EFFECTS OF A RECESSION ON THE TAX BURDENS DISTRIBUTION:

DISTRICT OF COLUMBIA HOUSEHOLDS2007 TO 2009

Betty Alleyne, OCFO Kelly Dinkins, OCFO

betty.alleyne@dc.gov kelly.dinkins@dc.gov

Daren Conrad, University of the West Indies Daniel Muhammad, OCFO

daren.conrad@sta.uwi.edu daniel.muhammad@dc.gov

All opinions expressed here are solely those of the authors and not the DC OCFO or the University of the West Indies.

Demas-Rampersad SeminarThe University of The West Indies at St. Augustine

Trinidad

April 24th, 2014

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About the Study

Background

a) Difficulties in empirical analysis re taxation studies:• Securing adequate data; • Disassociation of the effects attributable to a tax reflecting

changes in other economic forces; and• Measuring tax burdens.

a) Tax burdens are used as indicators of how well policies meet the goal of equity in raising revenue to run government.

c) Understanding tax burdens provide answers to broader economic and socioeconomic questions about the effect of tax policies on the distribution and potential redistribution of income and wealth

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PURPOSE

a) To identify whether there were significant changes in the overall distribution of household tax burdens in the District of Columbia during the 2007-2009 recession.

b) If so, identify some of the major causes for the redistribution of citywide tax burdens.

Significance of Study• Unlike many tax burden studies that rely heavily on methodological

assumptions, this study conducts a microanalysis of actual household tax liabilities for owner-occupied households over time.

The Study

 

 

 

                                             

 

 

 

 

 

 

                                        

 

Aggregate Supply

Aggregate Demand

Price Level 

Output, Income

Y2007 

P2009 P2007 

Y2009

P 

Y

The U.S. Economy: 2007 to 2009 

Aggregate Demand and Aggregate Supply 

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Literature Review

Tax Burdens

There is little detailed information on the tax burden which each state imposes on its residents or on how the burden varies with income and macroeconomic business cycles (Phares, 2003).

Taxation occupies the important position of distribution and by extension, which is of equal and potentially greater importance, distributive justice. Consequently, any discussion on taxes must address the issue of the distribution of the burdens of ‘social cooperation’ (Farrelly, 2004).

Burden tables even do a bad job of showing the initial incidence of a tax (IRET No. 88, 2004).

Tax Burdens

‘The true measure of a tax burden is the change in the individuals’ economic situation as a result of the tax after all economic adjustments are taken into account”(IRET No. 88, 2004).

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Data Standardization&

Matching

Standardization

a) Considered only residential properties receiving homestead exemption (reduced real property assessed value by $67,500 prior to computing the yearly tax liability).

a) Standardize name and address fields in both RPT and IIT files.For Example – “Doe, Jane 1122nd Street, NW Washington” or “J. Doe 11 22nd Street N.E. Washington, DC”

c) Standardization scheme was used to parse the address field of each dataset into several tokens. Standardization scheme was used to standardize taxpayer names on the IIT files and homeowner names on the RPT file.

Matching

a) Assigned “match code” to make the address and name unique in both files based on locale, match definition, and sensitivity level

b) End result of matching:TY 2007: 54,601 recordsTY 2008: 55,614 recordsTY 2009: 53,772 records

c) Comprehensive Taxpayer Dimension table

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Data Analysis

Data

a) For this study, household tax burden is defined as the combined total of DC individual income (IIT) and real property (RPT) taxes relative to federal adjusted gross income (AGI) of District of Columbia residents that live in owner-occupied households.

b) The matched data set (MDS) contains matched IIT and RPT tax records for over 53,000 owner-occupied households foreach of the three years under study. The MDS was generated bymatching records by name and address.

c) The tax years under investigation are 2007, 2008 and 2009.

* How Relevant is the Matched Data Set?

*Individual Income Tax•18% of all Individual Income Tax Filers•30% of all Adjusted Gross Income and Individual Income Taxes Paid

*Real Property Tax•59% of all Registered Homesteads•70% of all Homestead Value & Property Taxes Paid by Homesteads

*Total•Over $570 million in Tax Revenue and Over 34% of all DC Individual Income and Residential Real Property Taxes Paid

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* Distribution of Individual Income Tax Filers by Filer Type All District Filers vs. Matched Data Set

2007 - 2009

Filer Type The District Matched Data The District Matched Data The District Matched Data

Single 58.6% 51.9% 61.1% 53.1% 61.9% 52.7%

Married 15.6% 29.9% 15.9% 29.3% 16.3% 30.0%

Head of Household 19.5% 14.3% 19.8% 13.9% 18.6% 13.6%Married Filing Separate 3.2% 3.8% 3.2% 3.7% 3.2% 3.7%

CY2007 CY2008 CY2009

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3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

2007 2008 2009

5.50%

5.30%

5.10%

1.53%1.78%

2.15%

Effe

ctiv

e Ta

x Ra

tes

Income Tax Real Property Tax

Total Effective Tax Rates2007: 7.03%2008: 7.08%2009: 7.25%

*District of ColumbiaWard Map

Ward 8

Ward 3Ward 5

Ward 2

Ward 4

Ward 7Ward 6

Ward 1

* Matched Data Set Statistics By WardsPercentage Point Changes in ETRs, 2007 to 2009

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Wards IIT/AGI RPT/AGI TB/AGI

Ward 1 -0.03% 0.48% 0.46%

Ward 2 -0.32% 0.75% 0.43%

Ward 3 -0.56% 0.73% 0.17%Ward 4 -0.25% 0.50% 0.26%

Ward 5 0.12% 0.25% 0.37%

Ward 6 0.21% 0.16% 0.36%

Ward 7 0.08% 0.15% 0.23%

Ward 8 0.05% 0.11% 0.17%

Total -0.3% 0.6% 0.2%

* Average AGI by Ward, 2007 and 2009

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Wards2007

Average AGI2009

Average AGI % Change

Ward 1 $124,713 $121,470 -2.6%

Ward 2 $263,598 $213,677 -18.9%

Ward 3 $394,046 $300,148 -23.8%Ward 4 $143,341 $130,475 -9.0%

Ward 5 $64,250 $66,254 3.1%

Ward 6 $82,103 $92,854 13.1%

Ward 7 $53,729 $56,407 5.0%

Ward 8 $47,028 $49,630 5.5%

Total $186,511 $156,369 -16.2%

* Matched Data Set Statistics By Income LevelTotal Percent Changes, 2007 to 2009

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Income Levels AGIIIT

Liability AVRPT

LiabilityTotal Tax Burden

LT $50,000 -31.4% -17.8% 14.9% 22.2% 8.5%

$50,000 - $75,000 0.1% -5.8% 16.2% 24.6% 6.6%

$75,000 - $100,000 0.2% -4.0% 12.5% 21.7% 5.0%$100,000 - $200,000 0.3% -1.7% 6.6% 16.8% 4.0%

$200,000 - $500,000 -1.5% -4.0% 5.8% 15.9% 0.6%

GT $500,000 -18.7% -27.5% 4.5% 13.1% -24.0%

Total -13.0% -18.2% 10.1% 19.4% -10.0%

* Total Percentage Point Changein Effective Tax Rates By Income Level

2007 to 2009

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Income Levels IIT/AGI RPT/AGI TB/AGI

LT $50,000 0.6% 4.9% 5.5%

$50,000 - $75,000 -0.2% 0.6% 0.4%

$75,000 - $100,000 -0.2% 0.5% 0.3%$100,000 - $200,000 -0.1% 0.4% 0.3%

$200,000 - $500,000 -0.2% 0.3% 0.2%

GT $500,000 -0.6% 0.2% -0.4%

Total -0.3% 0.6% 0.2%

* Effective Tax Rates for the Matched Data Set by Deciles - TY 2007 vs. TY2009

* Share of Taxes Paid for the Matched Data Set by Deciles - TY 2007 vs. TY2009

* Percentage Point Change in Shares of Total Taxes Paid for the Entire MDS by Deciles, TY2007 vs. TY2009

* Percentage Point Change in Shares of Taxes Paid for Capital Gains Filers by Deciles, TY2007 vs.

TY2009

* Percentage Point Change in Shares of Taxes Paid for Business Income Filers by Deciles, TY2007 vs.

TY2009

20%

40%

60%

80%

100%

2007 2009

52.6%66.6%

47.4%33.4%

The Share of IIT Paid by Income Group- MDS

Income LT $500k Income GT $500k

20%

40%

60%

80%

100%

2007 2009

86.7%

90.1%

13.3% 9.9%

The Share of RPT Paid by Income Group- MDS

Income LT $500k Income GT $500k

20%30%40%50%

60%

70%

80%

90%

100%

20072009

61.3%

74.5%

38.7%25.5%

The Share of Total TaxesPaid by Income Group- MDS

Income LT $500k Income GT $500k

Some of the burden of taxes has shifted from very high income to lower income taxpayers over the study period.

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Income Groups N Share % Chg in W/S Share of WS

$1-30k 23,019 38.5% -40.2% 7.3%

$30-50k 13,448 22.5% -34.2% 10.1%

$50-70k 7,046 11.8% -34.7% 8.0%

$70-90k 4,080 6.8% -34.1% 6.3%

$90-110k 2,631 4.4% -33.6% 5.1%

GT $110 9,571 16.0% -50.6% 63.2%

Total 59,571 100.0% -45.0% 100.0%

Filers with some wage/salary losses in 2009

Wage Losses Among Common Filers in 2007 and 2009

• 59,571 filers with some wage losses paid $149.4 million less in taxes in 2009.

• These filers account for about 20% of all AGI.

• 2007 wage: mean $86,311, median $38,569

Income Groups N Share % Chg in W/S Share of WS

$1-30k 4,031 57.9% 100.0% 12.6%

$30-50k 1,057 15.2% 100.0% 12.3%

$50-70k 626 9.0% 100.0% 11.0%

$70-90k 404 5.8% 100.0% 9.6%

$90-110k 223 3.2% 100.0% 6.6%

GT $110 622 8.9% 100.0% 47.9%

Total 6,964 100.0% 100.0% 100.0%

• 6,964 filers with total wage losses paid $20.3 million less in taxes in 2009.

• These filers account for about 2% of all AGI.

• 2007 wage: mean $48,074, median $22,432

Filers with total loss of all wage/salaries in 2009

• Some of the city’s tax burden shifted from households with income GT $500k to households with income LT $500k households.

• The lower effective tax rates for high income households appears to be caused by major declines in AGI (capital gain losses).

• IIT effective tax rates in DC East went up, and IIT effective tax rates in the DC West went down.

• RPT effective tax rates in DC West went up more than the RPT effective tax rates in DC East.

• The biggest change to the DC economy in 2009 was the 13% decline in IIT revenue (-$158 million). This appears to be correlated to a 40% decline in the S&P 500 in 2008 and a 61% ($1.9 bill.) decrease in DC capital gains in 2009.

• Even though total AGI and total tax revenue declined, wages/salaries and business income increased for several categories of taxpayers.

• Tax reform requires political fortitude.

• Existing beneficiaries could see a loss of income and real property values while others may see a gain in income and wealth

ISSUES THAT NEED CONSIDERATION

• Should the tax system be income based or consumption based?

• Should we have high tax rates and liberal exemptions or should we have low tax rates levied on broad bases?

• Do we want horizontal equity or do we want wide differentiation?

• How much redistribution should be reasonably expected?

*Conclusions

*The recession caused a significant redistribution in the share of taxes paid. The burden shifted away from high income filers to the middle class and low income filers.

*Real property tax policy (and not market values) are the cause of higher real property effective tax rates in 2008 and 2009.

*Unlike most tax burden studies, this analysis of actual microlevel tax data for households allows for a high degree of insight into underlying changing dynamics that caused a significant redistribution of the city’s tax burden during the most recent recession.

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CGE ModelsComputable general equilibrium (CGE) models have been used since the early 1970s to analyse the economic effects of changes in taxation (see Shoven and Whalley, 1992; Greenaway et al., 1993).

• Estimation of burdens using the CGE