $163.87 $631.59 $607.71 $954.85 Minnesota $3,815.42 $529.08 $1,252.39 $164.08 $681.97 $359.90 $828.00 Nevada '' $3,751.70 $617.@6' $1,022.03 $260.66 $638.44 $288.46 $924.56 Pennsylvania. $3.715.09 $505.71 $886.56 $104.69 $586.95 $454.85 $1,176-32 Virginia $3,666.95 $535.99 $1.249.06 $132.24 $61134 $185.75 $951.58 -:Tlorida :.--:@-:.-.:-$3,630.90 $495..67. $860.4.6. $221.74 $686.74 $171.23. $1,195.06 ..-Colorado :.$3,580-1..8...:..:. $5agtQ.... $!, 1 64.22.@ $181.35 $627.69 $289.03 $779.26 Ohio $3,573.91 $480.80 $82213 $87.18 $608.24 $599.87 $975.59 Wisconsin $3,564.80 $492.37 $972.71 $136.24 $614.78 $453.55 $895.17 Alaska $3,509.63 $671.97 $883.83 $105.09 $735.66 $671.38 $441.70 Vermont $3,468.19 $437.69 $919.39 $123.14 $663.69 $475.38 $B48.90 Maine.... .........$3,374.88 . . .... ...$397.P3... 181.1.2.6 ..$97.10 .$695.87.. 3392.46 $981..16 Kansas $3,364.53 $473D5 $80351 $10831 $594.64 $398A2 $986.19 Missouri $3,290.75 $453.07 $750.96 $112.21 $608.72 $367.13 $998.67 Georgia $3,237.84 $456.51 $991.86 $107.59 $602.11 $276.15 $803.62 Indiana :.$3.228.53 $475.65 $70102 $84.25 $613.89 $476.61 $876.12 -38... $11193- $602-90 $327.12 $96719 `$3.21M.35 .24 : wa $427 $7.66. Wyoming $3,164.61 $509.02 $520.67 $206.64 $540.62 $286.34 $1,101.32 Arizona $3,157.37 $404.51 $951.05 $110.89 $588.11 $169.28 $933.53 Nebraska $3,149.16 $440.87 $796.91 $131.82 $580.55 $271.94 $927.07 Idaho $3,099.40 $400.29 $877.83 $178.00 $521.51 $162.99 $958.77 North Carolina $3,099.02 $43.7,67. $899.57. $103.68 $588.85 $196.39 $872' 85 $Z970.74 $380.53 $771.95 $ Morytana '' @: t'l 65.62 $59ik $13s.64 924.78 Alabama $Z945.42 $399.97 $651.84 $92.25 $559.90 $204.88 $1,036.59 South DakDU .$Z911.72 $403.14 $419.47 $179.86 $603.07 $252.81 $1,053.37 South Carolina $Z880.96 $387.0.8 $808.02 $8810 $593AB $97.63 $906.56 Oldahomx $ZQ65.81 $379.28 $709.56.. $80.48 $554.00 $128.00 $1,014:67 Texas $2,824.42 $471.65 $6 1 B.82 $117.14 $629.77 $148.88 $838.16 Kentucky $2,798.15 $380.84 $670.80 $80.23 $564.66 $168.04 $933.58 ArIkansas $2,785.77 $343.13 $561.41 $88.39 $568.28 $83.02 $1,141.55 Tennessee $2,759.63 $443.72 $534.44 $105.13 $575A8 $168.76 $932.10 $2,745.26 $369..78.. .$948.78. -$92.20 $494.43. $166.94 - - $673.13 New Mexico $2,743.86 $359.23 $642.99 $9225 $527.89 $186.92 $934.58 West Virleinia $2,658.88 $349.27 $347.27 $53.10 $497.41 $156.25 $1 a55.58 North Dakota $2,584.16 $384.75 $512.54 $93.86 $628.23 $199.08 $765.70 Louisiana $2,512.45 $372.61 $468.93 $68.43 $603.18 $11130 $887.99 -Mississippi.. $2,346.60. $29&43 $451.69.. $72A5 $458.55 $114.37 $953.11

United States $3.673.45 $503.21 $1,060.62 $135.48 $619.34 $387.09 $967.72

About the Author

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