ITEP Microsimulation Tax Model Overview

The state and federal distributional analyses and revenue estimates that ITEP produces are based on data from the ITEP Microsimulation Tax Model. First developed in 1996, the model computes the revenue yield and incidence of federal, state and local taxes, including both current tax law and proposed tax law changes. The model is unique in its ability to produce analyses at the federal and state levels and to analyze income, consumption and property taxes.

The basic model consists of detailed records on income, tax paid and other characteristics for about three-quarters of a million “tax units” (i.e., filers and non-filers), one of the largest databases on tax returns available to the public. Currently calibrated to reflect detailed population characteristics in 2015, the model incorporates detailed national, regional and state-level data on tax, income and a variety of other socioeconomic indicators as published by the IRS, Census, the Bureau of Labor Statistics, and the Bureau of Economic Analysis, among other U.S. data agencies. Information from all those data sources is used to “age” detailed income and other characteristics of the tax units in ITEP’S tax microsimulation database. The model also incorporates the latest available detailed data from statutory federal and state tax law.

The ITEP model’s federal tax calculations are similar to those produced by the congressional Joint Committee on Taxation, the U.S. Treasury Department and the Congressional Budget Office, although each of these models differs in varying degrees as to how the results are presented. Some state government offices, such as the Minnesota Department of Revenue, maintain similar models that can analyze the incidence of taxes within their state’s borders. The ITEP model, however, can be used to model both federal and state policies on a 50-state basis, which is a capability not found in any government model.

Below is an outline of each area of the ITEP model and its capabilities:

The Personal Income Tax Model analyzes the revenue and incidence of current federal and state personal income taxes and amendment options including changes in:

  • Rates, including special rates on capital gains, dividends and pass-through business income
  • Inclusion or exclusion of various types of income from the tax base
  • Inclusion or exclusion of all federal and state adjustments
  • Exemption amounts and a broad variety of exemption types and, if relevant, phase-out methods
  • Standard deduction amounts and a broad variety of standard deduction types and phase-outs
  • Itemized deductions and deduction phase-outs
  • Credits, such as earned-income and child-care credits and credits for property and payroll taxes
  • Thresholds for filing tax returns
  • Alternative minimum taxes

The Consumption Tax Model analyzes the revenue yield and incidence of current sales and excise taxes. It also has the capacity to analyze the revenue and incidence implications of a broad range of base and rate changes in general sales taxes, special sales taxes, motor fuel, tobacco, alcohol, and cannabis excise taxes. There are more than 250 base items available to amend in the model, reflecting sales tax base differences among states and possible changes that might occur. The model also includes modules for visitor consumption, reflecting the in-state purchases of individuals residing in other states or countries, and for business consumption, reflecting the in-state purchases of locally-based and nationally-based businesses.

The Property Tax Model analyzes revenue yield and incidence of current state and local taxes on real and personal property. It can also analyze the revenue and incidence impacts of statewide policy changes in property tax, including the effect of circuit breakers, homestead exemptions, and rate and assessment caps.

Local Taxes: The model can analyze the statewide revenue and incidence of local taxes (not, however, broken down by individual localities).

 

ITEP MODEL DATA SOURCES

The ITEP model is a “microsimulation model.” That is, it works on a very large stratified sample of tax returns and other data, aged to the year being analyzed. This is the same kind of tax model used by the U.S. Treasury Department, the congressional Joint Committee on Taxation and the Congressional Budget Office. The ITEP model uses the following micro-data sets and aggregate data:

Micro-Data Sets:

IRS 1988 Individual Public Use Tax File, Level III Sample; IRS Individual Public Use Tax Files; Current Population Survey; Consumer Expenditure Survey; U.S. Census; American Community Survey.

Partial List of Aggregated Data Sources:

Miscellaneous IRS data; Congressional Budget Office and Joint Committee on Taxation forecasts; other economic data (Commerce Department, WEFA, etc.); state tax department data; data on overall levels of consumption for specific goods (Commerce Department, Census of Services, etc.); state-specific consumption and consumption tax data (Census data, Government Finances, etc.); state-specific property tax data (Govt. Finances, etc.); American Housing Survey; Census of Population Housing; Energy Information Administration; Federal Highway Administration; BDS Analytics; Zillow Group, Inc.; Centers for Disease Control and Prevention; Kaiser Family Foundation; National Equity Atlas (produced by PolicyLink and the USC Program for Environmental and Regional Equity); Lincoln Institute of Land Policy and Minnesota Center for Fiscal Excellence; Rental Housing Finance Survey.

MORE RESOURCES:

Frequently asked questions about the ITEP model

ITEP’s approach to modeling taxes by race and ethnicity