March 8, 2022
A new study from the Institute on Taxation and Economic Policy on Senator Rick Scott’s “Skin in the Game” tax proposal found that the proposal would raise taxes by more than $1,000 on average for Americans in the bottom 40% of income distribution. The proposal would also raise taxes for the middle class, resulting in a $500 increase on average for the middle 20%, while leaving the tax rate for the top 1% unchanged.
The majority of the overall funds raised by raising taxes would be paid by the lowest-income Americans, with the bottom 40% contributing 79% of the tax increase.
The analysis follows a report [whitehouse.us19.list-manage.com]by the Tax Policy Center which also found that the impacts of raising taxes would fall disproportionately on low- and middle-income Americans.
Institute on Taxation and Economic Policy: “State-by-State Estimates of Senator Rick Scott’s ‘Skin in the Game’ Proposal” [whitehouse.us19.list-manage.com][3/7/22]
A recent suggestion by Senator Rick Scott, chairman of the National Republican Senatorial Committee (NRSC), to require all Americans to pay federal personal income taxes would raise taxes by more than $1,000 on average for the top 40 percent of ‘Poorest Americans. The share of households facing tax increases would vary by state, ranging from a low of about 24% in Washington State to a high of about 50% in Mississippi.
The most affected states, where more than 40% of residents would face tax increases, are located mainly in the south: Mississippi, West Virginia, Arkansas, Louisiana, Alabama, Kentucky, Oklahoma, Georgia, New Mexico , South Carolina and Sen. Scott’s home state of Florida.
As Figure 1 illustrates, most of the resulting tax increase in the United States would be paid by the bottom 40% of Americans. The poorest fifth of Americans would pay 34% of the tax increase while the next fifth would pay 45% of the tax increase.
This analysis interprets Senator Scott’s proposal to require federal income tax of at least $1. For some Americans, it would simply increase their tax liability from $0 to $1. But many more currently have negative federal income tax because they receive refundable tax credits like the earned income tax credit or the child tax credit, which can bring a household to receive a check from the IRS.
These refundable tax credits are a feature of the federal personal income tax that makes it progressive. But Americans, including those who benefit from these tax credits, pay many other taxes that are not progressive, such as the federal payroll tax and state and local taxes, especially property and community taxes. sale. (ITEP has demonstrated in previous analyzes that the US tax system as a whole, including all the taxes Americans pay, is not very progressive.)
The only possible interpretation of Senator Scott’s proposal is that anyone who has negative federal income tax under current law would instead have federal income tax of at least $1. The EITC and child tax credit would no longer offer households negative income tax, meaning no one would receive money from the IRS after filing their tax return. The most significant effects would be felt by the bottom 40% of Americans, as shown in Table 1.
Table 1: Impacts of requiring a minimum federal personal income tax of $1 in 2022 in the United States
For example, Table 1 shows that the poorest fifth of Americans would pay 34% of the total tax increase under the proposal, and the average tax increase for this group would be about $1,000. This would happen because the average federal personal income tax for this group under current law will be around $1,000 due to the EITC and Child Tax Credit. (This figure varies depending on the number of children and the amount of household income.) As explained below, the only possible interpretation of Senator Scott’s proposal is that it would eliminate significant benefits that Americans low and middle income benefit from these tax credits.
More details on Senator Scott’s proposal
Senator Scott’s suggestion that everyone should have a positive federal income tax was released in February as part of a proposed agenda for a possible future Republican Congress. The importance of this tax proposal could be overlooked given that it is expressed in only 27 words:
“All Americans would have to pay income tax to be in the game, even if it’s a small amount. Currently, more than half of Americans pay no income tax.
It’s true that some people don’t pay federal personal income tax, though Scott’s claim that “more than half of Americans” fall into that category was only true during the pandemic years. unusual of 2020 and 2021.
Some people do not pay federal income tax simply because their income is very low. For example, the standard deduction for married couples in 2022 is $25,900, which means any couple earning less than that amount owes no income tax.
Retirees and people with disabilities sometimes owe no income tax because most Social Security benefits are tax-exempt.
Low-income workers receive the EITC and people with children sometimes receive the Child Tax Credit, and both are refundable tax credits. When a tax credit is refundable, it means that a household can claim the credit even if it exceeds the tax payable that households would otherwise have.
For example, if a household would have an income tax liability of $1,000 before considering credits and receives a refundable credit of $1,500, the result is a negative income tax of $500, which means that the household receives $500 from the IRS. This money can help offset other regressive taxes paid by the household (like federal payroll taxes and state and local taxes) and can help families make ends meet when their incomes are low. (Research shows that many EITC recipients earn more later in life and have positive income taxes.) The household in this example would lose the $500 check from the IRS under Senator Scott’s proposal, which would increase their federal income tax from minus $500 to over $1.
The effects of Senator Scott’s proposal would vary from state to state
As explained at the start, the states with the largest share of residents facing a tax increase under Senator Scott’s plan (states where more than 40% of residents would face a tax increase) are primarily of the southern states.
Table 2 lists each state in alphabetical order along with the share of state residents who would face a tax increase under the proposal. Table 3 presents the same information but ranks states from those with the highest percentage facing a tax increase to those with the lowest percentage.
More detailed state-by-state estimates can be downloaded from the link at the top of this report.