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WebMemo #1844 on Federal Budget

March 11, 2008

The House Budget Resolution: Tax Hikes Would Harm Economy,Taxpayers

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On March 5, the House Budget Committee passed its fiscal year 2009 budget resolution. If implemented, it would increase taxes significantly, thus decreasing job growth, reducing disposable income, and weakening the economy. This WebMemo projects the likely impact of the House budget resolution on the tax burden, jobs, and economic growth in states and congressional districts.

Economic Consequences

The House leadership has proposed to increase spending over the next five years. Since the budget resolution is subject to Pay-As-You-Go (PAYGO) rules, these spending increases will have to be offset by increased tax revenues. One likely source of higher taxes is the expiration of the Economic Growth and Tax Relief Reconciliation Act of 2001 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (referred to as the "Bush tax cuts"). Once again, House leaders have failed to include any language addressing the expiration of the Bush tax cuts in their budget resolution, which indicates that they may be allowed to expire. In other words, the House leadership could be placing a large and expensive tax increase upon American taxpayers. This WebMemo also presents estimates of the potential impact of allowing the Bush tax cuts to expire.[1]

The House budget resolution has the potential to cost the average American taxpayer more than $2,000 in additional taxes in 2012 alone. 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. As a result of the tax increases implicit in the House budget resolution, Americans could also see their personal income decrease by an average of $1,767 due to a weaker economy.

Moreover, the budget resolution could damage employment growth, causing about one million fewer jobs to be created, and could lower economic output by more than $100 billion compared to what it would have been; the average cost to congressional districts could be 2,191 lost jobs and $247 million in economic output.

Table 1(PDF version) lists the economic consequences of the House budget resolution in states and congressional districts.

Estimating the Economic Effects of Tax Increases

Analysts in the Center for Data Analysis (CDA) at The Heritage Foundation used two models to develop estimates of how the Bush tax cuts likely affect the U.S. economy. They used the CDA Microsimulation Tax Model and the U.S. Macroeconomic Model of Global Insight Inc., a leading economic consulting company.[2] Estimates were projected to 2012 because that is the first full year when all of the tax provisions of the budget resolution will be in effect.[3] These projections assume normal levels of economic, population, and employment growth over the next five years.

These national estimates became the basis for the state and congressional district data in the attached tables. CDA analysts aggregated additional data used for this subnational analysis. State population estimate data were obtained from the Census Bureau,[4] and disposable personal income data were obtained from the Bureau of Economic Analysis.[5] Data on economic output by state were also obtained from the Bureau of Economic Analysis,[6] and employment data were collected from the Bureau of Labor Statistics.[7]

CDA analysts allocated these state estimates across congressional districts using data from the American Community Survey.[8] Specifically, data were collected on total population, total non-farm employment, median household income, and aggregate income for each congressional district.[9] 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. Tax increases were first calculated at the state level based on Congressional Budget Office (CBO) estimates of revenues from the President's budget request. The President's budget includes an extension of the 2001 and 2003 tax cuts, which are set to end in 2010. CBO estimates that the proposed extensions in the President's budget would reduce revenue by $250 billion in 2012.[10] Conversely, this would mean that an additional $250 billion would be collected in revenue in 2012 if these tax cuts were not extended. Using data from the IRS,[11] the $250 billion in additional revenue was allocated to states based upon each state's share of total federal income tax paid. Average tax increase per taxpayer in each state was obtained by dividing the state's share of the $250 billion revenue increase by the number of taxpayers in the state (adjusted upward for normal levels of population growth through 2012).

    The state estimates were then applied to congressional districts using median household income. State median household income was used to create an adjuster for each congressional district based on how the median income of the congressional district compared to that of the state. For example, if the median household income in a congressional district was $36,000 and the state median was $30,000, the district had a median income that was 20 percent higher than the state median income ($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 was calculated as the total amount of personal income, in millions of dollars, that could be lost across the entire population of the state. Each congressional district's share is calculated based on the proportion of people residing in that con­gressional district. This number was then divided by the number of employed persons, age 16 or older, to obtain an average personal income loss estimate for each congressional district. For example, assume that a congressional district with a population that accounts for 10 percent of the state population has an employed population of 1,000 workers aged 16 or older. If the total per­sonal income loss in this state was $1,000,000, then the personal income loss in this congressional district would total $100,000 ($1,000,000 * .10 = $100,000). The loss in personal income per employed person would be $100 ($100,000/1,000 = $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 GDP was estimated as a state total, representing the total amount of esti­mated growth 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 more than $2,000 in additional taxes. Furthermore, allowing the Bush tax cuts to expire would harm job creation and reduce economic output. Given the already weak state of the U.S. economy, these consequences should be the last things that House leaders aim to accomplish with their budget resolution.

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



[1] 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. State-level averages were calculated based on a sharing of these national averages by total state tax burden. For more information on how state estimates were calculated, see the methodology section.

[2]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.

[3] 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.

[4] 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, 2007," NST-EST2006-01, at http://www.census.gov/popest/states/tables/NST-EST2007-01.xls.

[5] U.S. Department of Commerce, Bureau of Economic Analysis, Regional Economic Information System, Table SQ1, at http://www.bea.gov/regional/sqpi/drill.cfm.

[6] U.S. Department of Commerce, Bureau of Economic Analysis, "Gross Domestic Product by State" at http://www.bea.gov/regional/gsp/.

[7] U.S. Department of Labor, Bureau of Labor Statistics, "Labor Force Data Seasonally Adjusted: Table 3, Civilian labor force and unemployment by state and selected area, seasonally adjusted," at http://www.bls.gov/news.release/laus.t03.htm.

[8] U.S. Census Bureau, "American FactFinder: 2006 American Community Survey," at http://factfinder.census.gov/servlet/DatasetMainPageServlet?_program=ACS&_submenuId=datasets_2&_lang=en.

[9] The data used to distribute these estimates across congressional districts are from 2006, 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 profiles of the congressional districts in these states, including employment and income characteristics.

[10] Congressional Budget Office, "Preliminary Analysis of the President's Budget Request for 2009, Table 3: CBO's Estimate of the Effect of the President's Budget on Baseline Deficits or Surpluses," at /static/reportimages/31AF86EFC873BE96921B1655FBD09F8C.pdf.

[11] Internal Revenue Service, SOI Tax Stats, "Individual Income and Tax Data, by State and Size of Adjusted Gross Income, Tax Year 2005: Historical Table 2," at http://www.irs.gov/taxstats/article/0,,id=171535,00.html.

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