The charity approach almost certainly wouldn’t have as much effect on projected federal revenue as the payroll-tax approach would. That’s because of another change in federal tax law -- a near doubling of the standard deduction that’s expected to result in fewer taxpayers itemizing their deductions. A new standard deduction worth $24,000 per married couple would outstrip the average SALT deduction claimed in all states, according to 2015 data. (The highest average was in New York, $22,200.) Experts estimate that about 90 percent of individual taxpayers will take the standard deduction going forward.
Estimates’ Methodology
Hemel’s analysis of the payroll-tax plan relies on statewide wage income figures, an average state income tax rate, an average marginal federal tax rate, and an assumption for the percentage share of state income taxes that won’t be deductible under the new tax law.
Since taxpayers who don’t itemize don’t report state income taxes to the IRS, Hemel approximated the average state income tax rate by dividing individual income tax collections by individual income. He used the middle federal tax bracket of 24 percent and placed the share of state income taxes that will not be deductible under the new law at 90 percent, since about 90 percent of individuals will claim the new, higher standard deduction, and many itemizers will hit the new $10,000 SALT cap based on property taxes alone.
In New York’s case, state wage income for 2015 was $516.8 billion. Hemel calculated an average state income tax rate of 4.76 percent, then applied a 24 percent federal rate. Factor in the 90 percent share of state income taxes that Hemel figures wouldn’t be deductible under the tax law and the total is $5.3 billion.
The calculations then factored in a nominal wage growth measure -- the index of aggregate weekly payrolls -- which rose 9 percent from June 2015 to June 2017. A conservative nominal wage inflater of 2.5 percent a year was then applied to subsequent years.
Hemel’s method “looks reasonable to me, and clever,” said New York University law professor David Kamin.
This article was provided by Bloomberg News.