It’s a stark contrast: A person earning $1 million a year gets a tax break of $8,226. A family earning $25,000 a year gets a break of $39.
If you read that description of the personal income tax changes in the latest N.C. state budget, you are likely to have one of three reactions.
First, it might confirm your belief that Republican budget writers care more about millionaires than they care about working people. Second, you might suspect that this is liberal propaganda designed to smear Republicans.
Third, you might seek more information to help you place those numbers in context. The rest of this column aims to help those of you in category number three.
N.C. House Minority Leader Darren Jackson, D-Wake, cited the numbers above in a tweet issued hours before the House’s opening debate Wednesday on the final budget plan. Before conservatives write the data off as tainted by liberal bias, it’s worth exploring the facts in greater detail.
Jackson cites the figures from a table compiled by the N.C. Office of State Budget and Management. That’s Democratic Gov. Roy Cooper’s budget team. Labeled “preliminary estimates” based on OSBM’s “income tax microsimulation model” for 2018, the table purports to show the distributional impact of the new budget’s personal income tax changes.
Regardless of the reliability of the simulation, a close look at the table shows that Jackson doesn’t get the numbers quite right. The $8,226 figure comes from a column labeled “single” filers with adjusted gross income of $1 million “or more.” In other words, that figure includes taxpayers earning $1 million, $5 million, even $25 million (to cite Jackson’s example from the budget debate of Carolina Panthers quarterback Cam Newton).
Meanwhile, the $39 figure comes from a column for “married-joint” filers with incomes ranging from $10,000 to $25,000. Using that range skews the numbers in a way that minimizes benefits for this income group, for reasons we will explain below.
A tax break of $8,226 is nearly 211 times as large as a tax break of $39. But that gap narrows as one sets tighter parameters for the particular taxpayers under consideration.
Let’s use Jackson’s own example. He cites a person earning $1 million. The actual tax break at that income level amounts to $2,533, incorporating just the lower flat tax rate of 5.25 percent and a higher standard deduction of $10,000 ($20,000 for married filers). To get an $8,226 tax break, a single taxpayer would have to earn nearly $3.3 million.
A married couple earning $25,000, in contrast, gets a tax break of $150. (Once again, we’re limiting this discussion to the lower flat tax rate and the higher standard deduction. If this couple has children, the tax break would be even greater.)
You might wonder why that $150 figure is so much higher than the $39 Jackson cited. Here’s where the OSBM chart’s income range of $10,000 to $25,000 comes into play.
Under current law, married couples pay no state income tax on their first $17,500 of income. That means it is impossible for couples earning $10,000 to $17,500 to reap any additional benefit from new income tax changes. Their income tax liability has been zero. It remains zero.
Now every married couple between $17,500 and $20,000 sees its tax liability reduced to zero under the new budget. For some, the new savings amount to pennies. For those earning $20,000, the savings total $137. Because OSBM’s range includes families already removed from the tax rolls, as well as those who had minimal tax liability under current law, it makes sense that the average savings for the entire range would skew closer to zero.
Going back to Jackson’s example, we see that a more accurate comparison would pit a single $1 million earner’s $2,533 tax break against a $25,000 married couple’s $150 tax break. The “millionaire” secures a tax break 17 times as large as the married couple of lesser means. That’s a far cry from the ratio of 211-to-1 implied in Jackson’s tweet. It’s also much lower than the 85-to-1 margin Gov. Roy Cooper mentioned when critiquing the state budget deal last week.
Still, one might question the fairness of a 17-to-1 margin. Let’s consider some additional context.
To say that government gives one taxpayer a $2,533 income tax break while giving another taxpayer a $150 break, we imply that the process starts with government officials standing around a big pile of money. These officials then dole out tax breaks as if they’re handing out wads of cash. How could it be fair to hand one taxpayer a break 17 times larger than another taxpayer’s break, especially when the person getting the larger tax break has a much higher income?
Of course, this is not how income taxation works. Either through paycheck withholding, or through a check submitted to the tax man by mid-April each year, government takes money away from taxpayers. Government then uses that money to pay for government’s priorities, rather than allowing income earners to spend or save that money themselves.
To give a taxpayer an income tax break, then, is actually to agree to take less money away from the person or couple who earned it in the first place.
Under the current flat tax, state government calls on a single tax filer with an income of $1 million to pay $54,508. His effective tax rate is 5.45 percent, slightly less than the 5.499 percent official flat tax rate. Government calls for a married couple earning $25,000 to pay personal income tax of $412. That couple’s effective tax rate is 1.6 percent. The $1 million earner’s tax bill is 132 times as large as the $25,000 married household’s tax bill.
With the changes incorporated in the new budget, the government calls on the single $1 million earner to pay $51,975. As we’ve pointed out, that’s a tax break of $2,533. It’s also less than 5 percent of his total tax liability. In other words, his tax bill is about 95 percent as high as it was before the tax changes. His effective rate falls just below 5.2 percent.
Meanwhile, the government now calls on the married household with $25,000 of income to pay a bill of $262. It’s a break of $150, which represents 36 percent of the couple’s total state income tax liability. The couple’s effective tax rate falls to roughly 1 percent.
Also worth noting: Even after the single $1 million earner sees a tax break 17 times as large as the $25,000 couple’s break, his total state income tax bill is 198 times as large as the couple’s bill.
You read that correctly. The ratio between the total tax bill of the higher earner and the lower earner grows from 132-to-1 to 198-to-1. That’s largely because the increased standard deduction now shields 80 percent of the $25,000 household’s income from state taxation. The married couple is paying a lower rate on a lower income base.
It’s time for a caveat. This analysis takes no account of any portion of the tax code that might help higher-income earners shield more of their money from being considered within adjusted gross income in the first place. It’s entirely possible that other deductions and exemptions change these ratios in ways that benefit the higher-income earner. It’s fair to discuss and address those issues.
But that’s irrelevant for a discussion of the impact of the lower flat rate and the increased standard deduction. These two key changes, working in tandem, give every taxpayer a break. While higher earners see a larger dollar value from the break, lower-earning households see a larger impact on the percentage of their overall income subjected to the tax man’s scrutiny.
The new law ensures that a single tax filer earning $1 million now pays 198 times as much income tax as a $25,000 household, while still keeping $2,533 more of his money to spend or save as he sees fit. That sounds like a pretty good deal.
Mitch Kokai is senior political analyst for the John Locke Foundation.