IRS punishes S corp shareholders that have relatives From Forbes, copied right.

Posted on October 2, 2021 by markinaustin

In a tremendously unpleasant surprise for owners of S-corporations and C-Corporations and their tax advisors, the IRS issued Notice 2021-49 on August 4th which states that the Employee Retention Credit (ERC), made available for businesses suffering from the COVID-19 crisis, will not be available with respect to wages paid to a majority owner, or such owner’s spouse, if the majority owner has a brother or sister (whether by whole or half-blood), ancestor, or lineal descendant.

In the event that the majority owner of a corporation has no brother or sister (whether by whole or half-blood), ancestor, or lineal descendant, then wages paid to a majority owner and such owner’s spouse will qualify for the Employee Retention Credit.

Yes, you read that right. If a majority owner of a corporation has any living family members then wages paid to the owner will not be eligible for the ERC credit; however, if the majority owner has no family then wages are eligible for the ERC credit.

This is brutally unfair and makes no sense whatsoever. Only orphans that have no children are able to get the credit, while it is people with large families who need the credit to support their families. This is anti-family, unamerican, and utterly without logic or justification.

My comment: Congress ain’t gonna fix it, either.

 

Filed under: Economy, Open Thread, taxes | 13 Comments »

Morning Report: Decent jobs report 11/3/17

Posted on November 3, 2017 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2579.0 2.3
Eurostoxx Index 395.2 0.3
Oil (WTI) 54.8 0.3
US dollar index 87.7 0.0
10 Year Govt Bond Yield 2.34%
Current Coupon Fannie Mae TBA 102.875
Current Coupon Ginnie Mae TBA 103.938
30 Year Fixed Rate Mortgage 3.95

Stocks are up small after the jobs report. Bonds and MBS are up small.

Jobs report data dump:

  • Nonfarm payrolls up 261,000 versus 325,000 expected
  • 2 month payroll revision up 90,000
  • Unemployment rate 4.1% versus 4.2% expected
  • Labor force participation rate 62.7% vs 63% expected
  • Average hourly earnings flat / up 2.4% YOY.

Overall, a decent report. Payrolls disappointed, but the 2 month revision more than made up for the miss. The unemployment rate is now the lowest since 2000. The drop in the labor force participation rate and flat hourly earnings were disappointing, however. This report won’t make any difference to the Fed’s thinking for December, and the market is basically calling a 25 basis point hike a sure thing at this point.

Note that the miss in average hourly earnings was driven in part by the hurricanes. Restaurant and bar jobs were hit the hardest in the areas affected, and they are lower paying jobs. The loss of these low-paying restaurant and bar jobs in September artificially increased average wages overall. That effect was reversed in October.

The PMI for services was flat in October, while the ISM Services index increased to 60.1. Hurricane effects could be coming into play here as well.

Factory orders increased 1.2% in September, as the manufacturing sector continues to expand.

If you heard a snap yesterday, that was the sound of McMansions in places like Darien, CT and McLean, VA cracking on the proposed sharp reduction in the mortgage interest deduction. Luxury homebuilder Toll Brothers was down 6% yesterday on the proposal, which lowers the MID cap to $500,000 and ends the deduction for second homes. The homebuilder ETF was only down 2.5%. Automaker Tesla was also hit 7% on the proposed elimination of the $7,500 electric car tax credit. I also wonder how this will affect jumbo delinquencies and demand for jumbo MBS.

The NAHB is warning that the change in the mortgage interest deduction could trigger a housing recession. Their point is that it will cause weakness in some high end markets and that weakness will spread to others. FWIW, I think the sheer lack of inventory is the most important characteristic of the current housing market and that will dominate. That said, it won’t be good for home prices in the million dollar range at the margin, and some markets in California could see a moderation of home prices.

Filed under: Economy, Morning Report, taxes | 27 Comments »

Morning Report: More on tax reform 9/28/17

Posted on September 28, 2017 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2499.5 -5.0
Eurostoxx Index 385.4 -0.3
Oil (WTI) 52.4 0.3
US dollar index 86.4 -0.1
10 Year Govt Bond Yield 2.33%
Current Coupon Fannie Mae TBA 103.05
Current Coupon Ginnie Mae TBA 103.98
30 Year Fixed Rate Mortgage 3.88

Stocks are higher this morning after a strong GDP number. Bonds and MBS are down.

Second quarter GDP was revised upward to 3.1%, while the PCE price index was steady at 1%. Consumption was unchanged at 3.3% while after-tax incomes rose 3.3%.  This is a Goldilocks type report for the economy, with strong growth and muted inflation. Residential Construction was a weak spot, falling 7.3%, the biggest drop since 2010.

In other economic data, Initial Jobless Claims came in at 272k, a touch lower than expectations. Claims in Texas are getting back to normal, while claims in Florida are still elevated. Retail inventories rose 0.7% while wholesale inventories rose 1%. Corporate profits rose 7.4%.

Tax reform could cause a quick jump in jobs, assuming it plays out the way its drafters hope. One provision that is getting attention is the accelerated depreciation idea. Accelerated depreciation will let companies expense new capital investment in the year it is made instead of having to depreciate it over a longer time period. The net effect is to make reported profit (and therefore the tax liability) lower than it would otherwise be, and that actually adds to the cash flow of the company. The big question is whether it will encourage job growth, and that is a question that divides economists almost 50/50 and largely falls along ideological lines. Liberal economists believe that this will only reward investors, while more right-leaning economists believe that the tax effect makes some marginal projects begin to make sense economically. If you are a leftie, you think the tax savings will get plowed back into dividends and buybacks. If you are a rightie, you think the tax savings will encourage investment in the business and hiring.

Note that one provision of tax reform includes a repatriation tax credit, which could cause bond yields to rise if companies sell Treasuries en masse to bring cash back to the US. The amount of money isn’t trivial: Microsoft alone holds $133 billion in cash overseas, largely sitting in Treasuries.

Tax reform at the individual level is still sketchy, and it looks like there will be winners and losers. The winners will be people in low-tax states as well as the super-rich. The losers will be upper middle class taxpayers in high tax states like NY and CT. Historically, the upper middle class taxpayer has been the “third rail” of tax reform and it is likely that hitting them will doom tax reform at the individual level. There is probably more support for corporate tax reform given that we have the highest statutory corporate tax rates in the world, and US corporations that don’t have overseas exposure (generally the smaller ones) are disadvantaged relative to the bigger guys.

Equifax’s CEO resigned over the hacking episode and the new CEO has unveiled free credit locking for life. To prevent identity theft, locking means that a new creditor cannot access your credit file unless you specifically request it, for example if you are getting a new car or opening a new credit card. This presumably prevents someone from opening a credit line in your name. So far, we have not heard about issues with mortgage loans and the inability to access credit reports from borrowers who have locked their accounts, but the hack is still relatively recent.

Housing credit risk increased in the second quarter, according to CoreLogic. Credit risk is still within the benchmark range of 2001-2003, before the housing bubble began to inflate in earnest. It seems that there have been two opposing phenomenons going on – first an increase in investor and condo loans has increased credit risk, while better DTIs and FICO scores have lowered it. The average credit score for new mortgages is 745, which is up 9 points YOY. DTI ratios were flat at 36%, while LTV ratios fell from 87.5 to 85.5. The increase in FHA loans over time has increased the number of 95+ LTVs by over 50% since 2001.

Tennessee Senator Bob Corker said he will not stand for re-election. Corker is a big name on the Banking Committee and is instrumental in GSE reform. This will accelerate the push for GSE reform in his last 15 months in office. GSE reform is difficult and cleaves strongly down ideological lines. Bob Corker and Senator Mark Warner came up with a bill that made it out of committee, however the left opposed it. The right wants to limit exposure to the taxpayer and introduce more competition. The left wants to ensure that low-income and targeted lending are not compromised. In the current state, Fannie and Fred remain under conservatorship, with all profits going to Treasury.

Thinking outside the box in Albuquerque:

tacos

Filed under: Economy, Morning Report, taxes | 20 Comments »

Morning Report: Tax reform to be unveiled today 9/27/17

Posted on September 27, 2017 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2500.8 5.3
Eurostoxx Index 385.4 1.4
Oil (WTI) 51.9 0.0
US dollar index 86.5 0.4
10 Year Govt Bond Yield 2.29%
Current Coupon Fannie Mae TBA 103.24
Current Coupon Ginnie Mae TBA 104.21
30 Year Fixed Rate Mortgage 3.87

Stocks are up this morning as Washington pivots to tax reform. Bonds and MBS are down.

Janet Yellen spoke yesterday and said that it would be “imprudent” to wait until inflation hits 2% to start hiking rates. Those comments were taken as support for a December hike and the Fed Funds futures took up the odds of a rate hike in December to 81%.

Bonds were also under pressure due to the possibility of some sort of tax deal. Here is a preview of the tax plan. Trump plans on releasing the details today. Apparently the big pieces involve cutting the corporate tax rate falls to 20%, while the top individual income tax bracket falls to 35%. There is an option for Congress to institute a higher bracket. Deductions will be limited while the standard deduction increases. The most contentious deduction will be the state and local tax deduction, which will hit taxpayers in high tax states like NY and CT the most. CT is already reeling from an exodus of high income earners and businesses, and this will only exacerbate that. This won’t be good for real estate prices there. While this is largely going to hit blue states, there are enough Republican House members in blue states to deep-six it unless Trump can get some Democrats on board. No word on eliminating or lowering the cap on the mortgage interest deduction.

Pending Home Sales fell by 2.6% in August, according to NAR.

Mortgage applications fell half a percent last week as purchases rose 3% and refis fell 4%. The hurricanes did depress activity in Florida and Texas, however increasing rates and a lack of home inventory were the biggest drivers.

Durable goods orders rose 1.7% in August, which beat consensus estimates. Ex-aircraft, they were up 0.2%. Capital Goods orders rose 0.9%, which is an indication that business expects to see further activity and is increasing their capacity. The bump in capital goods orders is being driven by the rebound in oil prices and drilling activity in the energy sector. Capacity Utilization rates are still low compared to historical standards.

The bond market has been in a tight range for this entire year. In fact, the 62 basis point range has been the tightest in over 50 years. Historically, that range has been closer to 175 basis points. The article is somewhat misleading, as the range is going to fall naturally when rates fall from 10% to 2%. Using volatility measured in sigma is better. That said, it isn’t just the US bond market: volatility in general is down. The VIX (the volatility measure for the stock market) has been in the single digits. Historically that has been a warning sign (When VIX is high, time to buy. When VIX is low, time to go).

Filed under: Economy, Morning Report, taxes | 25 Comments »

Morning Report: Corporate tax reform 12/9/16

Posted on December 9, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2250.0 2.0
Eurostoxx Index 354.2 2.0
Oil (WTI) 51.3 0.4
US dollar index 91.8 0.4
10 Year Govt Bond Yield 2.41%
Current Coupon Fannie Mae TBA 103
Current Coupon Ginnie Mae TBA 104
30 Year Fixed Rate Mortgage 4.08

 

Stocks are higher this morning on no real news. Bonds and MBS are flat.
Slow news day.
Consumer sentiment jumped in November from 94 to 98.
Negative equity fell 0.8% from Q2 to Q3, according to CoreLogic. Currently, 8.4% of all mortgaged homes have negative equity, and another 1.6% are near negative equity. In total, 14.6% of all mortgaged homes in the US have less than 20% equity. Home price appreciation has been one driver of this, as well as borrowers who have been switching to 15 year mortgages which pay down principal faster. Over the past year, the average homeowner has picked up $12,500 in home equity.
One of the best chances for bipartisanship next year is corporate tax reform. While Republicans and Democrats disagree on how much revenue corporate taxes should bring in, most everyone agrees that our current system isn’t working. Over the past 16 years, virtually all of our competitors cut corporate taxes, however the US has maintained its 35% rate. You can see how much the market has shifted over the past 16 years in the chart below. The new plan would eliminate the incentives that companies use to shift revenues and costs to various jurisdictions in order to minimize taxes. Rates would fall, however interest would no longer be deductible.

A notable bond bear believes the tipping point in the bond market is 3% yields on the 10-year. At yields above that, he believes the stock market and the bond market would suffer a vicious sell-off.

Filed under: Economy, Morning Report, taxes | 40 Comments »

Morning Report: RIP the mortgage interest deduction? 10/10/16

Posted on October 10, 2016 by Brent Nyitray

Vital Statistics:

Last Change
S&P Futures 2158.0 12.0
Eurostoxx Index 341.2 1.6
Oil (WTI) 50.6 0.8
US dollar index 87.6 -0.2
10 Year Govt Bond Yield 1.72%
Current Coupon Fannie Mae TBA 103.3
Current Coupon Ginnie Mae TBA 104.2
30 Year Fixed Rate Mortgage 3.54

Bonds are closed today, but overseas bond markets are weaker. Stocks are up.

No economic data today. The week after the jobs report is typically data light to begin with, and there really isn’t anything market-moving this week, except for may the PPI on Friday.

Dave Stevens of the MBA raised the issue of eliminating the mortgage interest deduction, albeit with the caveat that it be done in the context of tax reform, with lowering rates and eliminating deductions. He wasn’t advocating eliminating it in a vacuum.

If Donald Trump wins, tax reform is a definite possibility. If Hillary wins, will she be more like her husband, willing to deal with Republicans to get something done, or will she be more like Obama, where both sides had hardened positions? If you were going to eliminate the mortgage interest deduction, it will certainly make housing less affordable and would have a dampening effect on home price appreciation. That said, with rates as low as they are, interest payments as a percentage of your mortgage payment are at all-time lows. So if you wanted to eliminate it at the time when it causes the least amount of pain, now is the time to do it.

Republicans will never support eliminating deductions without cutting rates, and the historical bargain between right and left (Democrats trading increased taxes and spending for increased defense spending) might not work this time around. Believing in that trade was what got us the sequester, where Obama found his bluff called, as Republicans tolerated lower defense spending in exchange for lower discretionary spending. Given the general war fatigue of the American voter, Republicans are probably not going to be willing to trade increases in defense spending for more social spending, and certainly not for tax increases.

Punch line: the mortgage interest deduction probably isn’t going anywhere.

That said, the US subsidizes the residential real estate market six ways to Sunday, with the mortgage interest deduction, the 30 year fixed rate mortgage (try finding that anywhere else on the planet), taxpayer backing of almost all new origination, and the cornucopia of subsidies for affordable housing. Not to mention the central bank targeting of mortgage rates and real estate prices. And the powers that be still scratch their heads wondering why we had a real estate bubble…

Mortgage credit availability improved in September, according to the MBA.

Filed under: Economy, housing, Morning Report, taxes | 19 Comments »

Thought Experiment 5/26/15

Posted on May 26, 2015 by markinaustin
If our federal tax system had a voluntary box for contributions above income tax due, and if the box allowed for contributions to be earmarked for any of eight major federal budget “needs”:
1]  debt reduction
2]  defense and national security
3]  medicaid
4]  highway, dam, and port maintenance
5]  national parks
6] VA
7] ag subsidies
8] health subsidies through ACA
9] Returned Directly to the State Treasury of Your Choice__________________________
10] Existing specific federal budget item of your choice_______
Would you check off for any?  $50?  $500?  $5000?
Which functions do you think would draw the most contributions?
Which the least?
Assuming the earmarks would be honored, would Congress immediately offset the predicted earmarks in the following year’s budget?  Would that be good, in that voters would have changed budget priorities to directly suit themselves, or bad, in that Congress would just waste the money?
Would it make a difference to you if the contribution were tax deductible in the following year?  I exclude the possibility of it becoming a tax credit as that would defeat this mind experiment. But see below.

In the alternate mind experiment, in which one can choose to contribute one’s tax payment to selected budget items, which items do you think would be funded?

—–

I will post this at PL.  The reactions there should be – uh- different.

Filed under: Open Thread, taxes | 38 Comments »

FYI – a chance to comment on a proposed regulation

Posted on November 27, 2013 by markinaustin

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today will issue initial guidance regarding qualification requirements for tax-exemption as a social welfare organization under section 501(c)(4) of the Internal Revenue Code.  This proposed guidance defines the term “candidate-related political activity,” and would amend current regulations by indicating that the promotion of social welfare does not include this type of activity.  The proposed guidance also seeks initial comments on other aspects of the qualification requirements, including what proportion of a 501(c)(4) organization’s activities must promote social welfare.

The initial guidance is expected to be posted on the Federal Register later today.

There are a number of steps in the regulatory process that must be taken before any final guidance can be issued.  Given the significant public interest in these and related issues, Treasury and the IRS expect to receive a large number of comments.  Treasury and the IRS are committed to carefully and comprehensively considering all of the comments received before issuing additional proposed guidance or final rules.

“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” said Treasury Assistant Secretary for Tax Policy Mark J. Mazur.  “We are committed to getting this right before issuing final guidance that may affect a broad group of organizations.  It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently.”

“This is part of ongoing efforts within the IRS that are improving our work in the tax-exempt area,” said IRS Acting Commissioner Danny Werfel.  “Once final, this proposed guidance will continue moving us forward and provide clarity for this important segment of exempt organizations.”

Organizations may apply for tax-exempt status under section 501(c)(4) of the tax code if they operate to promote social welfare.  The IRS currently applies a “facts and circumstances” test to determine whether an organization is engaged in political campaign activities that do not promote social welfare.  Today’s proposed guidance would reduce the need to conduct fact-intensive inquiries by replacing this test with more definitive rules.

In defining the new term, “candidate-related political activity,” Treasury and the IRS drew upon existing definitions of political activity under federal and state campaign finance laws, other IRS provisions, as well as suggestions made in unsolicited public comments.

Under the proposed guidelines, candidate-related political activity includes:

1.      Communications

  • Communications that expressly advocate for a clearly identified political candidate or candidates of a political party.
  • Communications that are made within 60 days of a general election (or within 30 days of a primary election) and clearly identify a candidate or political party.
  • Communications expenditures that must be reported to the Federal Election Commission.

2.      Grants and Contributions

  • Any contribution that is recognized under campaign finance law as a reportable contribution.
  • Grants to section 527 political organizations and other tax-exempt organizations that conduct candidate-related political activities (note that a grantor can rely on a written certification from a grantee stating that it does not engage in, and will not use grant funds for, candidate-related political activity).

3.      Activities Closely Related to Elections or Candidates

  • Voter registration drives and “get-out-the-vote” drives.
  • Distribution of any material prepared by or on behalf of a candidate or by a section 527 political organization.
  • Preparation or distribution of voter guides that refer to candidates (or, in a general election, to political parties).
  • Holding an event within 60 days of a general election (or within 30 days of a primary election) at which a candidate appears as part of the program.

These proposed rules reduce the need to conduct fact-intensive inquiries, including inquiries into whether activities or communications are neutral and unbiased.

Treasury and the IRS are planning to issue additional guidance that will address other issues relating to the standards for tax exemption under section 501(c)(4).  In particular, there has been considerable public focus regarding the proportion of a section 501(c)(4) organization’s activities that must promote social welfare.  Due to the importance of this aspect of the regulation, the proposed guidance requests initial comments on this issue.  The proposed guidance also seeks comments regarding whether standards similar to those proposed today should be adopted to define the political activities that do not further the tax-exempt purposes of other tax-exempt organizations and to promote consistent definitions across the tax-exempt sector.

Filed under: First Amendment, Open Thread, regulations, taxes | 21 Comments »

DO AWAY WITH THEM

Posted on May 20, 2013 by markinaustin

Do Away With Them
John D. Colombo

John D. Colombo is the Albert E. Jenner Jr. professor of law at the University of Illinois College of Law. His primary research area is federal and state tax-exemption for nonprofit organizations.

May 15, 2013

The best solution to the problems with 501(c)(4) organizations is to eliminate them completely. The problem with the (c)(4) designation is that it is essentially a charity that is permitted to engage in unlimited lobbying and some significant amount of political campaign activity (as long as that activity isn’t the organization’s “primary purpose”) in exchange for denying the organization the ability to receive deductible charitable contributions.

The I.R.S, will never be able to satisfactorily police the line at which political activity becomes “primary.”

But the Internal Revenue Service will never be able to satisfactorily police the line at which political activity becomes “primary.” Since “issue advocacy” (for example, lobbying) is permitted in any amount, the problem isn’t just one of identifying when political campaign activity becomes primary; it is also identifying the line between permissible issue advocacy and political campaign activity. This line is hard enough to enforce in the 501(c)(3) context, where political campaign activity is absolutely prohibited and lobbying permitted only to an “insubstantial” degree. The loosening of these restrictions in the (c)(4) context virtually invites wholesale noncompliance, which is pretty much what we have.

Further, the (c)(4) designation has no real purpose. The best explanation, in my view, for tax exemption for charities is that it is a sort of partial government subsidy for organizations that offer services that the private market will not offer, and that government either will not or cannot offer directly. I find it hard to believe that lobbying suffers from such a serious market failure that we need to subsidize organizations whose primary activity is to lobby. In fact, it seems almost perverse that the government would subsidize organizations whose primary purpose is to lobby the government.

So let’s make it simple: if you want to be a charity, be a charity and live with the 501(c)(3) limits; if you want primarily to be engaged in the political process through lobbying or otherwise, pay taxes like everyone else or register as a 527 political organization.

Filed under: taxes | 5 Comments »

A Not So Modest Proposal

Posted on January 6, 2013 by ScottC

I was thinking today about our discussion regarding what method the Feds should use to fund federal spending, and it suddenly occurred to me that we don’t actually need a single method.  This is the beauty of a federal system.  If we think of the nation as it was originally conceived, a collection of semi-sovereign states bound together through the Constitution and governed by a federal government, then it is easy to imagine a system in which the federal government simply tells member states how much they owe, and the states themselves figure out how to come up with the money.  So if Californians like a a progressive income tax, they can have one, and if Texans prefer a consumption tax, they can have that too, and New York can have a transaction tax on all the evil Wall Street transactions , if that is how they prefer to raise the funds owed to the Feds.

The issue then becomes how to determine what the burden should be for each state.  If a balanced budget is desirable, the states, combined, need to be charged whatever the Feds are going to spend.   Since federal spending is generally measured as a percent of GDP, and since GDP is basically the sum total of either all income or all expenditures in the economy (depending on how you set out to measure it), making an individual state’s contributions a function of GDP makes sense and can be viewed as either a tax on income or consumption, depending on your preference.  And, interestingly enough, we can and do measure each state’s share of GDP, called GSP (Gross State Product).  So we have a ready and easy metric to determine what a given state’s share of the federal tax burden should be. If, say, federal spending is going to be set at roughly 20% of GDP annually, why not make each state’s contribution to the federal coffers be 20% of each individual state’s GSP?  Again, individual states can determine for themselves how to actually raise the amount owed from its citizens.  This would put an end to divisive national discussions about tax rate disparities, different “kinds” of income, and who is paying their  “fair share”, and would create a system of competition among states for the most efficient and “fair” method of raising funds.

Thinking about this, I decided to check to see how such a methodology would compare to what individual states have actually been contributing to the federal coffers.  The most recent year for which I could easily find both GSP figures and federal taxes paid broken out by state was 2007.  Note that the federal taxes broken out by state include both income taxes and corporate taxes.  It turns out that 2007 is actually a good year to use, because total revenues that year amounted to 19.5% of the sum of all state GSP’s, and the last time we actually had a balanced budget, federal spending was roughly 20% of GDP, so if we use that as a baseline for what spending “should” be, 2007 would have produced a balanced budget.  The results were interesting.

In 2007, the top 5 states in terms of GSP were also the top 5 states in terms of taxes paid to the federal government (see chart below).  Note that the positions of New York and Texas flip depending on whether the order is GSP or taxes paid, but otherwise the top 5 is in order either way.  The rest of the states are also roughly in the same order, which is not that surprising since GSP is a measure of all income received in that state, and federal taxes are currently based on income.  There were a couple of outliers, however, for example, Minnesota is number 9 in terms of taxes paid, but drops to 16 in terms of GSP, and Connecticut, which is 16 in taxes paid drops to 23 in GSP.  But for the most part the order of states is pretty close.

Next I compared what states actually paid with what they would have paid had their “bill” to the federal government been determined by a “flat” tax of 19.5 percent of GSP which would result in total revenue equal to that which was actually collected.  There were some interesting disparities.  For example, California, which had the highest GSP and paid the highest taxes still only paid 17.42% of its GSP in taxes, more than 2% less than it would have paid under a “flat tax” of 19.5% on GSP.   Another way of saying this:  Californian’s share of GDP was 13.14% but it’s share of the federal tax burden was only 11.76%.  On the other hand, Connecticut paid more than 22.5% of its GSP in taxes, 3% more than it would have paid with a flat 19.5%, and while it’s share of GDP was 1.55%, it paid over 2% of all tax revenue.    See below for a list of all states (numbers in millions of $).

State

Gross collections

GSP

% of GDP

collection as % of GSP

Collection at 19.5%
California

$313,999

$1,801,762

13.14%

17.43%

$350,804
Texas

$225,391

$1,148,531

8.37%

19.62%

$223,619
New York

$244,673

$1,105,020

8.06%

22.14%

$215,148
Florida

$136,476

$741,861

5.41%

18.40%

$144,441
Illinois

$135,458

$617,409

4.50%

21.94%

$120,210
Pennsylvania

$112,368

$533,212

3.89%

21.07%

$103,817
Ohio

$105,773

$462,506

3.37%

22.87%

$90,050
New Jersey

$121,678

$461,295

3.36%

26.38%

$89,814
Georgia

$75,218

$391,241

2.85%

19.23%

$76,175
North Carolina

$75,904

$390,467

2.85%

19.44%

$76,024
Virginia

$61,990

$384,132

2.80%

16.14%

$74,791
Michigan

$69,924

$379,934

2.77%

18.40%

$73,973
Massachusetts

$74,782

$352,178

2.57%

21.23%

$68,569
Washington

$57,450

$310,279

2.26%

18.52%

$60,411
Maryland

$53,705

$264,426

1.93%

20.31%

$51,484
Minnesota

$78,697

$252,472

1.84%

31.17%

$49,156
Indiana

$42,668

$249,229

1.82%

17.12%

$48,525
Arizona

$35,485

$245,952

1.79%

14.43%

$47,887
Tennessee

$47,747

$245,162

1.79%

19.48%

$47,733
Colorado

$45,404

$235,848

1.72%

19.25%

$45,920
Wisconsin

$43,778

$233,406

1.70%

18.76%

$45,444
Missouri

$48,568

$229,027

1.67%

21.21%

$44,592
Connecticut

$54,236

$212,252

1.55%

25.55%

$41,326
Louisiana

$33,677

$207,407

1.51%

16.24%

$40,382
Alabama

$24,149

$164,524

1.20%

14.68%

$32,033
Oregon

$23,467

$158,268

1.15%

14.83%

$30,815
Kentucky

$23,151

$152,099

1.11%

15.22%

$29,614
South Carolina

$20,499

$151,703

1.11%

13.51%

$29,537
Oklahoma

$29,325

$136,374

0.99%

21.50%

$26,552
Iowa

$18,437

$129,911

0.95%

14.19%

$25,294
Nevada

$19,619

$129,314

0.94%

15.17%

$25,177
Kansas

$22,311

$116,986

0.85%

19.07%

$22,777
Utah

$15,064

$105,574

0.77%

14.27%

$20,555
Arkansas

$27,340

$95,116

0.69%

28.74%

$18,519
DC

$20,394

$92,516

0.67%

22.04%

$18,013
Mississippi

$10,869

$87,652

0.64%

12.40%

$17,066
Nebraska

$19,043

$80,360

0.59%

23.70%

$15,646
New Mexico

$8,346

$75,192

0.55%

11.10%

$14,640
Hawaii

$7,666

$62,019

0.45%

12.36%

$12,075
Delaware

$16,858

$61,545

0.45%

27.39%

$11,983
West Virginia

$6,522

$57,877

0.42%

11.27%

$11,269
New Hampshire

$9,304

$57,820

0.42%

16.09%

$11,258
Idaho

$9,025

$52,110

0.38%

17.32%

$10,146
Maine

$6,289

$48,021

0.35%

13.10%

$9,350
Rhode Island

$11,967

$46,699

0.34%

25.63%

$9,092
Alaska

$4,287

$44,887

0.33%

9.55%

$8,740
South Dakota

$4,766

$35,211

0.26%

13.53%

$6,856
Montana

$4,523

$34,266

0.25%

13.20%

$6,672
Wyoming

$4,725

$31,544

0.23%

14.98%

$6,142
North Dakota

$3,660

$28,518

0.21%

12.83%

$5,552
Vermont

$3,806

$24,627

0.18%

15.46%

$4,795

Then, just for fun, I decided to see what would happen if the Feds allocated a state’s share of the tax burden in the same way it currently allocates an individual’s share of the burden, ie progressively.  So, for example, since the share of taxes paid by the top 1% of income earners is 36.7%, I looked at what it would take to make the share of the top 1% of GSP states be an equivalent 36.7%.  And so on for the next 4% (22% share of taxes), 5-10% (11.8% share), 10-25% (16.8% share), 25-50% (10.4% share), and finally the bottom 50% (2.3% share).

It turns out that under a progressive tax on GSP, the top 10% of states are all paying less than their “fair share”, while the bottom 90% are all over paying more.  Far and away the most egregious under-payer is California which, being the top 1% in terms of GSP, should be paying more than 3 times what it is currently paying.  The biggest over-payer is Arkansas, which is paying almost 10 times what it would be paying under a “fairer”, progressive system.  See chart below for what all states would pay, and their share of all taxes paid.

State

Gross collections

Collection at 19.5% of GSP

progressive share

Share of all taxes
California

$313,999

$350,804

$980,059

36.70%
Texas

$225,391

$223,619

$299,422

11.21%
New York

$244,673

$215,148

$288,079

10.79%
Florida

$136,476

$144,441

$171,983

6.44%
Illinois

$135,458

$120,210

$143,131

5.36%
Pennsylvania

$112,368

$103,817

$71,303

2.67%
Ohio

$105,773

$90,050

$61,848

2.32%
New Jersey

$121,678

$89,814

$61,686

2.31%
Georgia

$75,218

$76,175

$52,318

1.96%
North Carolina

$75,904

$76,024

$52,215

1.96%
Virginia

$61,990

$74,791

$51,367

1.92%
Michigan

$69,924

$73,973

$50,806

1.90%
Massachusetts

$74,782

$68,569

$47,094

1.76%
Washington

$57,450

$60,411

$30,236

1.13%
Maryland

$53,705

$51,484

$25,768

0.96%
Minnesota

$78,697

$49,156

$24,603

0.92%
Indiana

$42,668

$48,525

$24,287

0.91%
Arizona

$35,485

$47,887

$23,968

0.90%
Tennessee

$47,747

$47,733

$23,891

0.89%
Colorado

$45,404

$45,920

$22,983

0.86%
Wisconsin

$43,778

$45,444

$22,745

0.85%
Missouri

$48,568

$44,592

$22,318

0.84%
Connecticut

$54,236

$41,326

$20,684

0.77%
Louisiana

$33,677

$40,382

$20,212

0.76%
Alabama

$24,149

$32,033

$16,033

0.60%
Oregon

$23,467

$30,815

$4,637

0.17%
Kentucky

$23,151

$29,614

$4,457

0.17%
South Carolina

$20,499

$29,537

$4,445

0.17%
Oklahoma

$29,325

$26,552

$3,996

0.15%
Iowa

$18,437

$25,294

$3,806

0.14%
Nevada

$19,619

$25,177

$3,789

0.14%
Kansas

$22,311

$22,777

$3,428

0.13%
Utah

$15,064

$20,555

$3,093

0.12%
Arkansas

$27,340

$18,519

$2,787

0.10%
District of Columbia[1]

$20,394

$18,013

$2,711

0.10%
Mississippi

$10,869

$17,066

$2,568

0.10%
Nebraska

$19,043

$15,646

$2,355

0.09%
New Mexico

$8,346

$14,640

$2,203

0.08%
Hawaii

$7,666

$12,075

$1,817

0.07%
Delaware

$16,858

$11,983

$1,803

0.07%
West Virginia

$6,522

$11,269

$1,696

0.06%
New Hampshire

$9,304

$11,258

$1,694

0.06%
Idaho

$9,025

$10,146

$1,527

0.06%
Maine

$6,289

$9,350

$1,407

0.05%
Rhode Island

$11,967

$9,092

$1,368

0.05%
Alaska

$4,287

$8,740

$1,315

0.05%
South Dakota

$4,766

$6,856

$1,032

0.04%
Montana

$4,523

$6,672

$1,004

0.04%
Wyoming

$4,725

$6,142

$924

0.03%
North Dakota

$3,660

$5,552

$836

0.03%
Vermont

$3,806

$4,795

$722

0.03%

Come on California and Texas…start pulling your weight!!!!

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