Tax Revenues: Business as (Un)usual

You can file your 2019 tax returns starting January 27. The IRS  will accept and process 2019 tax year returns from individual filers beginning that day. Tax Day, the deadline to file tax returns and pay any tax owed, will be Wednesday, April 15. The IRS expects more than 150 million individual returns, with most coming before April 15.

The chance the IRS audits your return hasn’t been this low since 2000. The personal income tax audit rate has fallen to 0.45 percent, the lowest since 0.49 percent nearly twenty years ago. In 2010, when the IRS experienced a budget peak, the audit rate was 1.11 percent. But the agency budget is off by 20 percent since then. The IRS has lost almost 30,000 full-time positions since 2010 and expects that nearly one-third of its current workers will retire in the next five years. 

Effective income tax rates have fallen for the top one percent since World War II. TPC’s Robert McClelland and Nikhita Airi illustrate how. While the individual income tax remains progressive, effective tax rates—measured as federal income tax divided by adjusted gross income (AGI)—have fallen significantly over the past seven decades for those in the top 1 percent of the income distribution.

Meanwhile, trillion dollar federal budget deficits continue to grow, despite solid economic growth. TPC’s Howard Gleckman reviews that story in a chart from the  Committee for a Responsible Federal Budget. It’s “not how it is supposed to work. In normal fiscal times… deficits are expected to rise when the economy slows and fall when times are good.  Now, it seems, they rise even when the economy is at full employment…. Will a future Congress and president still be able to borrow to cut taxes and boost spending in the teeth of the next recession?”

New York State lawmakers eye new taxes on the rich. A group of Democratic state senators plan to sponsor a revenue package that would raise up to $30 billion a year by targeting billionaires. The package includes income tax increases on the wealthy and higher  levies on banks, hedge funds, and private equity firms. It also would reduce corporate tax incentives, and  roll back the sales tax exemption on luxury yachts and private planes. The tax would fund investments in housing, a state  Green New Deal, and other progressive policies. 

The Tax Cuts and Jobs Act has been very good for Texas’ high earners. The Federal Reserve Bank of Dallas finds that tax cuts enacted under the TCJA reduced total tax liabilities in Texas by 2.1 percent in 2018, more than the 1.4 percent average tax cut for the rest of the country. The highest-earners, with incomes exceeding $500,000, enjoyed average tax savings exceeded 3 percent of income, two or three times higher than the average savings for similar earners in the US. 

Would a very high tax on vaping increase traditional cigarette smoking? A new study from the National Bureau of Economic Research looked at Minnesota’s steep vaping tax of 95 percent. Declines in cigarette smoking leveled off, but in  states that lacked similar vaping taxes, smoking rates continued to fall. The  results suggest that if Minnesota’s 95 percent tax were imposed nationally, about 1.8 million smokers could be deterred from quitting in a ten-year period. If the vaping tax were the same as the tax on cigarettes, it could deter more than 2.75 million smokers from quitting. The researchers conclude, however, that “the public health benefits of not taxing e-cigarettes, however, must be weighed against effects of this decision on efforts to reduce vaping by youth.”

For the latest tax news, subscribe to the Tax Policy Center’s Daily Deduction. Sign up here to have it delivered to your inbox weekdays at 8:00 am (Mondays only when Congress is in recess). We welcome tips on new research or other news. Email Renu Zaretsky at [email protected].