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Backgrounder #2031 on Taxes

May 7, 2007

Tax Increases Ahead: The Impact of the House Budget Resolution, ByCongressional District

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Click here to see the cost in your state and district

On March 29, the House passed its fiscal year 2008 budget resolution. The House's budget, if imple­mented, could increase taxes significantly over the next five years, in turn decreasing job growth, reduc­ing personal income, and weakening the economy. This paper presents state-by-state and district-by-dis­trict projections of the likely impact of the House's budget resolution on the tax burden, jobs, and eco­nomic growth.

Taxing Results of the House Budget Resolution

The House leadership has proposed to increase spending over the next five years. Given the leader­ship's avowed commitment to paying for spending increases, tax revenues will have to rise. Which taxes will have to rise is unclear, as budget resolutions are notoriously short on details. However, the failure of House leaders to include any language addressing the expiring Bush tax cuts of 2001 through 2004 indicates that they could intend to end these tax cuts.[1] This, in turn, means that the House leadership could be allowing American taxpayers to assume a large and expensive tax increase upon the expiration of these tax cuts.

The House budget resolution has the potential to cost the average American taxpayer an additional $3,026 in taxes. In addition to the increased tax bur­den, Americans could also see their personal income decrease by an average of $502 dollars due to a weaker economy. Moreover, the budget resolution could dam­age employment growth, causing about one million fewer jobs to be created, and has the potential to damage economic output by over $100 billion nationally. The average cost of the House budget resolution to each congressional district amounts to the potential loss of 2,284 jobs that would have oth­erwise been created and a loss in economic output by an average $240 million.

The culprit for these negative impacts is higher taxes. Many economists believe that higher taxes, particularly on capital, cause the level of private investment to fall, thereby slowing productivity improvements and weakening the earning capac­ity of households. Wages and business earnings, which are closely tied to productivity, would fall as well.

Again, the budget resolution does not contain a detailed tax plan. However, the resolution also is silent on the most important tax policy change since 2001: the expiration of the tax law changes from 2001 through 2004 over the next four years. This paper presents estimates of the potential impact that allowing the Bush tax cuts to expire would have on Americans.[2]

Estimating Economic Effects of Tax Increases

This paper uses an earlier dynamic analysis of the 2001 and 2003 tax acts as a basis for estimating how allowing the Bush tax cuts to expire is likely to affect the U.S. economy. In that dynamic analysis, analysts in the Center for Data Analysis (CDA) at The Heri­tage Foundation used two models to estimate the economic and budget effects of permanently extending provisions of the Bush tax cuts. They used the CDA microsimulation model of the federal individual income tax and Global Insight's short-term U.S. macroeconomic model.[3] CDA analysts simulated the economic and budget effects of allow­ing a number of the provisions of the 2001 and 2003 tax acts to expire in 2010.[4] They did not include alternative minimum tax (AMT) relief, which the House leadership also proposes, in their analysis. They measured the economic and revenue effects presented against the Congressional Budget Office's baseline economic and budgetary projec­tions.[5] Those projections assume normal levels of economic, population, and employment growth over the next five years. Those also assume the expi­ration of all provisions of the 2001 and 2003 tax acts at the end of calendar year 2010.

National estimates from this CDA analysis became the basis for the state and congressional dis­trict data in the attached tables.[6] CDA analysts aggregated additional data used for this subnational analysis. State population estimate data were obtained from the Census Bureau,[7] and personal income data were obtained from the Bureau of Eco­nomic Analysis.[8] Data on economic output by state were also obtained from the Bureau of Economic Analysis,[9] and employment data were collected from the Bureau of Labor Statistics.[10]

CDA analysts allocated these state estimates across congressional districts using data from the American Community Survey.[11] Specifically, data were collected on total population, total non-farm employment, median household income, and aggregate income[12] for each congressional dis­trict.[13] Each of these figures was used to calculate the district's shares of the state tax increase, personal income loss, job loss, and loss in gross domestic product (GDP).

Congressional district shares were calculated as follows:

  1. The estimated tax increase for each congres­sional district was calculated using median household income. First, the average median household income was calculated for each state. This number was then used to create an adjuster for each congressional district based on how its median household income com­pares to this calculated average. For example, if the median household income in a congres­sional district was $36,000 and the state aver­age was $30,000, the district had a median income that was 20 percent higher than the state average ($36,000/$30,000 = .20). Because tax burden is based on income, the state tax increase figure was allocated to each congres­sional district using this income adjuster. Using the example above, and assuming that a state's taxpayers can expect an estimated tax increase (based on average income) of $1,500, a tax­payer residing in this congressional district would have an actual tax increase that is 20 per­cent greater, or $1,800 (($1,500 x .20) + $1,500 = $1,800).

  2. Loss of personal income, at the state level, was calculated at the aggregate level, representing the total amount of personal income that could be lost across the entire population of the state.[14] Each congressional district's share is calculated as the proportion of people residing in that con­gressional district. For example, if the total per­sonal income loss in a state was $1,000 and a congressional district comprised 10 percent of the state's population, people in that congres­sional district could expect to lose $100 in per­sonal income ($1,000 x .10 = $100).

  3. Non-farm employment for each congressional district was calculated by subtracting the number of people working in farming, fishing, and forestry from the total civilian employed population aged 16 or older. The percentage of non-farm employees in each congressional district was then calculated by dividing this number by the state's non-farm employment. Each congressional district's share of job losses was assumed to be equal to the proportion of non-farm jobs held in each district. For exam­ple, if a state could expect to lose 2,000 jobs as a result of the House budget resolution and a specific congressional district employed 15 percent of the state population, that congres­sional district could expect to lose 300 jobs (2,000 x .15 = 300).

  4. Loss in gross domestic product was estimated as a state total, representing the total amount of esti­mated growth in GDP that a state could lose as a result of the House budget resolution. Because GDP and income are highly correlated, each con­gressional district's share of GDP was assumed to be equal to the proportion of aggregate income found in that congressional district. For example, if a state could expect to lose $100 million in GDP, or economic growth, and a congressional district accounted for 20 percent of that state's aggregate income, the congressional district could expect to lose $20 million in economic output ($100 mil­lion x .20 = $20 million).

Conclusion

As it currently stands, the House budget resolu­tion proposes to allow the Bush tax cuts to expire, which could potentially cause the average taxpayer to face an additional $3,026 in taxes. Further, allowing the Bush tax cuts to expire could cause great damage to the economy, reducing both job creation and economic growth.

Shanea Watkins, Ph.D., is Policy Analyst in Empirical Studies in the Center for Data Analysis at The Heritage Foundation.



[1]It is the policy of the resolution to extend the child tax credit, the 10-percent marginal income tax bracket, and marriage penalty relief, and to reform the estate tax. These reforms would be conditional upon the availability of reserve funds. Form more information in the policy of the House budget resolution, see /static/reportimages/FB5380C264777D7879F959195B68D8CD.cgi?dbname=110_cong_bills&docid=f:hc99rh.txt.pdf.

[2]The state-level average tax liability estimates are based on provision-by-provision national-level estimates of tax collection changes following expiration, as prepared by the Congressional Budget Office and the Joint Committee on Taxation. These estimates were summed for the years 2001 through 2017, and taxpayer averages were taken for each year. State-level aver­ages were calculated based on a sharing of these national averages by state income levels. For the state-level estimates, see /static/reportimages/EAFD7F89A11AC3F5527F1C74CD17954B.pdf.

[3]The Global Insight model is used by private-sector and government economists to estimate how changes in the economy and public policy are likely to affect major economic indicators. The methodologies, assumptions, conclusions, and opin­ions presented here are entirely the work of analysts at The Heritage Foundation's Center for Data Analysis. They have not been endorsed by, and do not necessarily reflect the views of, the owners of the Global Insight model.

[4]For additional analysis of the positive effects of extending the Bush tax cuts, see Tracy L. Foertsch and Ralph A. Rector, "The 2001 and 2003 Bush Tax Cuts: Economic Effects of Permanent Extension," Heritage Foundation WebMemo No. 1361, February 15, 2007, at www.heritage.org/Research/Taxes/wm1361.cfm, and Tracy L. Foertsch and Ralph A. Rector, "A Dynamic Analysis of the 2001 and 2003 Bush Tax Cuts: Applying Alternative Techniques for Calibrating Macroeconomic and Microsimulation Models," Heritage Foundation Center for Data Analysis Report No. CDA06-10, November 22, 2006, at www.heritage.org/Research/Taxes/cda06-10.cfm.

[5]The projections are measured against the Congressional Budget Office's (CBO) January 2006 baseline economic and bud­getary projections. CBO produces what is called a current-law baseline. A current-law baseline embodies the rules and con­ventions governing a current services federal budget. This means that over the 10-year budget period CBO assumes no changes in tax provisions or tax rates other than those already specified in current law. It also means that CBO assumes the continuation of current levels of federal spending. For more information, see Congressional Budget Office, "The Budget and Economic Outlook: Fiscal Years 2007 to 2016," at www.cbo.gov/ftpdocs/70xx/doc7027/01-26-BudgetOutlook.pdf).

[6]Estimates presented in Table 1 of this paper are for 2012.

[7]U.S. Census Bureau, "Annual Estimates of the Population for the United States, Regions, and States and for Puerto Rico: April 1, 2000 to July 1, 2006," NST-EST2006-01, at www.census.gov/popest/states/tables/NST-EST2006-01.xls.

[8]U.S. Department of Commerce, Bureau of Economic Analysis, Regional Economic Information System, Table SQ1, at www.bea.gov/regional/sqpi/default.cfm?sqtable=SQ1.

[9]U.S. Department of Commerce, Bureau of Economic Analysis, "Gross Domestic Product by State," Table 3, at www.bea.gov/newsreleases/regional/gdp_state/2006/xls/gsp1006.xls.

[10]U.S. Department of Labor, Bureau of Labor Statistics, "Regional and State Employment and Unemployment: February 2007," Table 3, at www.bls.gov/news.release/archives/laus_03302007.pdf.

[11]U.S. Census Bureau, "American FactFinder: 2005 American Community Survey," at http://factfinder.census.gov/servlet/DatasetMainPageServlet?_program=ACS&_submenuId=datasets_2&_lang=en&_ts=.

[12]Aggregate income, as reported by the American Community Survey and used in this paper, is the sum of monies received, by all persons who are 15 years old and older, from the following sources: wage or salary income; self-employment income; interest, dividends or net rental income; Social Security income; Supplemental Security Income (SSI); public assistance or welfare payments; retirement, survivor or disability income; and all other income sources. For more information on the measurement of income in the American Community Survey see "American Community Survey (Puerto Rico Community Survey): 2005 Subject Definitions," at www.census.gov/acs/www/Downloads/2005/usedata/Subject_Definitions.pdf .

[13]The data used to distribute these estimates across congressional districts are from 2005, which covered the 109th Congress. Two states, Georgia and Texas, redrew their districts for the 110th Congress. Congressional district estimates for these two states should be interpreted with caution because redistricting may have altered the demographic attributes of these states' districts, including employment and income characteristics.

[14]The calculation for loss of personal income in 2012 is from Tracy L. Foertsch and Ralph A. Rector, "A Dynamic Analysis of the 2001 and 2003 Tax Cuts: Applying an Alternative Technique for Calibrating Macroeconomic and Microsimulation Mod­els," Table 3, Heritage Foundation Center for Data Analysis Report No. CDA06-10, November 22, 2006, at www.heritage.org/Research/Taxes/cda06-10.cfm. The estimate in this paper was further adjusted to account for state tax rates, the final calcula­tions are available upon request.

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