High-income residents of New York City and President Barack Obama’s home state of Hawaii would have the highest marginal tax rates in the U.S. if Congress adopts the president’s proposal to increase taxes for top earners, a study found.
The Tax Foundation, a Washington research group that advocates for lower taxes, said state, local and federal levies would result in a top 50.8 percent rate on high-income New York City residents. Affluent Hawaiians would pay 49.7 percent. Residents of California, Vermont, Maryland and New York round out the five states with the heaviest burdens, with top federal- state rates of 49.4 percent, 48.8 percent, 48.6 percent and 48.4 percent, respectively.
“High-income taxpayers, along with second earners, tend to be the most sensitive to higher marginal taxes,” said Gerald Prante, the Tax Foundation economist who prepared the report. “And as they keep getting higher and higher, the marginal cost grows even faster.”
Lower tax rates on income and investments enacted in 2001 and 2003 expire Dec. 31. Obama and most Democrats want to retain those that target individuals earning less than $200,000 and married couples earning under $250,000 and allow policies that benefited those with higher incomes to expire. Republicans generally back extending all of the tax cuts. (To see an interactive chart of the tax debate, click here.)
Obama’s proposal would allow the top marginal tax rates of 33 percent and 35 percent to revert to 36 percent and 39.6 percent next year. Phase-outs for deductions and exemptions would also be reinstated, pushing the rate higher. Tax rates on dividends and capital gains would increase to 20 percent from 15 percent.
Under current law, the top federal tax rate applies only to taxable income that exceeds about $375,000; amounts below that are taxed at lower rates. Taxable income is equal to gross income minus deductions, so most taxpayers wouldn’t begin paying at top rates until they gross more than about $400,000.
The top marginal rates also don’t reflect the overall tax the highest earners pay, especially when most of the income comes from capital gains or dividends.
The 400 highest-earning U.S. households reported an average of $345 million of income in 2007, while their average tax rate fell to 16.6 percent, the lowest in almost 20 years.
$532 Tax Bill
Almost three-quarters of the highest earners’ income was in capital gains and dividends taxed at a 15 percent rate set as part of tax cuts backed by President George W. Bush in 2003, Internal Revenue Service statistics show. Of the 400 earners, 289 paid a total effective federal tax rate of 20 percent or less in 2007, the last year for which figures were available, the data show.
Separately, IRS data shows 80 percent of those facing higher taxes under Obama earn between $200,000 and $500,000. An analysis by the congressional Joint Committee on Taxation in August concluded their taxes would increase on average by $532 a year.
The marginal tax rate rankings of states would be little changed if Republicans prevail and all tax cuts are extended, the Tax Foundation found. In that case, the top marginal rate in New York City would be 45.3 percent; Hawaii, 44.3 percent; California, 44.1 percent; Vermont, 43.3 percent; Maryland, 43.1 percent; New Jersey and New York, 43 percent.
Other states at the top under one or both scenarios include Maine, Minnesota, Idaho, North Carolina and Ohio.
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