Select Page

Ranking Unemployment Insurance Taxes on the 2019 State Business Tax Climate Index

Tax Policy – Ranking Unemployment Insurance Taxes on the 2019 State Business Tax Climate Index

Today’s map is the final in our series examining each of the five major components of the 2019 State Business Tax Climate Index. Compared to individual, corporate, sales, and property taxes, unemployment insurance (UI) taxes are less widely understood but have important implications for the business climate in a state. A state’s performance on the UI tax component accounts for 9.8 percent of that state’s overall Index score.

Unemployment insurance is a joint federal-state social insurance program that finances benefits for recently-unemployed workers through taxes on employers. State UI tax systems are often quite complex, using variable-rate structures that impose different rates on different industries and bases depending on the health of the state’s UI trust fund, among other factors. All 50 states and the District of Columbia levy UI taxes, but some states structure their system better than others.

The least-damaging UI tax systems are those that adhere closely to the federal taxable wage base, have low minimum and maximum tax rates on each rate schedule, avoid levying their own surtaxes or creating benefit add-ons, and have simple experience formulas and charging methods. More harmful UI tax systems are those that have high minimum and maximum rates, wage bases that far exceed the federal level, complicated experience formulas and charging methods, and surtaxes or benefit add-ons that go beyond the core functions of the UI program.

On this year’s Index, the states with the best-scoring UI tax systems are Oklahoma, Florida, Delaware, Louisiana, Mississippi, and Ohio. The worst-structured UI tax systems are found in Massachusetts, Michigan, Idaho, Kentucky, Pennsylvania, and Nevada.

Ranking Unemployment Insurance Taxes on the 2019 State Business Tax Climate Index

Note: This is part of a map series in which we will examine each of the five major components of our 2019 State Business Tax Climate Index.

There are several reasons UI taxes may impact employers’ location decisions. One simple reason is that some states have high statutory minimum and maximum tax rates that apply to large taxable wage bases, while others have low minimum and maximum rates and low taxable wage bases. For example, Arizona, California, Florida, and Tennessee align their taxable wage base with the federal base (or ceiling) of $7,000 per employee, while other states extend the taxable wage base far beyond the federal minimum, such that the tax is applied on tens of thousands of dollars of each employee’s wages. (Currently, Washington is the state with the highest taxable wage base, at $47,300.)

Another important consideration is a state’s experience rating formula, which varies from state to state. The concept behind experience ratings is that each employer’s UI tax liability should be adjusted by their own past experience with unemployment. Companies with frequent layoffs face greater liability than companies with steadier track records. But there are different ways that these ratings can be calculated, and different approaches for handling new businesses which have yet to develop a meaningful track record.

Some states lean more heavily on aggregate state “experience,” while others focus more specifically on individual businesses. Some use what is called a benefit ratio formula, based on the ratio of unemployment benefits to payroll. Others use a benefit wage ratio formula, or a reserve ratio formula, defined as the balance in the employer’s state unemployment insurance account divided by payroll.

One of the most harmful aspects of UI taxes is that financially troubled businesses, for which layoffs may be a matter of survival, are shifted into higher tax rate schedules when they can least afford to pay a higher tax bill. Failing businesses face ever-higher UI taxes, leading them to fail sooner. Similarly, surtaxes imposed when UI fund reserves are low mean higher tax liability right when businesses are struggling most. Well-designed UI tax systems emphasize greater stability and predictability.

To read more about how UI tax systems are evaluated in the Index, click here.

For even more information about UI taxes, read our background paper, “Unemployment Insurance Taxes: Options for Program Design and Insolvent Trust Funds.”

To determine whether your state’s unemployment insurance tax has risen or fallen in the ranks in recent years, see the table below.

Unemployment Insurance Tax Component of the State Business Tax Climate Index (2016–2019)

Note: A rank of 1 is best, 50 is worst. All scores are for fiscal years. DC’s score and rank do not affect other states.

  2016 Rank 2017 Rank 2018 Rank 2019 Rank Rank Change from 2018 to 2019
Alabama 26 14 11 12 -1
Alaska 22 29 25 35 -10
Arizona 5 11 15 13 +2
Arkansas 43 30 32 34 -2
California 13 16 13 17 -4
Colorado 34 42 35 40 -5
Connecticut 20 21 19 23 -4
Delaware 3 3 3 3 0
Florida 2 2 2 2 0
Georgia 39 35 38 38 0
Hawaii 24 24 27 26 +1
Idaho 45 46 46 48 -2
Illinois 37 38 42 42 0
Indiana 15 10 10 11 -1
Iowa 35 34 34 33 +1
Kansas 11 12 12 15 -3
Kentucky 46 48 47 47 0
Louisiana 4 9 4 4 0
Maine 41 44 44 24 +20
Maryland 28 26 24 28 -4
Massachusetts 47 49 49 50 -1
Michigan 48 47 48 49 -1
Minnesota 29 28 37 25 +12
Mississippi 8 5 5 5 0
Missouri 12 7 7 8 -1
Montana 18 19 20 21 -1
Nebraska 10 8 9 9 0
Nevada 42 43 45 45 0
New Hampshire 44 41 43 44 -1
New Jersey 32 25 36 32 +4
New Mexico 7 17 16 10 +6
New York 33 32 30 31 -1
North Carolina 9 6 6 7 -1
North Dakota 16 15 14 14 0
Ohio 6 4 8 6 +2
Oklahoma 1 1 1 1 0
Oregon 27 33 31 37 -6
Pennsylvania 50 45 50 46 +4
Rhode Island 49 50 23 29 -6
South Carolina 31 37 29 27 +2
South Dakota 40 40 39 39 0
Tennessee 25 23 22 22 0
Texas 14 13 26 18 +8
Utah 19 22 21 16 +5
Vermont 17 20 18 20 -2
Virginia 38 39 41 43 -2
Washington 21 18 17 19 -2
West Virginia 23 27 28 30 -2
Wisconsin 36 36 40 41 -1
Wyoming 30 31 33 36 -3
District of Columbia 27 27 30 33 -3


Source: Tax Policy – Ranking Unemployment Insurance Taxes on the 2019 State Business Tax Climate Index

Proposed rules would exempt corporate US shareholders from Sec. 956

IRS Tax News – Proposed rules would exempt corporate US shareholders from Sec. 956
The IRS issued proposed regulations providing that Sec. 956, which requires an income inclusion by U.S. shareholders of controlled foreign corporations (CFCs) that invest in U.S. property, should not apply to corporate shareholders.
Source: IRS Tax News – Proposed rules would exempt corporate US shareholders from Sec. 956

Family Provisions in the New Tax Code

Tax Policy – Family Provisions in the New Tax Code

Key Findings

  • The tax code contains several provisions which vary based on family composition and are designed for purposes such as offsetting the costs of having children or encouraging lower-income individuals to join the labor force.
  • Currently, family status affects at least six tax provisions: the child tax credit, the child and dependent care tax credit and exclusion for employer-sponsored child and dependent care benefits, the earned income tax credit, filing status, the standard deduction, and tax rates and brackets.
  • The Tax Cuts and Jobs Act reformed three of the primary family provisions, by consolidating them into two expanded provisions, which simplified some parts of the individual income tax code.
  • The remaining provisions are still in need of reform. Many of the credits have different, and complex, qualification requirements, which leads to taxpayer confusion and problems with administrability.
  • Provisions that are related to work contain family status differentials, providing greater work incentives to workers with children than to workers without children, with no clear policy rationale.
  • Other family provisions contribute to marriage penalties or bonuses, resulting in different tax liability for couples than if they both were single.
  • The nonneutral treatment of different taxpayers, differences in qualifying requirements, and the overlap between some of the work and child benefits, present an opportunity for reforms that would simplify the process for taxpayers and better focus the intended incentives.

Introduction

The benefits of many provisions of the individual income tax code vary depending on a taxpayer’s family status. Similarly, tax rates and brackets vary by whether taxpayers are single, married, or filing under a different status. Qualifying requirements vary across these provisions, and some combine child-related benefits with work-related benefits. While these policies are designed to help taxpayers, they add unnecessary complexity to the tax code and thus are well suited for reform.

The Tax Cuts and Jobs Act (TCJA) made important changes to three of the primary family provisions in the tax code: the standard deduction, the personal exemption, and the child tax credit. However, further reforms could consolidate the various family-related credits into streamlined credits for children and for work and provide certainty to taxpayers by making the changes of the TCJA permanent.

This paper reviews six family-related tax provisions under current law, including how the TCJA reformed three of the primary family provisions, and examines the need for further reform.

Family Provisions under Current Law

Prior to the Tax Cuts and Jobs Act, the tax code contained three primary provisions which reduced household income taxes dependent on household size. These were the standard deduction, the personal exemption, and the child tax credit. Under the TCJA, these three provisions were consolidated into two: the personal exemption was eliminated in favor of an expanded standard deduction and child tax credit.[1]

The new tax law increases the standard deduction to $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers in 2018 (compared to $6,500, $9,550, and $13,000 respectively under prior law), and it eliminates the personal exemption, which had previously allowed households to reduce their taxable income by $4,150 for each filer and dependent.[2] It also expanded the child tax credit from $1,000 to $2,000, making up to $1,400 refundable, while increasing the income phaseout from $110,000 to $400,000 for married couples.

These three changes are nearly revenue neutral. Over the next eight years, the expanded standard deduction will reduce federal revenue by $690 billion, the elimination of the personal exemption will increase revenue by $1.16 trillion, and the expanded child tax credit will reduce revenue by $474 billion.[3] In total, the three changes reduce federal revenue by just $4.2 billion between 2018 and 2025, after which the provisions expire.

Though these changes have a negligible impact on federal revenue, they have important implications for the structure of the individual income tax. These changes simplify the tax code for many Americans.[4] By making the standard deduction larger, the value of itemized deductions is lessened. Nearly 29 million more filers will be better off taking the expanded standard deduction instead of itemizing their deductions.[5]

While the TCJA made important progress in simplifying the individual income tax, the individual code remains unnecessarily complex. Many of the credits which relate to the cost of raising children have different requirements for qualifying children. Provisions that are related to work also contain elements that increase benefits in relation to family size, providing greater work incentives to workers with children than to workers without children.

Currently, family status affects at least six tax provisions: the child tax credit, the child and dependent care tax credit and exclusion for employer-sponsored child and dependent care benefits, the earned income tax credit, filing status, the standard deduction, and tax rates and brackets.

Child Tax Credit

The child tax credit provides a tax credit per child under the age of 17 to taxpayers. If the credit exceeds a taxpayer’s liability, they may receive a portion of the credit as a refund. Eligibility for the credit depends on seven requirements, including the age of the child and the income level of the household.[6]

Prior to the TCJA, the child tax credit was a credit which offset tax liability. A separate credit, the Additional Child Tax Credit, allowed for a portion of the child tax credit to be refundable if it exceeded tax liability. However, under the TCJA there is not an Additional Child Tax Credit separate from the child tax credit; rather, there is one credit that is refundable, subject to certain requirements.[7]

The TCJA doubled the maximum child tax credit from $1,000 to $2,000 and makes up to $1,400 of the credit refundable.[8] The only portion of the child tax credit that is indexed to inflation is the refundability limit. Under current law, if the tax credit exceeds tax liability, taxpayers generally use an earned income formula to determine refundability: 15 percent of income above $2,500, up to the full refundability amount. For example, a family with $5,000 in earned income would be eligible for a refund of $375.[9]

The credit phases out at a 5 percent rate for married filers making above $400,000 and all other filers making above $200,000. For example, the maximum credit per child a single filer making $220,000 could receive would be $1,000 instead of the maximum credit of $2,000.[10] These new thresholds are set by the TCJA. Under old law, the credits phased out at much lower income levels.[11]

Illustrating the phase in and phaseout of the child tax credit

The new tax law also expanded the child tax credit by adding a nonrefundable $500 credit for each dependent who is not a qualifying child under age 17.[12] This new credit, referred to as a “family credit,” is designed to compensate for the eliminated personal exemption[13] and is subject to the same phaseout as the child tax credit.

These expansions of the child tax credit are currently scheduled to expire after 2025.

In tax year 2016, pre-TCJA, more than 22 million households claimed the child tax credit for a total of $26.8 billion, while 18.9 million claimed the Additional Child Tax Credit for benefits of $25.4 billion.[14] (Note that under current law, there is just one refundable child tax credit.) The benefits of the child tax credit peak at households making between $50,000 and $100,000, while the benefits of the Additional Child Tax Credit peak at households making between $15,000 and $30,000. Because of the income phaseout range prior to the TCJA, a relatively small number of households in the $200,000 to $500,000 AGI range benefited from either of the credits.

Child Tax Credit and Additional Child Tax Credit Benefits Vary by Income Level

The Joint Committee on Taxation estimates that in 2018, the child tax credit will reduce federal revenues by $103.8 billion,[15] which is significantly larger than the pre-TCJA estimate of $54.2 billion for 2018.[16] This difference reflects the doubling of the maximum child tax credit, the increase in the refundability amount, the credit for other dependents, and the expanded income thresholds. These changes will impact the distribution of the child tax credit.

Child and Dependent Care Tax Credit and Exclusion for Employer-Sponsored Child and Dependent Care Benefits

The tax code also allows for a provision to help offset some of the costs of child or dependent care. The Tax Cuts and Jobs Act did not make changes to this credit.

Eligibility for this credit depends on meeting seven tests, outlined in Internal Revenue Service (IRS) Publication 503.[17] Qualifying individuals are children under the age of 13 for the entire year or the taxpayer’s spouse or dependent who is incapable of caring for himself or herself.[18] The taxpayer and spouse, for households filing jointly, must both meet earned income tests, and the care expenses must be related to working or looking for work. Additionally, married taxpayers must file jointly to be eligible for the credit.

Taxpayers calculate their credit by multiplying qualifying expenses by a credit rate. The credit rate varies from 35 percent to 20 percent depending on the taxpayer’s adjusted gross income (AGI). Qualifying expenses are limited to $3,000 for one qualifying individual or $6,000 for two or more qualifying individuals, and the credit is not refundable.

The credit rate begins at 35 percent for taxpayers with adjusted gross income (AGI) between $0 and $15,000 and gradually phases down to 20 percent for taxpayers with AGI of $43,000 and above. Table 2 illustrates how income levels, the credit rate, and the maximum allowable expenses interact to determine the maximum credit taxpayers may claim; credits for one child range from $600 to $1,050 and for two or more children, $1,200 to $2,100. Note that the income thresholds are not adjusted for inflation.

Table 1: Illustrating the Child and Dependent Care Tax Credit Rate

Source: Internal Revenue Service, “Publication 503 (2017), Child and Dependent Care Expenses”

    Maximum Statutory Credit Amount
AGI Credit Rate One Qualifying Individual (maximum expenses of $3,000) Two or More Qualifying Individuals (maximum expenses of $6,000)
$0 under $15,000 35% $1,050 $2,100
$15,000 under $17,000 34% $1,020 $2,040
$17,000 under $19,000 33% $990 $1,980
$19,000 under $21,000 32% $960 $1,920
$21,000 under $23,000 31% $930 $1,860
$23,000 under $25,000 30% $900 $1,800
$25,000 under $27,000 29% $870 $1,740
$27,000 under $29,000 28% $840 $1,680
$29,000 under $31,000 27% $810 $1,620
$31,000 under $33,000 26% $780 $1,560
$33,000 under $35,000 25% $750 $1,500
$35,000 under $37,000 24% $720 $1,440
$37,000 under $39,000 23% $690 $1,380
$39,000 under $41,000 22% $660 $1,320
$41,000 under $43,000 21% $630 $1,260
$43,000 and above 20% $600 $1,200

In tax year 2016, nearly 6.5 million households claimed the child care credit for total benefits of $3.6 billion. Like the child tax credit, the largest share of the child care credit benefits go to taxpayers making between $50,000 and $100,000. However, the largest average credit per return is claimed by taxpayers in the $30,000 to $50,000 income group, at $595.06 per return.[19]

who claims the child care credit

In addition to the credit for care expenses, taxpayers whose employers provide dependent care benefits under a qualified plan may be able to exclude those benefits from their income. If a plan qualifies, the maximum a taxpayer can exclude is the smallest of four limits: the total benefit, the total amount of qualified expenses, the taxpayer or spouse’s earned income, or $5,000. A common example of a qualifying employer-sponsored plan is a Flexible Spending Account used to pay for qualifying care.[20]

The exclusion for employer-provided benefits does interact with the credit for care expenses outlined above. Every dollar of exclusion reduces the maximum amount of qualifying expenses for the credit, dollar for dollar. For example, if a household has one qualifying person they would normally be able to use a maximum of $3,000 in expenses to calculate their credit. However, if this household also receives dependent care benefits from work, and excludes, for example, $1,000 of employer benefits from their income, this would directly reduce their dollar limit for the credit by $1,000 to $2,000; see table 2.

Table 2: Illustrating the Child Care Provision Interaction

Source: Author’s calculations

Maximum Credit Allowed

$3,000

Less Exclusion of Employer Benefits

-$1,000

New Credit Limit

$2,000

In tax year 2016, 1.2 million households excluded $4.3 billion worth of child care benefits from their taxable income.[21] Note that the value of an exclusion depends on what tax bracket the household falls under. For example, a $1,000 exclusion taken by a household in the 12 percent tax bracket would result in $120 of tax savings, but in the 22 percent bracket, the same $1,000 exclusion would result in $220 of tax savings, whereas the value of a credit is the same across income levels. The Joint Committee on Taxation estimates that together, the tax credit for child and dependent care and the exclusion for employer-provided benefits will reduce federal revenues by $4.6 billion in 2018.[22]

Earned Income Tax Credit

The Earned Income Tax Credit (EITC) provides a credit that helps offset income taxes for relatively low-income taxpayers and is refundable if the credit exceeds tax liability. It is intended to supplement other social and welfare programs while encouraging recipients to work.[23]

The EITC equals a fixed percentage (the credit rate) of earned income up to the maximum credit amount. The maximum credit amount varies greatly depending on the number of children in the household and the taxpayer’s marital status.

The EITC remains at the maximum between the earned income threshold and the phaseout threshold, at which point the credit begins phasing down at a set rate as income exceeds the phaseout threshold. For example, if a single taxpayer with no children earned $9,000 in one year, their maximum credit would be reduced by 7.65 percent of their income over the phaseout threshold, resulting in a credit of around $480 instead of the $519 maximum.[24]

phase in and phaseout of the Earned Income Tax Credit (EITC) for an unmarried tax filer with one child

The table below illustrates this variation. For example, the maximum credit amount that childless workers receive is $519, while the maximum for workers with one child is more than six times larger, at $3,461. This creates a large family-status differential.

Table 3: Calculating the EITC

Source: Gene Falk and Margot L. Crandall-Hollick, “The Earned Income Tax Credit (EITC): An Overview.”

Filing status No children One child Two children Three or more children

Single or head of household

       

Credit Rate

7.65% 34% 40% 45%

Earned Income Threshold

$6,780 $10,180 $14,290 $14,290

Maximum Credit

$519 $3,461 $5,716 $6,431

Phaseout Threshold

$8,490 $18,660 $18,660 $18,660

Phaseout Rate

7.65% 15.98% 21.06% 21.06%

Income Where Credit Equals $0

$15,270 $40,320 $45,802 $49,194

Married filing jointly

       

Credit Rate

7.65% 34% 40% 45%

Earned Income Threshold

$6,780 $10,180 $14,290 $14,290

Maximum Credit

$519 $3,461 $5,716 $6,431

Phaseout Threshold

$14,710 $24,350 $24,350 $24,350

Phaseout Rate

7.65% 15.98% 21.06% 21.06%

Income Where Credit Equals $0

$20,950 $46,010 $51,492 $54,884

The EITC can reduce a taxpayer’s tax liability, issued as a cash payment if the taxpayer has no liability, or a combination of both. Most households receive the EITC as a refund. In tax year 2016, 27.3 million tax returns claimed the EITC for a total of $66.7 billion, and of that amount $57.1 billion was refunded.[25]

who claims the earned income tax credit

Eligibility requirements for this credit are highly complex and depend on several factors, which leads to confusion and contributes to improper payments. Taxpayers must meet at least 20 requirements,[26] including: residency; earned income limits; earning less than a certain amount of investment income; the tax filer’s children must meet residency, age, and relationship requirements; childless workers must be between the age of 25 and 64; and Social Security numbers must be provided for the taxpayer, spouse, and any children for whom the credit is claimed.[27] 

The Government Accountability Office estimated that in fiscal year 2017, more than $16 billion of the program’s $67.9 billion in outlays, or nearly 25 percent, were considered improper payments.[28] The Treasury Department has identified several factors which lead to improper payments, including complexity of the law, structure of the credit, confusion and turnover among eligible claimants, unscrupulous tax return preparers, and fraud.[29] However, none of the six factors are considered the primary driver of improper payments.

The Tax Cuts and Jobs Act did not directly make any reforms to the EITC. However, the new law does have an impact on the EITC through its changing of the measure used to index parameters to inflation, from the consumer price index for urban consumers (CPI-U) to chained CPI-U. Because chained CPI-U tends to grow more slowly than CPI-U, the monetary parameters of the EITC will increase at a slower pace.[30] This will impact the maximum credit amounts as well as the earned income and the phaseout limits.[31]

Other Family-Related Provisions

At least three other tax provisions also vary with household composition: filing status, the standard deduction, and tax rates and brackets.

Generally, taxpayers may file as single, married filing jointly, married filing separately, or head of household.[32] This affects eligibility for and the size of certain credits, the size of the standard deduction, and which tax rates and tax brackets income falls under; see Table 4.

Table 4: Tax Brackets, Rates, and Standard Deductions 2018
  For Unmarried Individuals For Married Individuals Filing Joint Returns For Heads of Households

2018 Standard Deduction

$12,000 $24,000 $18,0000
Rate

Taxable Income Over

10% $0t $0 $0
12% $9,525 $19,050 $13,600
22% $38,700 $77,400 $51,800
24% $82,500 $165,000 $82,500
32% $157,500 $315,000 $157,500
35% $200,000 $400,000 $200,000
37% $500,000 $600,000 $500,000

An unintended consequence of these provisions is that they create marriage penalties or marriage bonuses, meaning that the combined income tax liability of a married couple may be higher or lower than it would have been if they remained single.[33]

For example, married taxpayers with no children may face marriage bonuses of up to 8 percent of the couple’s income or marriage penalties of up to 4 percent.[34] With one child, marriage bonuses can be as large as 21 percent of a couple’s income, and penalties can be as large as 8 percent of a couple’s income.[35]

The Tax Cuts and Jobs Act reduced marriage penalties and bonuses across many tax brackets, as all tax brackets for married filers are exactly double those for single filers, except for the top 37 percent marginal rate. Thus, marriage penalties are generally only felt at high income levels. However, for low-income individuals, marriage can push qualifying income for the EITC further into the phaseout range, thus resulting in a marriage penalty due to interaction with the credit. However, completely eliminating marriage penalties and bonuses would require a drastic overhaul of the U.S. income tax system.[36]

One Option for Further Reform

Recent reforms made some progress in simplifying the individual income tax by streamlining the three primary family provisions under the old tax code. However, as discussed above, several family and work-related provisions remain, and they are complex, confusing, and in some cases lead to problems with administrability. As such, these provisions would benefit from further reform efforts.

A Congressional Research Service report which reviewed the child tax credit under current law noted the following:[37]

The age and citizenship requirements for a qualifying child for the child tax credit differ from the definition of qualifying child used for other tax benefits and can cause confusion among taxpayers. For example, a taxpayer’s 18-year-old child may meet all the requirements for a qualifying child for the EITC but will be too old to be eligible for the child tax credit.

Table 5: Age and Income Limits Differ Across Credits

Source: Congressional Research Service

  Age Phaseouts

Child Tax Credit

Under the age of 17 for the entire year

Begins phasing down at $200,000 for single households, $400,000 for married households

Child and Dependent Care Credit

Under the age of 13 for the entire year or the taxpayer’s spouse or dependent who is incapable of caring for himself or herself

Credit phases down between $15,000 and $43,000 but not to zero

Earned Income Tax Credit

Eligible Children: Under the age of 19 (or under the age of 24 if a full-time student) Taxpayers without eligible children must be between the age of 25 and 64

Begins phasing down from $8,490 to $24,350 depending on number of qualifying children and marital status Credit equals $0 when incomes reach $15,270 to $54,884 depending on number of qualifying children and marital status

The family differential of the EITC, as well as differences in qualifying requirements across the credits, could be simplified and streamlined to better target benefits and incentives. Policy proposals such as consolidating the child-related provisions into one credit, and work-related provisions into another credit, would address these issues.

For example, in the Taxpayer Advocate Service 2008 Annual Report to Congress, one of the legislative recommendations outlined a proposal to simplify the family status provisions:[38]

Consolidate the numerous family status provisions into two. One provision (the Family Credit) would reflect the costs of maintaining a household and raising a family. It would incorporate all current family status provisions that are based on the specific make-up of the family unit and its corresponding ability to pay taxes. The second provision (which could be called the “Worker Credit” or could continue to be called the EITC) would provide an incentive and subsidy for low income individuals to work.

Under this proposal, all the differences in tax liability conferred by family-status provisions, such as the child tax credit, the head of household filing status, the family-size differential of the EITC, and, under prior law, the personal exemption, would be consolidated into one Family Credit. This would allow the EITC to focus its benefits solely on incentivizing work for lower-income households without regard to family size.

In addition to the need to simplify the provisions under current law, taxpayers need certainty in the changes made by the Tax Cuts and Jobs Act, which are currently scheduled to expire after 2025. Rather than waiting until the last minute to decide which provisions to make permanent and which to let expire, lawmakers should consider the costs and benefits of permanence well before the end of 2025, keeping in mind that reforms like those made to the three family provisions are nearly revenue neutral and are a significant structural improvement to the tax code.

Conclusion

While the new tax law made changes to the primary family provisions, complex qualification requirements and interactions remain across the individual income tax code. These complexities make it difficult for taxpayers to understand and comply with the tax code, and lead to problems with administrability, such as improper payments of credits. Addressing the different requirements and definitions across the family provisions and consolidating these provisions would further improve the individual income tax code. Likewise, deciding which individual reforms to make permanent, well before the reforms are set to expire after 2025, would be beneficial for taxpayers.

Appendix Table 1: CTC and ACTC by Income Group, 2016

Source: Internal Revenue Service, “Table 3.3 All Returns: Tax Liability, Tax Credits, and Tax Payments, by Size of Adjusted Gross Income, Tax Year 2016 (Filing Year 2017)” and author’s calculations

  Number of CTC Claims Amount of CTC Benefits ($millions) Average CTC Number of ACTC Claims Amount of ACTC Benefits ($millions) Average ACTC
0 under $15,000 67,986 $17 $254.58 5,445,901 $5,507 $1,011.15
$15,000 under $30,000 3,234,995 $1,469 $454.18 8,180,783 $11,998 $1,466.64
$30,000 under $50,000 6,269,420 $6,184 $986.34 4,188,216 $6,279 $1,499.29
$50,000 under $100,000 8,806,414 $14,065 $1,597.11 1,073,217 $1,529 $1,424.95
$100,000 under $200,000 3,715,251 $5,063 $1,362.86 33,280 $60 $1,793.93
$200,000 under $500,000 2,835 $2 $611.29 37 $0.04 $1,054.05
Appendix Table 2: Child and Dependent Care Credit by Income Group, 2016

Source: Internal Revenue Service, “Table 3.3 All Returns: Tax Liability, Tax Credits, and Tax Payments, by Size of Adjusted Gross Income, Tax Year 2016 (Filing Year 2017)” and author’s calculations

  Child Care Credit (number of returns) Child Care Credit (amount in millions) Average Amount per Return
0 under $15,000 6,170 $1 $180.39
$15,000 under $30,000 685,423 $292 $425.80
$30,000 under $50,000 1,239,090 $737 $595.06
$50,000 under $100,000 1,938,420 $1,115 $575.29
$100,000 under $200,000 1,902,506 $1,092 $573.88
$200,000 under $1,000,000 697,467 $398 $570.53
Appendix Table 3: Earned Income Tax Credit by Income Level, 2016

Source: Internal Revenue Service, “Table 3.3 All Returns: Tax Liability, Tax Credits, and Tax Payments, by Size of Adjusted Gross Income, Tax Year 2016 (Filing Year 2017)” and author’s calculations

  Earned Income Tax Credit (number of returns) Earned Income Tax Credit (amount in millions) Average Amount per Return
0 under $15,000 12,915,083 $23,553 $1,823.69
$15,000 under $30,000 8,993,198 $34,176 $3,800.19
$30,000 under $50,000 5,365,467 $8,959 $1,669.84
$50,000 under $100,000 109,155 $35 $320.13

Notes


[1] Scott Greenberg, “Tax Reform Isn’t Done,” Tax Foundation, March 8, 2018, https://taxfoundation.org/tax-reform-isnt-done/.

[2] Ibid., and “Preliminary Details and Analysis of the Tax Cuts and Jobs Act,” Tax Foundation, Dec. 18, 2017, https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/.

[3] Joint Committee on Taxation, “Estimated Budget Effects of the Conference Agreement for H.R. 1.”

[4] See Erica York and Alex Muresianu, “The Tax Cuts and Jobs Act Simplified the Tax Filing Process for Millions of Households,” Tax Foundation, Aug. 7, 2018, https://taxfoundation.org/the-tax-cuts-and-jobs-act-simplified-the-tax-filing-process-for-millions-of-households/.

[5] The Joint Committee on Taxation Staff, “Tables Related to the Federal Tax System as in Effect 2017 Through 2026,” April 24, 2018, 6, https://www.jct.gov/publications.html?func=startdown&id=5093.

[6]Intuit TurboTax, “7 Requirements for the Child Tax Credit,” Updated for Tax Year 2018, https://turbotax.intuit.com/tax-tips/family/7-requirements-for-the-child-tax-credit/L3wpfbpwQ.

[7] Intuit TurboTax, “What is the Additional Child Tax Credit,” Updated for Tax Year 2018, https://turbotax.intuit.com/tax-tips/family/what-is-the-additional-child-tax-credit/L4IBvQted.

[8] P.L. 115-97, Section 11022.

[9] Prior to the Tax Cuts and Jobs Act, taxpayers had to earn $3,000 to be eligible for the credit. Refundability calculated as 15 percent of income above $2,500. ($5,000 – $2,500) * 15% = $375.

[10] The credit is reduced by 5 percent for income above $200,000. ($220,000 – $200,000) * 5% = $1,000.

[11] Prior to the Tax Cuts and Jobs Act, phaseout of the child tax credit began at $75,000 for single taxpayers and $110,000 for married taxpayers.

[12] P.L. 115-97, Section 11022.

[13] Kelly Phillips Erb, “What The Expanded Child Tax Credit Looks Like After Tax Reform,” Forbes, Dec. 21, 2017, https://www.forbes.com/sites/kellyphillipserb/2017/12/21/how-will-the-expanded-child-tax-credit-look-after-tax-reform/#12153e314205.

[14] Internal Revenue Service, “Table 3.3 All Returns: Tax Liability, Tax Credits, and Tax Payments,

by Size of Adjusted Gross Income, Tax Year 2016 (Filing Year 2017).”

[15] The Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2018-2022,” Oct. 4, 2018, 29, https://www.jct.gov/publications.html?func=startdown&id=5148.

[16] The Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2016-2020,” Jan. 30, 2017, 37, https://www.jct.gov/publications.html?func=startdown&id=4971.

[17] Internal Revenue Service, “”Publication 503 (2017), Child and Dependent Care Expenses,” https://www.irs.gov/publications/p503.

[18] Ibid.

[19] See Appendix Table 2.

[20] Kimberly Lankford, “Flexible Spending Account vs. Dependent-Care Credit,” Kiplinger, Sept. 24, 2009, https://www.kiplinger.com/article/business/T020-C001-S001-flexible-spending-account-vs-dependent-care-credit.html.

[21] Internal Revenue Service, “Individual Income Tax Returns Line Item Estimates 2016,” 84-85, https://www.irs.gov/pub/irs-soi/16inlinecount.pdf.

[22] The Joint Committee on Taxation, “Estimates Of Federal Tax Expenditures For Fiscal Years 2018-2022,” 29.

[23] Amir El-Sibaie, “Illustrating the Earned Income Tax Credit’s Complexity,” Tax Foundation, July 14, 2016, https://taxfoundation.org/illustrating-earned-income-tax-credit-s-complexity/.

[24] The phaseout in this example is calculated as 7.65 percent of income above the $8,490 threshold. ($8,490 – $9,000) * 0.0765 = -$39. The maximum credit amount is reduced by $39.

[25] Internal Revenue Service, “Table 3.3 All Returns: Tax Liability, Tax Credits, and Tax Payments,

by Size of Adjusted Gross Income, Tax Year 2016 (Filing Year 2017).”

[26] Amir El-Sibaie, “Illustrating the Earned Income Tax Credit’s Complexity.”

[27] Gene Falk and Margot L. Crandall-Hollick, The Earned Income Tax Credit (EITC): An Overview, Congressional Research Service, April 18, 2018.

[28] Government Accountability Office, “IMPROPER PAYMENTS Actions and Guidance Could Help Address Issues and Inconsistencies in Estimation Processes,” May 31, 2018, 30, https://www.gao.gov/assets/700/692207.pdf.

[29] Treasury Inspector General for Tax Administration, “The Internal Revenue Service Is Not in Compliance With Executive Order 13520 to Reduce Improper Payments,” Aug. 28, 2013, 2, https://www.treasury.gov/tigta/auditreports/2013reports/201340084fr.pdf.

[30] Gene Falk and Margot L. Crandall-Hollick, The Earned Income Tax Credit (EITC): An Overview, 1.

[31] Internal Revenue Service, “2018 EITC Income Limits, Maximum Credit Amounts and Tax Law Updates,” https://www.irs.gov/credits-deductions/individuals/earned-income-tax-credit/eitc-income-limits-maximum-credit-amounts-next-year.

[32] Another status, Qualifying Widow(er) with Dependent Child, may apply to some taxpayers meeting certain conditions. See Internal Revenue Service, “Determining Your Correct Filing Status,” https://www.irs.gov/newsroom/determining-your-correct-filing-status.

[33] Amir El-Sibaie, “Marriage Penalties and Bonuses under the Tax Cuts and Jobs Act,” Tax Foundation, Feb. 14, 2018, https://taxfoundation.org/tax-cuts-and-jobs-act-marriage-penalty-marriage-bonus/.

[34] Ibid.

[35] Ibid.

[36] See discussion in Amir El-Sibaie, “Marriage Penalties and Bonuses under the Tax Cuts and Jobs Act.”

[37] Margot L. Crandall-Hollick, “The Child Tax Credit: Current Law,” Congressional Research Service, May 15, 2018, 5.

[38] Taxpayer Advocate Service, “2008 Annual Report to Congress, Volume One,” Dec. 31, 2008, 367, https://www.irs.gov/pub/tas/08_tas_arc_legrec.pdf.


Source: Tax Policy – Family Provisions in the New Tax Code

European Tech Firms Have Low Levels of Capital Spending

Tax Policy – European Tech Firms Have Low Levels of Capital Spending

In the context of the debate in the EU over digital taxation there has been little attention paid to the economic impact that digital firms have on the European economy and the incentives they face relative to the politics of the proposals. Over the last several decades companies in heavily digitalized sectors have experienced incredible growth in many countries around the world, but some analysis has highlighted that Europe has been left behind.

A recent blog points out that The Economist has found that just eight of the 200 largest digital companies in the world are European, and The Wall Street Journal analysis shows just 14 European tech companies have been valued at $1 billion or more. The United States has 97 such tech companies.

These two metrics show where Europe is falling short of its competitors for tech innovation, but what about investment by tech companies?

Using data gathered by a professor of finance at the Stern School of Business at New York University, I find that tech sector companies in Europe spend less on capital investment when compared to the U.S., Japan, or emerging markets countries. Economic growth theory has long held that capital investment by firms is a key contributor to long-run economic growth, and investment in equipment by firms is a strong driver of growth in particular. If Europe’s tech sector is lagging in capital spending, then this will likely impact European growth for years to come.

For this analysis, I define industries in the tech sector to include Computer Services, Computers/Peripherals, Electronics (Consumer & Office), Information Services, Retail (Online), Software (Entertainment), Software (Internet), Software (System & Application), and Telecom (Wireless).

These sectors were selected after reviewing the industries covered by the database. One could argue that most industries have become so reliant on technology and digitalization that separating tech sectors from non-tech sectors is a fool’s errand. Because the data are downloadable, anyone who is interested could create a similar comparison to what follows using a different selection of sectors.

At a broad level, the 2017 data include 772 European firms from the nine tech sectors. In the U.S., there are 906 such firms, and the data has 535 tech firms in Japan. There are 1,429 tech firms in emerging markets countries which includes countries in Asia, Latin America, Eastern Europe, Middle East, and Africa.

Table 1: Number of Publicly Traded Firms from Tech Industry Sectors, 2017

Source: Author calculations Note: Europe includes the EU, UK, Switzerland, and Scandinavia, and Emerging Markets includes Asia, Latin America, Eastern Europe, Middle East, and Africa

Industry Name Number of Firms in Europe Number of Firms in U.S. Number of Firms in Japan Number of Firms in Emerging Markets
Computer Services 209 111 167 416
Computers/Peripherals 37 58 30 202
Electronics (Consumer & Office) 16 24 16 91
Information Services 31 61 18 63
Retail (Online) 57 61 37 36
Software (Entertainment) 33 13 18 58
Software (Internet) 153 305 116 168
Software (System & Application) 222 255 127 333
Telecom (Wireless) 14 18 6 62
Total 772 906 535 1429

For each industry, the database includes a number of variables, including capital expenditures. According to the author of the dataset, the capital expenditures variable is cumulated capital spending from the cash flow statements of firms and does not generally include acquisitions. Thus, it is a measure of how much firms are investing in machinery, equipment, buildings, or other assets that are part of their productive process.

The 772 tech firms in Europe invested $16.5 billion in 2017, while the 906 tech firms in the U.S. invested $85.4 billion in 2017 according to the data. Tech firms in Japan invested $32 billion in 2017, and firms based in emerging markets invested $110.5 billion in 2017.

Table 2. Total capital spending by tech firms (US $ millions), 2017

Source: Author calculation Note: Europe includes the EU, UK, Switzerland, and Scandinavia, and Emerging Markets includes Asia, Latin America, Eastern Europe, Middle East, and Africa

Industry Name Europe United States Japan Emerging Markets
Computer Services $2,565.7 $5,808.6 $3,015.5 $3,316.9
Computers/Peripherals $644.0 $17,195.1 $4,559.1 $50,408.0
Electronics (Consumer & Office) $282.6 $108.0 $7,156.2 $7,084.2
Information Services $549.4 $5,065.6 $54.5 $500.8
Retail (Online) $870.6 $11,829.5 $322.5 $349.8
Software (Entertainment) $131.9 $334.0 $390.7 $388.4
Software (Internet) $521.1 $20,295.3 $490.7 $2,549.9
Software (System & Application) $2,145.8 $13,111.5 $273.4 $1,967.3
Telecom (Wireless) $8,741.2 $11,684.7 $16,558.7 $43,983.2
Total $16,452.4 $85,432.3 $32,821.3 $110,548.3

It is also worth comparing capital expenditure per firm. This provides a sense of how much the average firm is investing. Looking at an aggregation across all sectors, on average, European firms made $93.9 million worth of capital investments in 2017, compared to U.S. firms investing $115.1 million, Japanese firms investing $93.6 million, and firms in emerging markets countries investing $48.6 million.

Capital Expenditure Per Firms Across Regions

Splitting out capital spending per firm into tech sectors versus non-tech sectors shows that Europe lags the other regions. European tech firms invested $80.2 million on average in 2017, a bit more than half of what U.S. tech firm invested on average ($158.1 million). Japanese tech firms invested $212.2 million on average, and tech firms based in emerging markets invested $121.1 million on average.

European Tech Companies Have Low Levels of Capital Investment

Among the nine individual industries that make up the tech sector definition, European companies have the lowest level of capital expenditure per firm in four [Computers/Peripherals, Software (Entertainment), Software (Internet), and Telecom (Wireless)] and the second-lowest level in two of them [Computer Services and Electronics (Consumer & Office)].

Capital Expenditure per Firm (US $ Millions), 2017

Source: Author calculations. Note: Europe includes the EU, UK, Switzerland, and Scandinavia, and Emerging Markets includes Asia, Latin America, Eastern Europe, Middle East, and Africa.

Industry Name Europe United States Japan Emerging Markets
Computer Services $12.30 $52.30 $18.10 $8.00
Computers/Peripherals $17.40 296.50 $152.00 249.50
Electronics (Consumer & Office) $17.70 $4.50 $447.30 $77.80
Information Services $17.70 $83.00 $3.00 $7.90
Retail (Online) $15.30 193.90 $8.70 $9.70
Software (Entertainment) $4.00 $25.70 $21.70 $6.70
Software (Internet) $3.40 $66.50 $4.20 $15.20
Software (System & Application) $9.70 $51.40 $2.20 $5.90
Telecom (Wireless) $624.40 649.20 $2,759.80 709.40

While these data do not present causal evidence, they do show that Europe is set apart from the other regions when it comes to capital spending by tech firms. These data also do not identify the location of where the investment is taking place, but most firms have a home-country bias when it comes to investing.

Innovative companies often pave the way for future growth, employment, and higher living standards. Countries and regions that host such companies can benefit greatly from the growth that they generate. However, policies that are designed to punish the success of innovative and growing firms can lead to long-term negative impacts.

European leaders can choose to continue to push policies that make the market environment for these tech firms more difficult, or they can choose to support and foster innovation with pro-growth and neutral policies that allow successful individuals and firms of all types to compete on a global scale.


Source: Tax Policy – European Tech Firms Have Low Levels of Capital Spending

2018 Outstanding Achievement in State Tax Reform

Tax Policy – 2018 Outstanding Achievement in State Tax Reform

Across the country, state policymakers took strides to improve tax codes. In recognition of these efforts, the Tax Foundation honors state legislators, governors, and other individuals with our Outstanding Achievement in State Tax Reform award.

As the name suggests, the honoree’s accomplishments must (1) be outstanding, (2) represent an achievement (not merely a proposal), and (3) reform taxes to make them simpler, more neutral, more transparent, more stable, and more pro-growth. Prior to this year’s awards, 31 individuals from nineteen states and the District of Columbia—and representing both political parties—had received an award, including five governors. This year, our awards reflect achievements in 2017 and 2018. (You can view prior years’ winners here: 2016, 201520142013)

Working for better tax policy is not easy and a piece of glass hardly compares to the efforts the recipients put in, but we do this because some recognition is important for what they achieved for the taxpayers of their states.

This year, we honor twenty-three individuals from nine states and the District of Columbia with our award for Outstanding Achievement in State Tax Reform in 2018:

Arkansas Senator Lance Eads (R) and Representative Andy Davis (R) for championing the repeal of the state’s InvestArk program, replacing it with better treatment of business purchases under the sales tax code. InvestArk, formerly the state’s largest business tax credit, distorted the tax code by favoring some businesses and activities over others. Revenue saved by the repeal of this nonneutral provision of the corporate income tax was put toward the exemption of repair parts from the sales tax base, reducing the “tax pyramiding” associated with taxing business inputs and improving the state’s overall treatment of business investment.


California Governor Jerry Brown (D) for colorful vetoes of targeted tax breaks which have helped California maintain some semblance of a broad tax base and improved its fiscal position. Governor Brown consistently vetoed popular proposed tax breaks, saying legislators should instead work through the annual budget process and balance those wants with other priorities. California has more work to do on fiscal solvency and tax climate, but Governor Brown’s demand for thoughtfulness and process in creating new tax breaks should be emulated by his successors.


Colorado Representative Tracy Kraft-Tharp (D) for creating and chairing the Sales and Use Tax Simplification Task Force, with the mission of identifying ways to simplify Colorado’s exceedingly complex state and local sales tax administration and to reduce compliance costs. The Task Force has already seen results, facilitating voluntary local reforms, and it takes on even greater importance in the wake of the Wayfair v. South Dakota decision regarding the taxation of remote sales.


Delaware Representative Michael Ramone (R) for sponsoring successful legislation to repeal the state’s short-lived estate tax, which had raised little revenue and was widely seen as driving wealthy retirees out of state. The bill, which was based on a tax commission recommendation, passed with bipartisan support.


Cook County, Illinois Commissioner Sean Morrison (R) for spearheading the effort to repeal the county’s highly unpopular sweetened beverage tax. Thanks to Morrison’s efforts, the tax was only in effect for four months prior to its repeal.


Iowa Governor Kim Reynolds (R) and Senator Randy Feenstra (R) for championing and securing passage of legislation beginning a multiyear overhaul of the state’s tax code, which will ultimately include both individual and corporate income tax rate reductions and simplification, along with modest sales tax base broadening. The tax package consolidates individual income tax brackets, eliminates an outmoded policy of federal deductibility, repeals the alternative minimum tax for individual taxpayers, and repeals or reforms several corporate tax credits while reducing the rate. These reforms, which increase the competitiveness of the state tax code, are the culmination of several years of legislative efforts.


Kansas Representatives Steven Johnson (R) and Tom Sawyer (D) for, as chairman and ranking member of the House Taxation Committee, deftly handling difficult negotiations on solutions for closing the state’s recurring budget shortfalls and secured the repeal of the state’s decidedly nonneutral pass-through exemption. That exemption, which excluded all pass-through business income from the individual income tax, improperly distinguished between sources of income and created unnecessary arbitrage opportunities. Its repeal represented the best way for the state to address its revenue shortfall.


Missouri Senators Bill Eigel (R) and Andrew Koenig (R) for shepherding through individual and corporate income tax reform, which could reduce the top individual income tax rate to 5.1 percent (while eliminating a bracket) and adopts the second-lowest corporate income tax rate in the nation, at 3.5 percent. These rate reductions are to be secured through the reduction of tax preferences and the utilization of revenue triggers, and will result in the simplification of Missouri’s tax code.


Rhode Island Governor Gina Raimondo (D) and Speaker Nicholas Mattiello (D) for championing reforms which make the state less of an outlier in state taxation. Governor Raimondo successfully advanced reforms to the state’s unemployment insurance taxes which will save Rhode Island businesses an estimated $30 million. Previously, the state ranked worst in the nation on unemployment insurance taxes on the Tax Foundation’s State Business Tax Climate Index. Governor Raimondo’s reforms improved the state to 29th on that measure. Speaker Mattiello secured the enactment of a budget that will gradually phase out the motor vehicle excise tax over a period of seven years, eliminating a tax which is among the most onerous of its kind in the country.


Nine Members of the District of Columbia Council for voting to fully phase in the District’s successful 2014 tax package, defending it against efforts to suspend the final year’s reforms. The package included corporate and individual income tax reductions, sales tax base broadening, and estate tax reform. These councilmembers are:

  • Chairman Phil Mendelson (D)
  • At-Large Councilmember Anita Bonds (D)
  • At-Large Councilmember Robert White (D)
  • Ward 2 Councilmember Jack Evans (D)
  • Ward 3 Councilmember Mary Cheh (D)
  • Ward 4 Councilmember Brandon Todd (D)
  • Ward 5 Councilmember Kenyan McDuffie (D)
  • Ward 6 Councilmember Charles Allen (D)
  • Ward 7 Councilmember Vincent C. Gray (D)

“Working for better tax policy is not easy,” said Tax Foundation Executive Vice President Joseph Bishop-Henchman. “A piece of glass hardly compares to the efforts the recipients put in, but we do this because some recognition is important for what they achieved for the taxpayers of their states.”


Source: Tax Policy – 2018 Outstanding Achievement in State Tax Reform