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:
- 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).
- 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).
- 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).
- 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.
[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.
[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.
