Millions of taxpayers were asked to delay filing their 2022 tax returns after questions arose over whether or not specific rebates should be included as taxable income, and now the Internal Revenue Service has given their answer.
The IRS said in a press release that “in the interest of sound tax administration,” residents in most states, including Illinois, will not be required to report rebates on their federal tax returns, and that filing of those returns can continue.
There were limited exceptions, including Alaska’s Permanent Fund Dividend, but for the most part all states that were included in the original notice will not require their taxpayers to report the rebates as income.
Illinois was included in a large group of states whose residents were advised to potentially delay filing their taxes after questions arose about the reporting of rebates given to taxpayers and property owners.
Those rebates, passed as part of the state’s fiscal year 2023 budget, were given to individuals who made less than $200,000, or couples who made less than $400,000. Those rebates returned $50 to each taxpayer.
Property tax rebates of up to $300 were also made available as part of the program.
Under the new IRS guidance, those payments are considered to be “general welfare” payouts, and therefore are not subject to federal income taxation.
Excessive tax rates on cigarettes induce substantial black and gray market movement of tobacco products into high-tax states from low-tax states or foreign sources.
New York has the highest inbound smuggling activity, with an estimated 53.5 percent of cigarettes consumed in the state deriving from smuggled sources in 2020. New York is followed by California (44.8 percent), New Mexico (45.5 percent), Washington (41.5 percent), and Minnesota (34.8 percent).
New Hampshire has the highest level of net outbound smuggling at 52.4 percent of consumption, likely due to its relatively low tax rates and proximity to high-tax states in the northeastern United States. Following New Hampshire is Indiana (35.6 percent), Virginia (27.6 percent), Idaho (25.8 percent), Wyoming (24.4 percent), and North Dakota (18.6 percent).
Illinois and New Mexico significantly increased their cigarette tax rate from 2019 to 2020. Both states saw major increases in cigarette smuggling.
Policymakers interested in increasing tax rates should recognize the unintended consequences of high taxation rates. Criminal distribution networks are well-established and illicit trade will grow as tax rates rise.
Massachusetts is already trending in the wrong direction in terms of migration. Since 2013, Massachusetts’ net population change levels have been trending downward; and in 2020 the Commonwealth realized its first net negative population change since 2004. Massachusetts lost an estimated 1,309 residents in 2020 but that figure grew to 37,497 by 2021. Much of that change is likely attributable to various changes brought on by the pandemic, including the expansion of remote work opportunities. However, Massachusetts’ struggle with migration precedes the pandemic.
The Bay State’s net migration levels generally mirror the downward trajectory of the net population change figures, but a closer look reveals that Massachusetts was experiencing net negative migration even before the pandemic began. The downward trend for net migration reached net negative levels in 2019, the first year since 2007.
Whether Massachusetts’ net migration figure is positive or negative primarily depends on the strength of net international migration. For 20 of the last 22 years, Massachusetts has seen net negative domestic migration. What this effectively means is that it is preferable to migrate to Massachusetts from abroad, but once a person lives there, it is preferable to move somewhere else. Between July 1, 2020 and July 1, 2021, an estimated 12,675 more people moved to the Bay State from abroad than left for foreign destinations. However, 46,187 more people left Massachusetts for other domestic locations than moved in from elsewhere in the United States. This should concern policymakers, but the figure that should be even more concerning is the net outmigration of adjusted gross income (AGI).
As the first quarter of 2022 came to an end and the United States passed the two-year anniversary of the start of the COVID-19 pandemic, total state tax revenue was at its highest level since just before its historic decline in early 2020. Collections were 18.1% greater than those for the final quarter of 2019, after adjusting for inflation and averaging across four quarters to smooth seasonal fluctuations. Only Wyoming and North Dakota had not taken in enough revenue to surpass their pre-pandemic levels.
Nationwide and in 31 states as of the end of the first quarter of 2022, cumulative tax receipts since the pandemic’s start, adjusted for inflation, were even higher than they would have been if pre-COVID growth trends had continued—despite fallout from the pandemic and a two-month recession. According to Pew estimates, Idaho led all states, with 16% more cumulative tax revenue than it would have collected under its pre-pandemic growth rate. New Mexico was second at 15.5% above the trend. Nationally, combined tax revenue at the end of the first quarter of 2022 was 3% above estimates of what might have been collected had the pandemic not occurred.
However, estimates also show that cumulative tax revenue fell short of its pre-COVID growth trend in slightly more than a third of states since the pandemic’s onset, and most other states’ recoveries largely followed historical trends.
Looking at cumulative totals since the start of the pandemic offers a way to identify states in which tax revenue has over- or underperformed since January 2020, based on pre-COVID trends. This approach also provides a different view of the strength of collections from the often-astonishing quarterly and annual percentage increases that were skewed by this particularly volatile period. For each of the nine quarters from Jan. 1, 2020 to March 31, 2022, Pew calculated the difference between actual tax revenue and estimates of how much each state would have collected had revenue grown at its pre-pandemic, five-year average annual growth rate.
Business owners are likely saving more than $10 billion annually in federal taxes through state laws that circumvent the $10,000 cap on state and local tax deductions, according to a Wall Street Journal analysis of state data.
The state laws blunt the cap’s effect on owners of closely held businesses such as law firms, hedge funds, manufacturers and car dealerships, while workers earning wages generally can’t take advantage. The strategy, now available in 27 states, converts business owners’ personal income taxes into deductible business taxes that escape what is known as the SALT cap on state and local tax deductions.
Much of the money flows to high-income people in California, New York and New Jersey, while those in Illinois, Massachusetts, Minnesota and Connecticut are likely saving hundreds of millions of dollars as well. It isn’t just a phenomenon in high-tax Democratic states. The proliferating workarounds mark a rare case where a state-tax policy trend has been swift, national and bipartisan, and Utah, Georgia, Arizona, South Carolina and Kansas now have similar laws.
For states, approving the workarounds has been easy, because their residents benefit and state tax collections are barely altered. For business owners, the chance to lower federal tax bills is attractive, and industry groups are lobbying in the states that haven’t yet enacted workarounds.
Tax cuts remain a powerful tool to entice people and firms, and the pandemic has triggered a new tax war. After the lockdowns, states and cities predicted unprecedented revenue drops. Instead, economies bounced back quickly from the pandemic, partly because of widespread adoption of remote work and extensive federal aid from the Trump and Biden administrations — hundreds of billions of dollars in unemployment benefits (which kept individuals spending money), business loans and funding for local governments to fight COVID-19.
The March 2021 Biden stimulus then provided local governments with an unprecedented $350 billion to bolster their budgets. The revenue gusher has produced state budget surpluses where experts had only recently predicted steep deficits.
Nearly a dozen states, mostly Republican-governed, have used the windfall to cut taxes. Idaho reduced its corporate and individual tax rates and shrank its income-tax brackets from seven to five, producing a $163 million tax cut for residents and businesses. The state also sent $220 million in rebates to everyone who filed tax returns in 2019.
Advocates for higher taxes often say that the levies don’t drive away wealthy individuals or businesses. When New Jersey raised taxes on the wealthy in November 2020, Democratic Gov. Phil Murphy said, “When people say folks are going to leave, there’s no research anywhere that suggests that happens.”
Yet New Jersey, with taxes on the wealthy and on businesses long ranking among the nation’s highest, ranked a dismal 42nd in economic growth over the five years preceding the pandemic, according to one study, and it has been an economic laggard for two decades. Voters in this overwhelmingly Democratic state showed their disapproval in giving incumbent Murphy an extremely narrow victory in his November reelection bid. Polls showed that most voters favored the Republican position on cutting taxes over Murphy’s.
Gov. Reynolds is proposing a bold tax reform that would increase the incentives to work and invest in the Hawkeye State. Her proposal unveiled last week would reshape the state income tax, gradually consolidating brackets en route to a flat 4% rate by 2026. “When the bill’s fully implemented,” she said, “an average Iowa family will pay more than $1,300 less in taxes.”
The flat 4% levy would drop the state’s top rate by more than a third. Under current law Iowans are set to pay 6.5% on earnings above about $80,000, a threshold that catches much of the middle class. That and three other income-tax brackets would be swept away by Gov. Reynolds’s reform.
The plan would also slash the state’s corporate tax, which is even more punishing. Iowa-based companies pay 9.8% of their earnings above $250,000 in state tax. Ms. Reynolds’s reform would gradually reduce the top rate to 5.5%, capping corporate-tax revenue at $700 million a year and using excess revenue to offset annual rate cuts. An immediate rate cut would be better economically, providing more clarity for corporate investment decisions. But the revenue target should be met if the economy continues to grow.
Nationally, the U.S. population only grew by 0.1 percent between July 2020 and July 2021, the lowest rate since the nation’s founding. Pandemic-induced excess deaths, virtually nonexistent international in-migration, and an already-declining birth rate yielded an almost flat population trend nationwide. This, however, belies state-level and regional differences. Whereas the District of Columbia’s population shrunk by 2.8 percent between April 2020 (roughly the start of the pandemic) to July 2021, New York lost 1.8 percent of its population, and Illinois, Hawaii, and California rounded out the top five jurisdictions for population loss, Idaho was gaining 3.4 percent, while Utah, Montana, Arizona, South Carolina, Delaware, Texas, Nevada, Florida, and North Carolina all saw population gains of 1 percent or more.
The picture painted by this population shift is a clear one of people leaving high-tax, high-cost states for lower-tax, lower-cost alternatives. The individual income tax is only one component of overall tax burdens, but it is often highly salient, and is illustrative here. If we include the District of Columbia, then in the top one-third of states for population growth since the start of the pandemic (April 2020 to July 2021 data), the average combined top marginal state and local income tax rate is 3.5 percent, while in the bottom third of states, it is about 7.3 percent.
It’s hard to say which of these is the “worst,” but the 2.3 percent gross receipts tax sticks out. That gross receipts taxes are an awful way to structure a business tax is one of the few things that tax policy experts across the political spectrum almost universally agree on. That’s because they make no allowance for the large variance in profit margins that different types of businesses make—whether a business has a profit margin of 0.1 percent or 10 percent, it would still have to pay the same percentage of its total revenues.
That’s a problem with any gross receipts tax, but California’s proposed tax would exacerbate this inherent problem with a rate that is three times the level of the nation’s current highest. The higher the gross receipts tax rate, the more low-margin businesses that could be put in a position where operating in California would lose them money.
Almost as bad is the proposal to institute a payroll tax on businesses with 50 or more employees. Not only are payroll taxes a regressive tax (even if the tax is imposed on the employer, it would be passed on to employees in the form of lower wages), but the 50-employee threshold would create an obvious disincentive for businesses to hire their 50th employee.
SALT deductibility does create serious issues, however. SALT was the largest itemized deduction, allowing itemizers to export a substantial portion of their burdens onto other Americans through the federal tax code. If I faced a 30percent federal marginal tax rate, paying $100 more in SALT lowers my federal tax bill by $30. It only costs me $70. Because that subsidy rises the more property is owned and the higher the income of the owner, the distortion overwhelmingly favors the richest, with the middle-class (who own less property, earn less, and face lower marginal tax rates) getting far smaller benefits, and non-itemizers getting no subsidy at all. In the process, it also subsidizes high state and local tax states at others’ expense.
Even when citizens do not feel they get their money’s worth from SALT-financed services, federal deductibility still subsidizes those governments, increasing their incentives to act in ways contrary to citizens’ interests. No wonder Democrats in high budget/high tax states are so strident in supporting deductibility. In the example above, federal income tax deductibility means that as long as a local citizen believes such spending provides more than 70 cents of value per dollar of spending, and they don’t take into account the added federal burdens they must bear from those similarly subsidized elsewhere, they think they gain. That encourages those governments to do more of what they should not do and more of what they do badly, not more of what their citizens find worth doing.
NJ’s revenue is being produced by higher rates on a smaller tax base: New Jersey needs to ensure that the outmigration of high-income residents does not continue. Between 2008 and 2017, New Jersey experienced growth in the number of tax filers of 4.2%; however, growth in those making $500,000 or more annually was only 2.5% during the same time.
NJ’s public spending is growing faster than inflation, our population or job creation: Our state will continue to see specific needs increase, especially in public health, health insurance, and public safety. New Jersey already taxes residents and businesses more than most other states. The problem is not too little revenue; rather, it is that the state’s spending is growing at a faster pace than inflation and the state’s population
The cost of NJ’s public workforce retirement and healthcare is the key driver of escalating spending and taxes: What New Jersey owes employees and retirees is growing significantly faster than the underlying economy that must support this liability. This is not sustainable. Pension liabilities are growing faster than assets
I am no billionaire. But like Mr. Buffett, I am willing to take one for the team. So as Democrats in Congress come under pressure to roll back the $10,000 cap on the federal tax deduction for state and local taxes, or SALT, this long-suffering resident of New Jersey offers his own Buffett-like message:
Don’t do it. Make me and people like me — those who choose to live in high-tax states — pay our full, fair share of federal taxes.
Such an approach accords well with what Mr. Biden has been saying about taxes and the wealthy. In his most recent remarks about his Build Back Better plan, the president said he’s “tired” of the rich not paying their “fair share.” And he attacked the 2017 tax cuts passed under Donald Trump as a “giant giveaway to the largest corporations and the top 1%.”
But that’s exactly who would benefit most from any expansion of the SALT deduction. According to the Tax Policy Center, 57% of the benefits of eliminating the cap on the SALT deduction would go to the top 1% of filers. The same researchers likewise reckon that the top 1% would get an average tax cut of more than $35,000 — against just $37 for middle-class taxpayers.