State lawmakers frequently make claims about how proposed tax changes would affect taxpayers at different income levels. Yet these lawmakers routinely ignore one important consequence of their tax reform proposals: the effect of state tax changes on their constituents’ federal income taxes. Wealthier taxpayers can use the federal income tax to partially offset their state and local income and property taxes. This “federal offset” has important implications for how state tax changes affect people. This policy brief explains this important but often-forgotten link between state and federal taxes.
Personal Income Taxes
The personal income tax is typically the fairest revenue source relied on by federal and state governments. A properly structured personal income tax could offer an important boost in progressivity to what are otherwise overwhelmingly regressive state tax structures.
Forty-one states and the District of Columbia levy broad-based personal income taxes. ITEP’s personal income tax resources provide both general and state-specific information about the impact as well as the mechanics and merits of personal income taxes.
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brief August 1, 2011 How State Tax Changes Affect Your Federal Taxes: A Primer on the “Federal Offset”
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brief August 1, 2011 Income Tax Simplification: How to Achieve It
Simplicity is generally seen as a virtue in state tax systems. Simplicity makes it easier for taxpayers to understand (and to pay) their taxes, and makes it easier for tax administrators to collect taxes fairly. In recent years, state lawmakers have proposed a wide variety of income tax changes under the guise of simplification. Yet not all of these purported tax simplification measures are well-designed to achieve it–and some measures would unnecessarily reduce the fairness of the income tax. This policy brief evaluates options for making state income taxes less complicated.
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report April 10, 2011 Don’t Give Up on Pease: States Can Decouple from Recent Federal Tax Cuts for Wealthy Itemizers
In 2011, thirty one states and the District of Columbia allow a group of income tax breaks known as “itemized deductions” (Figure 1). Itemized deductions are designed to help defray… -
report March 31, 2011 In It for the Long Haul: Why Concerns over Personal Income Tax “Volatility” Are Overblown
The precipitous drop in state tax collections during the recent recession has prompted some observers to argue that relying on volatile state taxes is a recipe for budgetary disaster. The… -
report March 24, 2011 Should Illinois Tax Retirement Income?
Earlier this month, Illinois Senate President John Cullerton suggested that limiting the state’s generous income tax break for retirement income “would just be a matter of fairness.” Senator Cullerton’s suggestion… -
report March 16, 2011 ITEP’s Testimony on EITC Legislation
My testimony focuses on House Bill 581, which would create a Missouri Earned Income Tax Credit (EITC). In particular, my testimony will discuss the impact of this bill on the… -
report March 10, 2011 Topsy-Turvy: State Income Tax Deductions for Federal Income Taxes Turn Tax Fairness on its Head
The budget outlook for state governments is bleak. Despite evidence that revenues are rebounding, there is a general acknowledgement that ?broad fiscal conditions remain fragile. The need for public investments—particularly… -
report January 15, 2011 A Capital Idea
The budget outlook for the states is improving, but uncertain. In this context, states must find ways to generate additional revenue that create neither additional responsibilities for individuals and families… -
report August 24, 2010 “Writing Off” Tax Giveaways: How States Can Help Balance Their Budgets by Reforming or Repealing Itemized Deductions
“Writing Off” Tax Giveaways examines options for reforming itemized deductions in the thirty-one states, plus DC, that offer such deductions. The study, released on August 24, 2010, focuses on five… -
report April 10, 2010 Leaving Money on the Table: “Federal Offset” Provides Incentive for States to Rely on Progressive Income Taxes
Seven states—Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming—have chosen to make up for the lack of an income tax by increasing their reliance on general sales taxes.1 The… -
report March 23, 2010 ITEP’s Testimony Before the MD House Ways & Means Committee on Preserving Maryland’s “Millionaires’ Tax”
My testimony today focuses on Senate Bill 913, which would temporarily extend, through 2014, the “millionaires’ tax” that is currently scheduled to expire at the end of 2010. This testimony… -
report March 18, 2010 ITEP’s Testimony on HB 2034 Income Tax Reforms
My testimony today focuses on one bill introduced in the Missouri House of Representatives: HB 2034, which would reform the state’s individual income tax structure. My testimony will discuss the… -
report March 11, 2010 ITEP’s Testimony Before the MD Senate Budget and Tax Committee on Preserving Maryland’s “Millionaires’ Tax”
My testimony today focuses on Senate Bill 913, which would temporarily extend, through 2014, the “millionaires’ tax” that is currently scheduled to expire at the end of 2010. This testimony… -
report January 8, 2010 Five Reasons to Preserve Maryland’s “Millionaires’ Tax”
In 2008, to compensate for the anticipated loss of revenue due to the repeal of a law subjecting the provision of computer services to the state’s sales tax, Maryland enacted… -
report May 15, 2009 Ready, Set, Reform – How the Income Tax Can Help Make the Illinois Tax System Fairer and More Sustainable
The Illinois tax system faces a crisis of both adequacy and equity. The state must confront a projected $11.6 billion budget shortfall over the next two fiscal years that will… -
report April 23, 2009 Fact Sheet on HB64 Income Tax Proposal
Missouri House Bill 64 would change the state’s personal income tax in three important ways: • Expand the starting point for the 6 percent top income tax bracket from $9,000… -
report April 23, 2009 Fact Sheet on SB71 Proposed Income Tax Rate Cut
This policy brief examines the impact of the principal tax change in House Committee Substitute for Senate Bill 71, which would decrease each of the state’s income tax rates by… -
report April 7, 2009 Budget Hikes Taxes on Low-Income Families to Pay for High-End Capital Gains Cuts
On Friday, April 3, the Georgia General Assembly passed a budget for fiscal year 2010 that includes a major new tax cut (an exclusion for long-term capital gains income) and… -
report March 15, 2009 A Capital Idea: Repealing State Tax Breaks for Capital Gains Would Ease Budget Woes and Improve Tax Fairness
This report explains what capital gains are, how they are treated for tax purposes, and who typically receives them. It also details the consequences of providing preferential tax treatment for… -
report November 1, 2007 ITEP Testimony on Governor’s Plan: Improving the Income Tax
My testimony today focuses on the proposed changes to Maryland’s personal income tax put forward by Governor O’Malley and the impact that those changes would have on Marylanders at different… -
report July 15, 2006 Analysis of Proposed Capital Gains Tax Cut
The Ohio legislature is considering a proposal to scrap the current Ohio rule that taxes capital gains (profits from selling stock, investment real estate, etc.) at the same rates as… -
report April 5, 2006 ITEP Testimony on HB 1960 Proposed Income Tax Reform
My testimony today focuses on one bill introduced in the Missouri House of Representatives: HB 1960, which concerns reforming the state’s individual income tax structure. In particular, my testimony will… -
report March 14, 2005 ITEP Testimony Bill 16-35 Proposed Income Tax Changes
ITEP’s analysis of Bill 16-35 shows that it would impact the District’s tax system in two important ways. First, the bill would make the District’s tax system less unfair by… -
report March 30, 2004 The Distributional Impact of SB 1374’s Personal Income Tax Changes
The Missouri personal income tax currently applies a graduated rate structure with tax rates ranging from 1.5 percent to 6 percent of taxable income. This rate structure is applied to… -
report January 28, 2003 The Impact of Imposing a “Flat Tax” on Missouri Personal Income
The Missouri personal income tax currently applies a graduated rate structure with tax rates ranging from 1.5 percent to 6 percent of income. This rate structure is applied to a…