In his February 24, 2009, speech to Congress, President Barack Obama described his plan to increase the tax burden on high-income Americans:
Now, let me be clear--let me be absolutely clear, because I know you'll end up hearing some of the same claims that rolling back these tax breaks means a massive tax increase on the American people: If your family earns less than $250,000 a year--a quarter million dollars a year--you will not see your taxes increased a single dime. I repeat: Not one single dime. [Applause.] Not a dime. In fact, the recovery plan provides a tax cut--that's right, a tax cut--for 95 percent of working families. And by the way, these checks are on the way.
According to the President's fiscal year (FY) 2010 budget blueprint, wealthy taxpayers will indeed pay a higher tax rate on the income they derive from wages and salaries, taxable interest, business income, capital gains, dividends, and retirement income. The President also proposes to scale back the value of their itemized deductions, such as charitable contributions, state and local taxes, and mortgage interest.
Specifically, President Obama proposes to:
- Reinstate the 36 percent and 39.6 percent rates (up from the current rates of 33 percent and 35 percent) for taxpayers earning more than $250,000 (married) and $200,000 (single);
- Reinstate the personal exemption phase-out and limitation on itemized deductions for those taxpayers earning over $250,000 or $200,000, respectively; and
- Increase the top rate on capital gains and dividends from 15 percent to 20 percent for those taxpayers earning more than $250,000 or $200,000, respectively.
Altogether, the White House Office of Management and Budget projects that these changes will raise taxes on wealthy Americans by $636.7 billion over the next decade, with the increase projected to start at $28.4 billion in 2011 and rise quickly to $49 billion in 2012, $58.1 billion in 2013, $67.3 billion in 2014, and $98.6 billion by 2019.
President Obama believes America's wealthiest households have become too wealthy and that the best way to "remedy" this situation is to increase their federal tax burden. In a message accompanying his FY 2010 budget, the President explained his reasoning:
For the better part of three decades, a disproportionate share of the Nation's wealth has been accumulated by the very wealthy. Yet, instead of using the tax code to lessen these increasing wage disparities, changes in the tax code over the past eight years exacerbated them.
According to the Internal Revenue Service, the Nation's top 400 taxpayers made more than $263 million on average in 2006, but paid income taxes at the lowest rate in the 15 years in which these data have been reported. In constant dollars, the average income of the top 400 taxpayers nearly quadrupled since 1992.
It's no surprise, then, that wealth began to be ever more concentrated at the top. By 2004, the wealthiest 10 percent of households held 70 percent of total wealth, and the combined net worth of the top 1 percent of families was larger than that of the bottom 90 percent. In fact, the top 1 percent took home more than 22 percent of total national income, up from 10 percent in 1980... And these disparities are felt far beyond one's bank statement as several studies have found a direct correlation between health outcomes and personal income.
However one assesses his rationale, it is clear that the President's proposal will dramatically increase the federal tax burden on a relatively small group of taxpayers. This paper examines the geographical distribution as well as the extent of these proposed tax increases. The analysis relates solely to the President's proposal to increase the top marginal tax rates on wage and investment income on the wealthiest taxpayers as well as his proposal to phase out their personal exemptions and cap their itemized deductions, and omits any additional tax increases that may be borne by these same taxpayers as a result of efforts to reform health care or control the emission of carbon dioxide through a "cap-and-trade" scheme.
Where Do They Live?
Not surprisingly, President Obama's proposed tax increase will affect some regions more severely than others. Affluent residents in major metropolitan areas, such as the tri-state New York region, the San Francisco Bay Area, Los Angeles, Philadelphia, Miami, Chicago, Boston, Seattle, Las Vegas, and Washington, D.C., will face the largest tax hikes--which could exceed $2,000 per month per affected household.
IRS data for the 2006 tax year, the latest year for which this data is available, tells us where these wealthy taxpayers reside. Taxpayers with incomes of at least $200,000 can be sorted by metropolitan area, county, congressional district, and even zip code. Their non-salary income (additional income from dividends, interest, capital gains, and small businesses, as well as distributions from IRAs, pensions, and other forms of retirement income) is also known, as well as their total tax payments for that year.
While their investment portfolios, home values, salaries, and bonuses may be dramatically lower due to the current economic recession, their geographic distribution is likely to remain the same. Beverly Hills, Fifth Avenue, Greenwich, and Pacific Heights will continue to be enclaves of great (if somewhat diminished) wealth relative to other parts of the country. In any event, White House economists claim that by 2012 (the first year in which the full force of the tax hikes will take effect) the economy will be growing at a robust 4.6 percent clip, the unemployment rate will have fallen to 6 percent, and inflation will be a relatively inconsequential 2 percent. Income tax receipts in 2012, they also predict, will have recovered as well, increasing from $1,044 billion in 2006 to $1,378 billion. The current economic malaise, in short, will be but a historical footnote.
Examining where these taxpayers live can offer a reliable roadmap to determining who will pay these higher taxes, and can help inform lawmakers at the state, local, and federal levels how the proposed tax hikes could affect their constituencies.
Who Will Pay?
In 2006, more than 3.9 million taxpayers reported income in excess of $200,000--these are the people who will comprise the overwhelming majority of those facing tax increases under the President's plan. Including non-salary income, these taxpayers earned $1.7 trillion that year, an average of $435,300 per household.
There are disproportionately large concentrations of these high-wage households in the largest metropolitan areas. While the 15 largest metro areas are home to one-third of the nation's taxpayers, almost half (1.9 million) of those targeted for the President's tax increase live in these regions, and because their incomes are so high (an average of $498,000) they will be responsible for a disproportionate 62 percent of the national total.
The formula used to calculate the extent of the proposed tax increase is as follows:
- Calculate the total income for households with wage and salary incomes over $200,000 per year.
- Subtract $250,000 in wage and salary income, personal exemptions, and total itemized deductions for each affected household.
- Apply the higher income tax rates, assumed to be an additional 3.5 percentage points, to the remaining income.
- Assume the tax on all capital gains and dividend income reported by these taxpayers will rise by 5 percentage points.
- Add an additional amount of tax liability (drawn from Obama's own budget documents) to reflect the added tax owed under his proposal to cap itemized deductions, such as charitable giving, and phase out personal exemptions for high-income households.
Under this formula, these 3.9 million taxpaying households will face a total annual tax increase of about $49.8 billion, nearly identical to the increase projected by the White House for the first full year in which the President's tax increase is in effect ($49 billion).
A significant amount of this increase, moreover, will be borne by small business owners who file as individuals. According to a recent Joint Committee on Taxation analysis of the President's proposal, nearly half (47 percent) of the income that would be subject to the marginal tax rate increases would be income earned by small business owners who file as individuals.
A Big Bite Out of the Big Apple
Nearly half a million wealthy households in the tri-state New York metropolitan area would bear the largest tax increase, in both relative and absolute terms. With nearly 7 percent of the nation's taxpayers, the tri-state area is home to a little more than 12 percent of the nation's top earners, whose average annual incomes exceed $586,000. The average increase for these taxpayers will be $20,223 per year. Taxpayers in Manhattan will be hit the hardest, being required to fork over an additional $42,438. The tax increase for the Big Apple's economic elite is $9.75 billion per year, which amounts to nearly 20 percent of the national total.
The story is much the same for other large metro areas. Over 136,000 well-heeled taxpayers in the San Francisco Bay Area will be required to pay more than $2.3 billion in additional taxes, about $16,700 each. In Boston, more than 112,000 targeted households would be required to ante up an additional $1.9 billion; in the Los Angeles metro area, the burden will be $3.1 billion spread among 214,000 households; in Chicago, the increase will be $2.6 billion per year, and so on. For the estimated tax increase for affected taxpayers in the 15 largest metropolitan areas, see Table 1.
The President's proposal to raise the top tax rate on capital gains and dividend income from 15 percent to 20 percent disproportionately affects affluent seniors, who derive more of their income from investments than the working age population. In the Miami metro area, home to large numbers of affluent seniors, the 91,400 affected households earn more from capital gains ($25.9 billion) than from wages and salaries ($21.9 billion), one of the few major metropolitan areas where this is true. Not surprisingly, the average tax increase for affected Miami taxpayers is considerably higher than the national average at $26,900; in Palm Beach County it is a sky-high $37,628. Affected taxpayers in the Las Vegas metro area also fit the profile of Miami, earning more in capital gains ($6.5 billion) than in salary and wages ($5.3 billion). In all, more than 22,500 Las Vegas taxpayers will be required to send an additional $583 million to Washington, or $25,912 per affected household.
Tax Increase by Congressional District
Affluent taxpayers in 47 congressional districts will face a total annual tax increase of $250 million or more; in six districts the increase will exceed $1 billion. Two New York City congressional districts, separated only by a narrow sliver of Representative Charles Rangel's Harlem constituency, reflect the two extremes of wealth in America. The so-called Silk Stocking district on Manhattan's East Side, represented by Carolyn Maloney, includes the heaviest concentration of these targeted taxpayers (48,124), while her colleague slightly to the north, Jose Serrano, who represents the impoverished South Bronx, has only 137 taxpayers with wage and salary income sufficient to warrant a tax increase under the President's proposal. See Table 2 for the 50 congressional districts in which taxpayers face the largest aggregate tax increases.
Wealthy taxpayers in 14 states face annual tax increases in excess of $1,000 per month. In five-- Wyoming, Nevada, New York, Florida, and Connecticut--the annual tax increase exceeds $20,000 per affected taxpayer. At the other extreme, the average annual tax hike will be less than $500 per month in 7 states--West Virginia, North Dakota, Iowa, Alaska, New Mexico, Maine, and Mississippi.
As the above analysis suggests, the brunt of the President's proposal to increase the tax burden on America's most economically successful citizens will impact some regions more severely than others. Lawmakers who represent constituencies with heavy concentrations of successful entrepreneurs, investors, and other professionals should appreciate the full extent to which their local economies will have to shoulder this new, often multi-billion-dollar annual tax burden. While it is not the purpose of this paper to discuss the potential economic harm that could befall these regions, lawmakers need to appreciate that major tax policy changes, such as those proposed by the President, do not occur in a vacuum.
Michael G. Franc is Vice President of Government Relations at The Heritage Foundation. Landon Zinda, Research Assistant and Outreach Coordinator for Government Relations, contributed to this paper.