An interactive visualization of tax collections by state governments.
Each year the United States Census Bureau collects data from the states regarding tax collections in various categories. I present this data in an interactive visualization.
The values are for tax collections by the state only, not local governmental entities like cities, counties, townships, improvement districts, cemetery districts, library districts, drainage districts, watershed districts, and school districts.
Of particular interest is the “Total by State” tab. Here you can select a number of states and compare their tax burdens. (Probably three or four states at a time is the practical limit.) This data is presented on a per-person basis.
From this data we can see a number of valuable comparisons. For example, it is often said in Kansas that we can’t eliminate our income tax as has Texas, because we don’t have as much oil severance tax revenue. From the data we see that Texas collected $84 per person in severance tax, while Kansas collected $17 per person. This difference is far larger than the difference in total tax collections between these states.
Similarly, when comparing Kansas to Florida — which like Texas has no income tax — the large amount of tourism in Florida is said to generate enough revenue to allow zero income tax. But, in 2016 Florida collected $1,081 per person in sales tax, while Kansas collected $1,115 per person. Florida does not collect sales tax on groceries, so it may be that visitors pay more of the sales tax burden. But, Kansas still collects more sales tax on a per-capita basis, and Kansas collects much more tax in total than Florida, again on a per-capita basis.
Effective July 1, 2015, the tax on cigarettes in Kansas rose by $0.50 per pack, going from $0.79 to $1.29 per pack. For the three years prior to that date cigarette tax collections averaged about $7.5 million per month. Since then collections has averaged about $11.1 million per month. But, as the chart shows, the trend is down. For February 2017 collections were $8.7 million, almost exactly the same as the month before the tax hike took effect.
An interactive visualization of tax collections by state governments.
Note: this visualization has been updated. Click here for the most recent version.
Each year the United States Census Bureau collects data from the states regarding tax collections in various categories. I present this data in an interactive visualization.
The values are for tax collections by the state only, not local governmental entities like cities, counties, townships, improvement districts, cemetery districts, library districts, drainage districts, watershed districts, and school districts.
Of particular interest is the “State Total” tab. Here you can select a number of states and compare their tax burdens. (Probably three or four states at a time is the practical limit.) This data is presented on a per-person basis.
The example shown below compares Kansas and Colorado. Many might be surprised to know that tax collections in Kansas are higher than in Colorado, on a per-person basis.
Is there a relationship between marginal tax rates and tax dollars collected?
The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent. Some see that as a lost opportunity. If we could return to the tax rates of the 1950s, they say, we could generate much more revenue for government.
The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich.
Top marginal tax rates and tax paid. Click for larger.A nearby charts illustrates the lack of relationship between the top marginal income tax rate and the income taxes actually paid. (Click chart for larger version.)
The top marginal tax rate has varied widely. But since World War II, the taxes actually collected, expressed as a percentage of gross domestic product, has been fairly constant. In 1952 the top tax rate was 92.0 percent, and income taxes paid as a percent of GDP was 18.5 percent. In 2007, for example, the top rate was 35.0 percent, and income taxes paid as a percent of GDP was 17.9 percent.
Try as we might, raising tax rates won’t generate higher revenues (as a percentage of gross domestic product), due to Hauser’s law.
W. Kurt Hauser explains in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.'”
For many people, there is a direct relationship between tax rates and the amount of tax paid. For workers who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more.
But people with high incomes can use these and other strategies to reduce the taxes they pay. In fact, there is an entire industry of accountants and lawyers to help people reduce their tax. Often — particularly in the past when top marginal rates were very high — investments and transactions were made solely for the purpose of avoiding taxes, not for productive economic benefit.
People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income, and make investments in unproductive tax shelters. There is less incentive to work and invest. These are some of the reasons why tax hikes usually don’t generate the promised revenue.
But: High tax rates make the middle class feel better about paying their own taxes. With top tax rates of 90 percent, they may believe that the rich are paying a lot of tax. The middle class may take comfort in the fact that someone else is worse off. But that is based on the misconception that high tax rates mean rich people actually pay correspondingly higher tax.
The Wichita Eagle editorial board writes an editorial that gives false hope to advocates of more taxation and more spending.
Advocates of eliminating sales tax exemptions in Kansas point to the great amount of revenue that could be raised if Kansas eliminated these exemptions, given at about $6 billion per year, according to a recent Wichita Eagle editorial.1
Analysis of the nature of the exemptions and the amounts of money involved, however, leads us to realize that the additional tax revenue that could be raised is much less than spending advocates claim, unless Kansas was to adopt a severely uncompetitive, and in some cases, unproductive and harshly regressive tax policy.
The unsigned editorial notes this: “And sales tax exemptions are costing the state a fortune — about $6 billion a year.” For context, general fund spending in Kansas is about the same amount. That’s a lot of money. Further, the tone of the sentence calls for more taxation so that government can spend more. In a previous op-ed on this topic Phillip Brownlee, opinion page editor for the Eagle, wrote ” And with each added exemption, the state is losing out on more revenue — $5.9 billion this fiscal year, according to the Kansas Department of Revenue. That’s money the state could be using to cover its budget shortfalls, increase funding to public schools or further reduce its income-tax rates.” At least he mentioned reducing other tax rates. Usually advocates of closing sales tax exemptions simply want more tax money to spend.
In 2015 I looked at the nature of Kansas sales tax exemptions, using data from 2014. The numbers would be a different if I repeated the analysis today. But not different by much, and the same conclusions apply.
Kansas sales tax exemptions, simplified. Click for larger version.We need to look at the nature of these exemptions. I’ve prepared a simplified table based on data from the Kansas Department of Revenue.2 I simplified because there are many deductions that probably should be eliminated, but they represent relatively small amounts of money.
Some sales tax exemptions are for categories of business activity that shouldn’t be taxed, at least if we want to constrain the state to a retail sales tax only. An example is exemption 79-3606 (m), described as “Property which becomes an ingredient or component part of property or services produced or manufactured for ultimate sale at retail.” The tax that could be collected, should the state eliminate this exemption, is given as $3,083.24 million ($3,083,240,000).
But this exemption isn’t really an “exemption,” at least if the sales tax is a retail sales tax designed to be levied as the final tax on consumption. That’s because these goods aren’t being sold at retail. They’re sold to manufacturers who use them as inputs to products that, when finished, will be sold at retail. Most states don’t tax this type of sales. If Kansas decided to tax these transactions, it would place our state’s manufacturers at a severe disadvantage compared to almost all other states.
There are two other exemptions that fall in this category of inputs to production processes, totaling an estimated $632 million in lost revenue. Another similar exemption is “Machinery and equipment used directly and primarily in the manufacture, assemblage, processing, finishing, storing, warehousing or distributing of property for resale by the plant or facility.” Its value is nearly $159 million.
Together, these exemptions account for $3,874 million of the $5,900 million in total exemptions.
It’s curious that the Eagle editorial did not mention these sales tax exemptions and the disadvantage that taxing these transactions would create. The authors — Brownlee, likely — did mention how other sales taxes would affect Kansas: “For example, eliminating the exemption on legal and accounting services could put Kansas at a competitive disadvantage, as other states don’t tax those services.”
Another big-dollar exemption is “items already taxed” such as motor fuel. This is an estimated $318.90 million loss in revenue. Other exemptions are purchases made by government, or purchase made by contractors on behalf of government. These exemptions account for an estimated $624.90 million in lost revenue. If these two exemptions were eliminated, the government would be taxing itself, with no net gain.
Not taxing prescription drugs means lost revenue estimated at $96.49 million. If the state started taxing residential and agricultural use utilities, it could gain an estimated $169.98 million. These taxes, like the sales tax on food and the motor fuel tax, fall hardest on low-income families. As Kansas is one of the few states to tax food, do we want to make life even more difficult for low-income households?
Adding these exemptions comes to about $5,084 million. There are other exemptions for which we could make similar arguments for their retention. What’s left over — the exemptions that really should not exist — isn’t much at all. The entire category of “Exemptions to Charitable Organizations by Name.” amounts to $3.05 million in exempted sales tax. These represent the organizations where a lawmaker has crafted an exemption like “Property and services purchased by Jazz in the Woods and sales made by or on behalf of such organization.”
So when the Eagle editorial board writes “As is, favored groups are saving billions of dollars a year, worsening the tax burden for everybody else,” It must be including broad categories of business like “all Kansas manufacturing companies” as a “favored group.” Or maybe he means prescription drug users are a “favored group.” Or families struggling to pay utility bills.
But there are more problems. The Eagle editorial board writes these sales tax exemptions are “costing the state a fortune.” The only way this makes sense is if one thinks that our property (our money) first belongs to the state, and that in order to spend it, we have to give the state its cut. That’s an opinion that you may agree with, or you may oppose. What’s remarkable — shocking, really — is that in his previous career Brownlee — the opinion page editor — was a Certified Public Accountant. He ought to understand the nature of sales taxes meant to be applied to retail sales, not components of manufactured goods.
When Kansas cities grant economic development incentives, they may also unilaterally take action that affects overlapping jurisdictions such as counties, school districts, and the state itself. The legislature should end this.
When Kansas cities create tax increment financing (TIF) districts, the overlapping county and school district(s) have an opportunity to veto its creation.
But for some other forms of incentives, such as tax increment financing district redevelopment plans, property tax abatements, and sales tax abatements, overlapping jurisdictions have no ability to object. There seems to be no rational basis for not giving these jurisdictions a chance to object to the erosion of their tax base.
This is especially important for school districts, as they are often the largest tax consumer. As an example, when the City of Wichita offered tax abatements to a company in June 2014, 47 percent of the abated taxes would have gone to the Wichita school district. But the school district did not participate in this decision. State law gave it no voice.
Supporters of economic development incentives say that the school district benefits from the incentives. The argument is that even though the district gives up some tax revenue now, it will get more in the future. This is the basis for the benefit-cost ratios Wichita uses to justify incentives. For itself, the City of Wichita requires a benefit-cost ratio of 1.3 to one or better, although there are many loopholes the city can use to grant incentives when this threshold is not met. For the June project, city documents reported these benefit-cost ratios for two overlapping jurisdictions:
Sedgwick County 1.18 to one
USD 259 1.00 to one
In this case, the city forced a benefit-cost ratio on the county that the city would not accept for itself, unless it uses a loophole. For the school district, the net benefit is zero.
The Kansas Legislature should look at ways to make sure that overlapping jurisdictions are not harmed when economic development incentives are granted by cities. The best way would be to require formal approval of the incentives by counties, school districts, and any other affected jurisdictions.
Two examples
In June 2014 the City of Wichita granted tax abatements for a new warehouse. City documents gave the benefit-cost ratios for the city and overlapping jurisdictions:
City of Wichita General Fund 1.30 to one
Sedgwick County 1.18 to one
USD 259 1.00 to one
State of Kansas 12.11 to one
It is not known whether these ratios include the sales tax forgiveness.
While the City of Wichita insists that projects show a benefit-cost ratio of 1.3 to one or better (although there are many exceptions), it doesn’t apply that standard for overlapping jurisdictions. Here, Sedgwick County experiences a benefit-cost ratio of 1.18 to one, and the Wichita school district (USD 259) 1.00 to one. These two governmental bodies have no input on the decision the city is making on their behalf. The school district’s share of the forgiven taxes is 47.4 percent.
City $81,272
State $3,750
County $73,442
USD 259 $143,038
The listing of USD 259, the Wichita public school district, is likely an oversight by the city, as the subject properties lie in the Derby school district. This is evident when the benefit-cost ratios are listed:
City of Wichita 1.98 to one
General Fund 1.78 to one
Debt Service 2.34 to one
Sedgwick County 1.54 to one
U.S.D. 260 1.00 to one (Derby school district)
State of Kansas 28.23 to one
Note that the ratio for the Derby school district is 1.00 to one, far below what the city requires for projects it considers for participation. That is, unless it uses a loophole.
Here is an interactive version of the list of delinquent property taxes in Sedgwick County. This list is printed in a local newspaper three times each summer.
The Sedgwick County Treasurer issues a disclaimer regarding this list, which is that some of the taxes may have been paid, or are waiting the result of a grievance or protest.
Click here to open the interactive list in a new window. As shown in the illustration below, you may click to expand the addresses of properties for an owner, and sort by any column.
States with higher rates of economic growth grow total charitable giving at a faster rate than states with low rates of economic growth, finds a new report by American Legislative Exchange Council.
From ALEC: Charity is a crucial component of efforts to address societal challenges and help individuals thrive. From religious organizations to community charities, philanthropic donations drive the institutions of civil society and enable communities to develop around a greater sense of shared purpose. Despite this important role, charitable giving is rarely addressed in discussions around public policy — especially state tax policy.
The report uses data collected from the Internal Revenue Service (IRS) and focuses on both the levels of charitable giving and the growth of charitable giving throughout the states. We examined these trends over two different time periods. First, the IRS data begins in 1997 and is available through 2012. Second, we measured state charitable giving from 2008 to 2012 to understand how states fared during the recession.
Here are some of the most significant findings from our report:
States with higher taxes generally experienced lower levels and lower rates of growth in charitable giving compared with their lower tax counterparts
A one percent increase in a state’s total tax burden is associated with a 1.16 percent decrease in the state’s rate of charitable giving
A one percent increase in a state’s personal income tax burden is associated with a 0.35 percent decrease in the state’s rate of charitable giving as a percent of total state income
In every category, over each time period, the nine states without income taxes grew their rates of charitable giving more than the nine states with the highest income taxes
An often overlooked aspect of public policy is the role that charitable organizations have in addressing some of society’s most pressing concerns. Because of this important role and since charitable organizations are funded privately through donations, understanding how state policies interact with charitable organizations is crucial for a robust discussion about public policy. This State Factor examines state tax policies that encourage charitable giving, apart from the charitable giving deduction.
While many factors certainly influence an individual’s choice about donating to charity, there are broad policy choices that can encourage higher rates of growth in charitable giving. By examining various tax burdens and tax rates with rigorous economic analysis, this paper’s research findings show that a 1 percent increase in the personal income tax burden is associated with 0.35 percent decrease in charitable giving per dollar of state income. Similarly, this State Factor found that an increase in personal income tax burden of roughly 1 percentage point of total state income results in a roughly 0.10 percentage point decrease in the level of measured charitable donations as a percent of income.
When all state taxes are considered, a 1 percentage point increase in the total tax burden is associated with a 1.16 percent drop in charitable giving per dollar of state income. Similarly, this State Factor found that an increase in total tax burden of roughly 1 percentage point of total state income results in a roughly 0.09 percentage point decrease in the level measured charitable donations as a percent of income.
According to the new report, The Effect of State Taxes on Charitable Giving the following states donated the most to charity as a percent of total income between 1997 and 2012, in order from 1st to 10th: Utah, Wyoming, Georgia, Alabama, Oklahoma, South Carolina, Maryland, Idaho, North Carolina and Mississippi. The report examines patterns of philanthropic contributions in the states over time and uses rigorous economic analyses to draw significant conclusions about charitable giving in the United States.
The report is written by Jonathan Williams, William Freeland, research analyst for the ALEC Center for State Fiscal Reform, and Ben Wilterdink, research manager for the ALEC Center for State Fiscal Reform. The report reveals that states with higher rates of economic growth grow total charitable giving at a faster rate than states with low rates of economic growth.
An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation, although Wichita has improved comparatively.
50 State Property Tax Comparison Study, Selected Wichita Data. Click for larger version, or see text for pdf version.The study is produced by Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. It’s titled “50 State Property Tax Comparison Study, April 2015” and may be read here. It uses a variety of residential, apartment, commercial, and industrial property scenarios to analyze the nature of property taxation across the country. I’ve gathered data from selected tables for Wichita. (A pdf version is available here.)
In Kansas, residential property is assessed at 11.5 percent of its appraised value. (Appraised value is the market value as determined by the assessor. Assessed value is multiplied by the mill levy rates of taxing jurisdictions in order to compute tax.) Commercial property is assessed at 25 percent of appraised value, and public utility property at 33 percent.
This means that commercial property faces 2.18 times the property tax rate as residential property. (The study reports a value of 2.173 for Wichita. The difference is likely due from deriving the value from observations rather than statute.) The U.S. average is 1.710.
Whether higher assessment ratios on commercial property as compared to residential property is desirable public policy is a subject for debate. But because Wichita’s ratio is high, it leads to high property taxes on commercial property.
For residential property taxes, Wichita ranks below the national average. For a property valued at $150,000, the effective property tax rate in Wichita is 1.253 percent, while the national average is 1.490 percent. The results for a $300,000 property were similar.
Commercial property taxes in Wichita compared to nation.Looking at commercial property, the study uses several scenarios with different total values and different values for fixtures. For example, for a $100,000 valued property with $20,000 fixtures (table 25), the study found that the national average for property tax is $2,519 or 2.099 percent of the property value. For Wichita the corresponding values are $3,289 or 2.741 percent, ranking fourteenth from the top. Wichita property taxes for this scenario are 30.6 percent higher than the national average.
In other scenarios, as the proportion of property value that is machinery and equipment increases, Wichita taxes are lower, compared to other states and cities. This is because Kansas no longer taxes this type of property.
Kansas legislative and executive leaders must realize that a shift to consumption taxes must be accompanied by relief from its disproportionate harm to low-income households.
While Kansas legislative leaders and the governor praise the shift from income taxes to sales taxes, they ignore the severely regressive effect of sales taxes in Kansas. That is, a sales or consumption tax affects low-income families in greatest proportion relative to their incomes. The primary reason for the harshness of the Kansas sales tax is its application to food purchased in grocery stores. Few states tax food, and many of those that do apply a lower tax rate to food.
During the debate over a proposed sales tax increase in Wichita last year, I gathered data from the U.S. Census Bureau regarding expenditures on various categories for five different levels of household income. My findings were that if the city raised sales tax by one cent per dollar, the lowest income class of families would experience an increase nearly four times the magnitude as would the highest income families, measured as a percentage of after-tax income. Others produced similar results. This is the regressive nature of sales taxes.
At the national level the Fair Tax is a program whereby income taxes are replaced by consumption taxes. Proponents believe it would be a positive factor for economic growth. In recognition of the regressive nature of sales taxes, the Fair Tax plan includes a “prebate” to compensate households for the sales tax paid on necessities like food. In effect, there would be no tax on food and other necessities, up to the poverty level.
During the legislative session this year, Kansas Legislative Research told legislators that increasing the sales tax from 6.15 percent to 6.50 percent would generate $164,200,000 in additional revenue to the state. This implies that a one percent increase in the sales tax rate would generate about $469 million in revenue. (This is based on static analysis, and therefore does not account for the changes in behavior that the higher sales tax would induce, however large or small the effect.)
Effect of sales tax on consumers of different income levels. Click for larger version.It’s thought that the present sales tax on food results in about $390 million in tax collections. While these two values — 469 and 390 — are not equal to each other, the $469 million figure is close to the gap between revenues and expenses. (The tax bill the legislature passed will raise about $400 million, but it is widely believed the governor will have to make an additional $50 million in cuts.)
So what would have happened if the legislature had raised the sales tax by one cent per dollar and eliminated the sales tax on food? The answer is the sales tax in Kansas would be less regressive.
I modified my worksheet to allow for adjustment of the sales tax rate for general purchases, and for food separately. I gathered the results for three scenarios and present the results in a chart. I use the sales tax rates that Sedgwick County residents would experience. This includes a one cent per dollar county-wide tax in addition to the statewide rate. (Most counties and cities add to the statewide rate. The unweighted average sales tax rate for Kansas cities is 7.835 percent, based on Kansas Department of Revenue figures.)
Kansas sales tax effects by income quintile, three scenarios. The vertical distance between the lines is a measure of the degree of regressivity. It is larger for lower income households. Click for larger version.The blue line, labeled “Sales tax at 7.15% on all purchases” is the current tax in effect in Sedgwick County. Note that the lowest quintile of households pay nearly seven percent of their after tax income in sales taxes. For the highest quintile the value is less than two percent.
The gold line (“Sales tax at 7.50% on all purchases”) represents the rates that will be in effect after July 1. Note that the vertical distance between the blue and gold lines is larger for low-income households than for high-income households, again illustrating the regressive nature of sales taxes.
The red line (“Sales tax at 8.15%, food at 0%”) illustrates the situation had the legislature raised the sales tax by one cent per dollar and eliminated the sales tax on food. Notice that the vertical distance between the red and gold lines is greatest for lower-income households, and becomes less as income increases. This means that under this policy, the sales tax is less regressive. But the Kansas Legislature did not do this. Instead, it implemented a sales tax changes that increases its regressive nature.
Kansas has a food sales tax refund program. It has been altered several times in recent years. Even if households can — and do — claim it, it doesn’t cover their likely cost of sales tax on food. At a rate of 7.50 percent, the lowest quintile of households pay an estimated $263 in sales tax, which is far above the maximum refund.
Kansas legislative leaders have said that food sales tax could be an issue to tackle next year. One proposal this year had the tax on food falling to 4.90 percent. That is welcome, and would reduce the harsh regressive nature of Kansas taxation. But Kansas would still have a high tax rate on food. Kansas legislative and executive leaders must realize that a shift to consumption taxes must be accompanied by relief from its disproportionate harm to low-income households.
Those who call for a return to 90 percent tax rates should be aware that few people actually paid tax at those rates.
Progressives are calling for higher income tax rates on the rich. The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent. Some see that as a lost opportunity. If we could return to the tax rates of the 1950s, they say, we could generate much more revenue for government.
The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich.
The mistake the progressives make is equating tax rates with the tax actually paid. For many people, there is a direct relationship. For workers who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more. But people with high incomes can use these and other strategies to reduce the taxes they pay. In fact, there is an entire industry of accountants and lawyers to help people reduce their tax. Often — particularly in the past — investments and transactions were made solely for the purpose of avoiding taxes, not for any other economic benefit.
But: High tax rates make the middle class feel better about paying their own taxes. With top tax rates of 90 percent, they may believe that the rich are paying a lot of tax. The middle class may take comfort in the fact that someone else is worse off. But that is based on the misconception that high tax rates mean rich people actually pay correspondingly higher tax.
Top tax rates and taxes actually paid
Figure 1. The top marginal income tax rate has varied widely, but since World War II, tax revenue collected as a percent of GDP is remarkably constant.A series of charts illustrate the lack of a relationship between the top marginal income tax rate and the income taxes actually paid. (Click charts for larger versions.)
Figure 1 shows that that top marginal tax rate has varied widely. But since World War II, the taxes actually collected, expressed as a percentage of gross domestic product, has been fairly constant. In 1952 the top tax rate was 92.0 percent, and income taxes paid as a percent of GDP was 13.5 percent. In 2012 the top rate was 35.0 percent, and income taxes paid as a percent of GDP was 11.2 percent.
Figure 2. The top marginal income tax rate has varied widely, but the average federal tax rates paid by top earners has varied less.Figure 2 shows how the top marginal income tax rate has varied widely, but the average federal tax rates paid by top earners has varied less. Data for this series is available only back to 1979.
Figure 3. The top marginal income tax rate has varied widely and has mostly fallen, and the share of federal taxes paid by top income earners has risen.Figure 3 shows how the top marginal income tax rate has varied widely and has mostly fallen, and the share of federal taxes paid by top income earners has risen.
Sources of data for these charts are the Internal Revenue Service, Bureau of Economic Analysis, and Congressional Budget Office.
Hauser’s Law
In 2010 W. Kurt Hauser explained in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.'”
Incentives matter, economists tell us. People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income. A common strategy is to make investments in economically unproductive tax shelters. There is less incentive to work, to save and build up capital stocks, and invest. These are some of the reasons why tax rate hikes usually don’t generate the promised revenue.
The subtitle to Hauser’s article is “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.” Figure 1 illustrates. The top line, the top marginal tax rate in effect for each year, varies widely. The other two lines show total taxes and federal income taxes as a percent of gross domestic product. Since World War II, these lines are fairly constant, even as the top marginal tax rate varies.
Examining tax collections by the states shows that Kansas collects more tax than many of our neighbors, and should put to rest some common myths.
Tax Collections by the States, Kansas and selected States, total and per capita.Of a selection of nearby states, Kansas collects more taxes than most, on a per-person basis. The nearby table shows total tax collections, and tax collections per person. The chart shows collections grouped by major category, and one special category, which is severance taxes.
Some of the data regarding specific taxes is revealing and should shape the debate over taxes in Kansas. Consider severance taxes, which are taxes levied on extracting materials like oil, gas, and coal. The common narrative in Kansas is that states like Texas are sitting atop a sea of oil, with the severance taxes funding a major portion of state government. The data shows that Texas collected $223 per person in severance taxes in 2014. For Kansas the figure is $43. This difference — $180 — doesn’t account for the difference in total tax collections between the states. Texas collects $2,050 in total taxes per person, while Kansas collects $2,526, a difference of $476.
Tax Collections by the States, Kansas and selected States, 2014. Click for larger version.We also commonly hear that Kansas doesn’t have the tourism of states like Florida, and therefore doesn’t have the flood of tourism spending and accompanying sales tax. Again, looking at the data, se see that Florida collected $1,460 in Sales and Gross Receipt Taxes per person for 2014. Kansas collected $1,340. This is a difference of $120, while the difference between total tax collections for Florida ($1,779) and Kansas ($2,526) is $747.
You may use this interactive visualization to customize the table to fit your own needs. Click here to open the visualization. Data is from the U.S. Census Bureau, Survey of State Government Tax Collections and Bureau of Economic Analysis, along with author’s calculations. Visualization developed using Tableau Public. Data is expressed on a per person basis, not adjusted for inflation.
“The purpose of high taxes on the rich is not to get the rich to pay money, it’s to get the middle class to feel better about paying high taxes.”
This is what Jim Pinkerton, the journalist, Fox News contributor, and co-founder of the RATE (Reforming America’s Taxes Equitably) Coalition told an audience at a conference titled “The Tax & Regulatory Impact on Industry, Jobs & The Economy, and Consumers” produced by the Franklin Center for Government and Public Integrity.
Pinkerton was referring to the economist F.A. Hayek. Others have also noted that changes to marginal tax rates often have little impact on the amount of taxes actually paid. The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent.
The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich. They often cite the rising prosperity of the 1950s as caused by the high marginal tax rate in effect at the time.
The mistake the progressives make is equating tax rates with the tax actually paid. For many people, there is a direct relationship. For workers who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more. But rich people can use these and other strategies to reduce the taxes they pay.
But as Pinkerton told the conference attendees, the high tax rates make the middle class feel better about paying their own taxes. They may take comfort in the fact that someone else is worse off, at least based on the misconception that high tax rates mean rich people actually pay correspondingly higher tax.
In 2010 W. Kurt Hauser explained in The Wall Street Journal: “Even amoebas learn by trial and error, but some economists and politicians do not. The Obama administration’s budget projections claim that raising taxes on the top 2% of taxpayers, those individuals earning more than $200,000 and couples earning $250,000 or more, will increase revenues to the U.S. Treasury. The empirical evidence suggests otherwise. None of the personal income tax or capital gains tax increases enacted in the post-World War II period has raised the projected tax revenues. Over the past six decades, tax revenues as a percentage of GDP have averaged just under 19% regardless of the top marginal personal income tax rate. The top marginal rate has been as high as 92% (1952-53) and as low as 28% (1988-90). This observation was first reported in an op-ed I wrote for this newspaper in March 1993. A wit later dubbed this ‘Hauser’s Law.'”
Incentives matter, economists tell us. People react to changes in tax law. As tax rates rise, people seek to reduce their taxable income. A common strategy is to make investments in economically unproductive tax shelters. There is less incentive to work, to save and build up capital stocks, and invest. These are some of the reasons why tax rate hikes usually don’t generate the promised revenue.
Click image for larger version
The subtitle to Hauser’s article is “Tax revenues as a share of GDP have averaged just under 19%, whether tax rates are cut or raised. Better to cut rates and get 19% of a larger pie.” The nearby chart illustrates. The top line, the top marginal tax rate in effect for year year, varies widely. The other two lines show total taxes and federal income taxes as a percent of gross domestic product. Since World War II, these lines are fairly constant, even as the top marginal tax rate varies.
Data is from Bureau of Economic Analysis (part of the U.S. Department of Commerce) along with my calculations.
As Kansas considers raising additional revenue by raising the tax on tobacco and alcohol, let’s declare the end to governmental labeling of vice as sin, and people as sinners.
Smoking cigarettes and drinking alcohol are vices, not sins. Yes, some religions may label these activities as sins, and the people who engage in them, sinners. That is fine for them to do. But these sins — no, vices — harm no one except the person practicing them. Yes, I know that some will say that alcohol fuels aggression in some people, and that leads to harm to others. If they really believe that line of reasoning, they should call for the prohibition of alcohol rather than the state to profiting even more from its sale. (And we know how well prohibitions work [not].)
Say, if smoking and drinking are sinful, what does it say about the State of Kansas profiting from these activities? And what about the state having an even greater rooting interest in smoking and drinking, so there is more for the state coffers?
At one time gambling was illegal in Kansas. It was a sin, we were told. But then the state found it could profit from gambling, first through the lottery, and now through full-service casinos. But gambling is still illegal, unless the state controls it — and profits from it. What constitutes sin, it seems, is in the eye of the beholder — and profiteer.
Like the general sales tax, these special sales or excise taxes are regressive, falling hardest on those least able to pay. If we feel sorry for those who drink or smoke, how about this: Let’s offer them a good word or a hand up — not a kick in the teeth in the name of propping up state spending.
By the way: Many of those who may vote on these higher Kansas taxes have signed a pledge to not raise taxes. I wonder if we can place a tax on violating a pledge made to to voters.
Lysander Spooner wrote long ago:
Vices are those acts by which a man harms himself or his property.
Crimes are those acts by which one man harms the person or property of another.
Vices are simply the errors which a man makes in his search after his own happiness. Unlike crimes, they imply no malice toward others, and no interference with their persons or property.
In vices, the very essence of crime — that is, the design to injure the person or property of another — is wanting.
It is a maxim of the law that there can be no crime without a criminal intent; that is, without the intent to invade the person or property of another. But no one ever practises a vice with any such criminal intent. He practises his vice for his own happiness solely, and not from any malice toward others.
Unless this clear distinction between vices and crimes be made and recognized by the laws, there can be on earth no such thing as individual right, liberty, or property; no such things as the right of one man to the control of his own person and property, and the corresponding and coequal rights of another man to the control of his own person and property.
For a government to declare a vice to be a crime, and to punish it as such, is an attempt to falsify the very nature of things. It is as absurd as it would be to declare truth to be falsehood, or falsehood truth.
“Nothing is so permanent as a temporary government program.” — Nobel Laureate Milton Friedman
Is this true? Do federal grants cause state and/or local tax increases in the future after the government grant ends? Economists Russell S. Sobel and George R. Crowley have examined the evidence, and they find the answer is yes.
The difference between this research and most other is that Sobel and Crowley look at the impact of federal grants on state and local tax policy in future periods.
This is important because, in their words, “Federal grants often result in states creating new programs and hiring new employees, and when the federal funding for that specific purpose is discontinued, these new state programs must either be discontinued or financed through increases in state own source taxes.”
The authors caution: “Far from always being an unintended consequence, some federal grants are made with the intention that states will pick up funding the program in the future.”
The conclusion to their research paper states:
Our results clearly demonstrate that grant funding to state and local governments results in higher own source revenue and taxes in the future to support the programs initiated with the federal grant monies. Our results are consistent with Friedman’s quote regarding the permanence of temporary government programs started through grant funding, as well as South Carolina Governor Mark Sanford’s reasoning for trying to deny some federal stimulus monies for his state due to the future tax implications. Most importantly, our results suggest that the recent large increase in federal grants to state and local governments that has occurred as part of the American Recovery and Reinvestment Act (ARRA) will have significant future tax implications at the state and local level as these governments raise revenue to continue these newly funded programs into the future. Federal grants to state and local governments have risen from $461 billion in 2008 to $654 billion in 2010. Based on our estimates, future state taxes will rise by between 33 and 42 cents for every dollar in federal grants states received today, while local revenues will rise by between 23 and 46 cents for every dollar in federal (or state) grants received today. Using our estimates, this increase of $200 billion in federal grants will eventually result in roughly $80 billion in future state and local tax and own source revenue increases. This suggests the true cost of fiscal stimulus is underestimated when the costs of future state and local tax increases are overlooked.
So: Not only are we taxed to pay for the cost of funding federal and state grants, the units of government that receive grants are very likely to raise their own levels of taxation in response to the receipt of the grants. This is a cycle of ever-expanding government that needs to end, and right now.
For two decades the Tax Foundation has estimated the combined state and local tax burden for all the states. I’ve created an interactive visualization that lets you compare states and see trends in rank over time.
In its publication, the Tax Foundation explains:
For nearly two decades, the Tax Foundation has published an estimate of the combined state and local tax burden shouldered by the residents of each of the fifty states, regardless of the jurisdictions to which those taxes are paid. We argue that it is important to note that a taxpayer’s true tax burden must include the substantial taxes they pay directly or indirectly to out-of-state governments.
When organizations analyzing federal tax burdens, such as the Congressional Budget Office or the Urban-Brookings Tax Policy Center, measure tax burdens by income group, they go beyond measuring the legal incidence of a tax (who writes the check to the government) and account for the fact that taxes legally imposed on a given person in one income group (such as employers via the payroll tax) can be shifted to a different person in another income group (like employees). Similarly, our state and local tax burden estimates account for the shifting of taxes from one group to another under a different variable by which household are organized: state of residence rather than income level. …
In this annual study, our goal is to move the focus from the tax collector (how much revenue is collected) to the taxpayer (how much income is foregone). We aim to find what percentage of state income residents are paying in state and local taxes and whether those taxes are paid to their state of residence or to others. …
When answering the question of which state’s residents pay the most in state and local taxes, it should be clear that such tax burden measures are not measures of the size of government in a state, nor are they technically measures of the complete burden of taxation faced by a given state’s residents.
To use the visualization, hover over any state from the map. Click here to open the visualization in a new window. The most recent data is for fiscal year 2011. Data from Tax Foundation; visualization created using Tableau Public.
The Tax Foundation has a new version of their booklet Putting a Face on America’s Tax Returns. The book is full of charts and explanations to help you understand the nature of our tax system. An example is nearby.
Kansas state government collects more tax revenue than most surrounding states. Additionally, severance taxes are a minor contribution to collections, even in Texas.
Note: this visualization has been updated. Click here for the most recent version.
The data considers only tax collections by state government. It does not include cities, counties, school districts, or the many other taxing jurisdictions that states may have formed. I have computed this data on a per-person basis. Data is for 2013.
State tax collections for Kansas and some nearby states. Click for a larger version.Considering total tax collections by state governments, note that Kansas, at $2,633 per person per year, is only slightly below the average for all states. For a group of nearby states, Arkansas and Iowa have higher state tax collections than Kansas. Nebraska, Oklahoma, Colorado, Texas, and Missouri are lower.
In some cases, state tax collections are substantially lower. Texas collects $1,955 per person per year, which is 25.75 percent less than Kansas.
Using the visualization.Of note are severance taxes, which are taxes collected based on the extraction of oil, gas, and sometimes minerals. Kansas has a severance tax that produces, on a per person basis, $26 per year. In Texas the same tax produces $176 per person per year, and in Oklahoma, $134.
I’ve created an interactive visualization of this data that you may use. Click here to open the visualization in a new window.
An ongoing study reveals that generally, property taxes on commercial and industrial property in Wichita are high. In particular, taxes on commercial property in Wichita are among the highest in the nation.
The study is produced by Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence. It’s titled “50 State Property Tax Comparison Study, March 2014” and may be read here. It uses a variety of residential, apartment, commercial, and industrial property scenarios to analyze the nature of property taxation across the country. I’ve gathered data from selected tables for Wichita. A pdf version of the table is available here.
A pdf version of this table is available; click here.In Kansas, residential property is assessed at 11.5 percent of its appraised value. (Appraised value is the market value as determined by the assessor. Assessed value is multiplied by the mill levy rates of taxing jurisdictions in order to compute tax.) Commercial property is assessed at 25 percent of appraised value, and public utility property at 33 percent.
This means that commercial property pays 25 / 11.5 or 2.18 times the property tax rate as residential property. (The study reports a value of 2.263 for Wichita. The difference is likely due to the inclusion on utility property in their calculation.) The U.S. average is 1.716.
Whether higher assessment ratios on commercial property as compared to residential property is good public policy is a subject for debate. But because Wichita’s ratio is high, it leads to high property taxes on commercial property.
For residential property taxes, Wichita ranks below the national average. For a property valued at $150,000, the effective property tax rate in Wichita is 1.324 percent, while the national average is 1.508 percent. The results for a $300,000 property were similar.
Wichita commercial property tax rates compared to national averageLooking at commercial property, the study uses several scenarios with different total values and different values for fixtures. For example, for a $100,000 valued property with $20,000 fixtures (table 25), the study found that the national average for property tax is $2,591 or 2.159 percent of the property value. For Wichita the corresponding values are $3,588 or 2.990 percent, ranking ninth from the top. Wichita property taxes for this scenario are 38.5 percent higher than the national average.
In other scenarios, as the proportion of property value that is machinery and equipment increases, Wichita taxes are lower, compared to other states and cities. This is because Kansas no longer taxes this type of property.
Jim Pinkerton, the journalist, Fox News contributor, and co-founder of the RATE (Reforming America’s Taxes Equitably) Coalition told an audience this: “The purpose of high taxes on the rich is not to get the rich to pay money, it’s to get the middle class to feel better about paying high taxes.”
Pinkerton was speaking last week at a conference titled “The Tax & Regulatory Impact on Industry, Jobs & The Economy, and Consumers” produced by the Franklin Center for Government and Public Integrity. His remarks, as he told the conference attendees, were based on the work of economist F.A. Hayek. Others have also noted that changes to marginal tax rates often have little impact on the amount of taxes actually paid. The top marginal tax rate — that’s the rate that applies to high income earners on most of their income — was above 90 percent during most of the 1950s. From 2003 to 2012 it was 35 percent, and is now 39.6 percent.
The top marginal tax rate is the rate that applies to income. It’s not the same as what is actually paid. This fact is unknown or ignored by those who clamor for higher taxes on the rich. They often cite the rising prosperity of the 1950s as caused by the high marginal tax rate in effect at the time.
A common mistake is equating tax rates with the tax actually paid. For many taxpayers, there is a direct relationship. For those who earn a paycheck, there’s not much they can do to change the timing of their income, find tax shelters, or shift income to capital gains. When income tax rates rise, they have to pay more. But rich people can use these (and other) strategies to reduce the taxes they pay.
Click image for larger version.
In The purpose of high tax rates on the rich I showed that despite wide fluctuations in the top marginal tax rate, the tax revenue collected since World War II is remarkably constant, when measured as a percent of gross domestic product.
This is not the only way to consider the effect of tax rates. Using data from the Internal Revenue Service and Congressional Budget Office, I developed two charts. One shows the share of total federal taxes paid by top income earners, in this case the top five percent and the top one percent. For the range of years for which CBO provides data, the top marginal income tax rate has varied widely and has mostly fallen, and the share of federal taxes paid by top income earners has risen slightly.
Click image for larger version.
A second chart shows the average federal tax rate for these two groups of top earners. The average federal tax rates paid by top earners has varied much less than the variation in tax rates.
As Pinkerton told the Franklin Center conference attendees, high tax rates make the middle class feel better about paying their own taxes. They may take comfort in the fact that someone else is worse off — that rich people are paying higher tax rates. But as the data shows, it’s a misconception that high tax rates mean rich people actually pay taxes at correspondingly higher rates.
“Nothing is so permanent as a temporary government program.” — Nobel Laureate Milton Friedman
