Tax Day: With Middle Income Families Paying Less Federal Taxes, States Have More Leeway for Revenue Increases

As states struggle to close budget gaps, it's worth highlighting that due to tax changes at the federal level, most middle income families are paying a far smaller percentage of their income in federal taxes than they did a few years ago.  So while states should concentrate revenue increases on those who can most afford it, there is greater capacity among middle income families to absorb some tax increases due to the lower federal tax burden.

Two new studies highlight this reality. In a recent policy brief, President Obama cut taxes for 98% of working families in 2009, Citizens for Tax Justice found, detailing that provisions in last year's Recovery Act reduced federal income taxes for 98 percent of all working families and individuals.  More broadly, the Center on Budget and Policy Priorities (CBPP) outlines in their report, Federal Income Taxes on Middle-Income Families at Historically Low Levels, that a family of four in the exact middle of the income spectrum will pay only 4.6 percent of its income in federal income taxes this year, the second-lowest percentage in the past 50 years.

Despite the the alarms advanced by the Tax Foundation and other conservative groups that average Americans have to work for many months to pay their tax obligations, a separate report from CBPP debunks these claims.  Congressional Budget Office data shows that 80 percent of U.S. households pay federal tax at a lower rate than the Tax Foundation’s estimated “average” federal tax obligation.

More Options for States to Raise Revenue:  With a lower federal tax burden, generating revenue at the state level become a less onerous proposition.  Progressive States Network has highlighted many of the best practices for states to raise revenue for needed services in an earlier Stateside Dispatch, Revenue Options in 2010: Making the Case and Debunking the Myths, which details how states are raising rates on high-income individuals, closing corporate loopholes, and expanding the sales tax base to services to increase revenue and fairness.

Emphasizing the argument for greater taxes on the wealthiest families, a new Economic Policy Institute report, At the Top: Soaring Incomes, Falling Tax Rates, shows how the 400 American families with the highest incomes have seen a dramatic decline in their effective tax rate since 1992.

Another report, Leaving Money on the Table, from the Institute on Taxation and Economic Policy and United for a Fair Economy's Tax Fairness Organizing Collaborative, demonstrates that residents in states that predominantly rely on regressive sales tax rather than a progressive state income tax, pay much higher federal income taxes.  States flagged in the analysis include Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming.  They conclude that states who "are most flagrantly ignoring the benefits of this important source of tax fairness could use this revenue-sharing agreement to provide valuable tax cuts to many state residents without depleting state coffers by a dime."

Progressive States Network - Revenue Options in 2010: Making the Case and Debunking the Myths
Citizens for Tax Justice  - President Obama Cut Taxes for 98% of Working Families in 2009
Center on Budget and Policy Priorities - Federal Income Taxes on Middle-Income Families at Historically Low Levels
Institute on Taxation and Economic Policy and Tax Fairness Organizing Collaborative - Leaving Money on the Table
Economic Policy Institute - At the Top: Soaring Incomes, Falling Tax Rates