One-third of those filing tax returns have zero income tax liability; the top 1 percent pay 37.3 percent.

With the deadline for filing federal tax returns approaching, along with legislative discussions here about tax progressivity, the Tax Foundations recent income tax series is timely. To understand the distribution of the tax burden, it’s important to consider local, state and federal taxes. We touched on that theme earlier this week. 

Yet, it’s easy to underestimate (or overlook) just how progressive the federal income tax has become. As the Tax Foundation notes here (and as shown in the graph below), a growing share of those filing returns now face zero liability. 

The following chart uses data from the Internal Revenue Service to show the percentage of nonpayers (taxpayers who owe zero income taxes after taking their credits and deductions) from 1950 to 2016. Despite occasional dips, the trend has been an increase in the percentage of nonpayers, from 28 percent in 1950 to 33.4 percent in 2016. During this period, the minimum percentage of nonpayers was 16 percent in 1969, and the maximum was 41.7 percent in 2009.

As TF notes, the reduced liability stems from the growth in tax credits aimed at relieving pressure on low income taxpayers.

The growth of refundable tax credits is driving this increase in nonpayers. As the value of refundable tax credits increases, more people find themselves paying no income taxes. The following chart uses data from the Congressional Budget Office to show the average refundable tax credit rate for the lowest, second, and middle quintiles from 1979 to 2015. The average refundable tax credit rate has increased more than tenfold for the lowest quintile, from 1.2 percent in 1979 to 12.4 in 2015. The second and middle quintiles have seen increases as well…

While the percentage of nonpayers has decreased slightly over the last decade, it may increase again as a result of the Tax Cuts and Jobs Act. With the expansion of the standard deduction and the child tax credit, more households are expected to have their tax liabilities eliminated.  

At the other end of the spectrum, the share of taxes paid by high-earners has increased over time.

As fewer Americans pay income taxes, the remaining taxpayers shoulder a greater share of the burden. As a result, the income tax burden has grown more progressive over time. From 1986 to 2016, for example, the top 1 percent’s share of income taxes rose from 25.8 percent to 37.3 percent, while the bottom 90 percent’s share fell from 45.3 percent to 30.5 percent.

Just what you’d expect under fiscal federalism.

A million more jobs than job seekers. Slow Q1 economic growth predicted as employers struggle to find skilled workers.

More signs of a slowdown. Calculated Risk’s Bill McBride posts on new estimates of Q1 GDP growth from Goldman Sachs (“We lowered our Q1 GDP tracking estimate by two tenths to +0.4%”), the Atlanta Fed (0.4 percent), and the New York Fed (0.4 percent). He concludes,

These early estimates suggest GDP will be slightly positive in Q1.

There’s a big difference between “slightly positive” and robust growth. We’ve warned of uncertainty and slow growth previously.

And with the slow growth we see persistent workforce challenges confronting employers, reported again by the Associated Press. 

U.S. employers posted nearly 7.6 million open jobs in January, near a record high set in November, evidence that businesses are still hungry for workers despite signs the economy has slowed.

The Labor Department said Friday that hiring also rose and the number of people quitting their jobs picked up. Quits are a sign of a healthy economy, because people typically leave a job for another, usually higher-paying, one.

The tally of available jobs now outnumbers the unemployed by roughly 1 million. Openings began to outpace the unemployed last spring, for the first time in the 18 years the data has been tracked.

The state revenue forecast comes out next week. We’ll be interested in how and whether the mounting national concerns affect estimates.

At $1,436, Washington ranks 24th in property taxes per capita. Again, state and local tax burden ranks near middle.

Washington’s state and local property taxes are right about at the national average, as the above Tax Foundation map shows. According to TF, the range is wide.

On average, state and local governments collected $1,556 per capita in property taxes nationwide in FY 2016, but collections vary widely from state to state. The highest state and local property tax collections per capita are found in the District of Columbia ($3,535), followed by New Jersey ($3,127), New Hampshire ($3,115), Connecticut ($2,927), New York ($2,782), and Vermont ($2,593). Meanwhile, the lowest collections per capita are found in Alabama ($548), Oklahoma ($699), Arkansas ($712), New Mexico ($768), and Kentucky ($775).

Property taxes, TF points out, also vary within states, as do property values and government services. And, as we know here, property taxes always attract a lot of taxpayer and political attention. 

We mention this, not just because people care about property taxes, but also because it continues an underreported fact. The performance of Washington’s tax structure, idiosyncratic as it is, resembles that of most states, most of the time. As the following chart from a Washington Research Council analysis of the state’s tax system makes clear, per capita tax collections here track well with the US average.

From the WRC summary:

Washington’s tax structure is unusual,but it yields revenues that are similar to other states by multiple metrics…

Despite its lack of an income tax, Washington’s state and local taxes per capita have largely tracked the national average (see Chart 3 on page 2). In 2016 (the most recent data available), Washington’s state and local taxes per capita were $5,050, above the national average of $4,946. By this measure, Washington ranked 17th in the nation.

The system is working.

No, Washington is not the “worst state to be poor.” Persistent myths frustrate efforts at understanding tax policy.

As state lawmakers prepare to write the next state budget, one that – at least initially – is likely to contain proposals for new and increased taxes, we see the reemergence of old myths. It’s one of those occasions where good people seem to revel in bad news. That’s right, we’re talking about the old shibboleth that Washington has the nation’s most “upside down” tax structure, one that imposes an extremely heavy burden on low-income taxpayers while letting high-income earners off the hook.

As the Washington Research Council effectively demonstrated, it’s more complicated than that. And, as the facts become more clear, the complicated and accurate analysis tells a more nuanced narrative,. As the WRC summarizes,

Charges that Washington has the nation’s most regressive state and local tax structurestem from a 2015 report by the Institute on Taxation and Economic Policy (ITEP). The ITEP analysis contains a number of methodological flaws that lead it to overstate the tax burden on low-income households nationally and, to an even greater extent, in Washington. In particular, our critique of the ITEP report identifies two major errors:

1. ITEP overestimates consumption spending by lower-income taxpayers relative to income, leading to an overstatement of the taxes they pay.

2. The ITEP treatment of Washington’s business and occupation tax causes it tooverestimate the degree to which the tax is shifted onto lower-income taxpayers. Their treatment of personal and corporate income taxes levied in other states shifts relatively less of the burden to lower-income taxpayers.

We also point to a key principle of fiscal federalism (a theory allocating responsibilities among the three levels of government), which holds that redistributive tax policies are best enacted at the national level. Adding this dimension to the analysis leads to our third finding:

3. All state and local tax structures are regressive. But when the steeply progressive federal income tax system is considered, the overall federal-state-local tax burden is progressive in Washington and every other state, and the differences among thestates represent smaller proportions of households’ tax burdens.

Yet, recently KUOW reported that “Washington ranks as the worst state for low-income earners to live, and it’s notably worse than any other state.” And The News Tribune writes, “Washington’s taxes make it the worst state to be poor.

Sigh.

KUOW also wrote that Washington’s tax structure failed to bring in enough money, claiming,

The regressive structure also means Washington taxes are low compared to other states, on average. States that tax people based on income bring in higher revenues.

WRC analyst Emily Makings responded to the news in a blog post. With respect to the inadequate revenue argument, she writes,

This is just not the case. As we showed in a recent report, Washington’s state and local taxes per capita were $5,050 in 2016. This was higher than the national average of $4,946 and Washington ranked 17th in the nation. Further, Washington’s state and local tax growth from 2015 to 2016 was the highest in the country. (2016 is the most recent data available.)

That’s not an argument. It’s a fact. We recommend the WRC’s report.

And, with respect to the regressively claim, Makings doesn’t reprise the detailed analysis from the WRC’s earlier report, but she does point out.

Additionally, the KUOW story stated, “Washington ranks as the worst state for low-income earners to live.” The rest of the story makes clear that they are talking about our tax structure, based on a report on state tax systems from the Institute on Taxation and Economic Policy (we have some issues with the report’s methodology, as we outlined in this paper). But that report doesn’t support the blanket statement that Washington is “the worst state for low-income earners to live.”

While low-income earners face significant challenges no matter where they live, the analysis ignores the impact of federal and state spending on programs that benefit low-income earners.

That’s a nontrivial point, worthy of more attention. As we wrote earlier citing a Governing magazine report,

ITEP’s analysis, however, has been criticized for not considering how states spend the tax revenue they receive and whether that may help lessen inequality. In 2014, the nonprofit Federal Funds Information for States (FFIS) warned that fairness is just one feature of a good tax system. Others are adequacy, simplicity, transparency and ease of administration. For example, FFIS pointed out that while Washington ranks poorly in tax fairness, it puts more of its revenues toward programs that support low-income families.

“Sometimes the policies that satisfy one feature run contrary to another, making it important that a system be evaluated in its entirety rather than in a piecemeal fashion,” the group said. (Emphasis added.)

In a New York Times op-ed, Monica Prasad, a professor of sociology and a faculty fellow in the Institute for Policy Research at Northwestern University, points out that European nations often cited for their “progressive” tax policies let spending programs carry much of the weight. Taxes there are high, she notes, but high on everyone.

The countries that have been most successful at reducing poverty and inequality have not done it by taxing the wealthy and giving to the poor.

Take Sweden, a country often cited by progressives for its extensive social programs. Sweden has very low poverty and inequality, and economic mobility is significantly higher than it is in the United States; a poor Swede is much more likely to become middle class than a poor American is.

We can learn from Sweden, but the lesson is not what many people think. Rich Swedes do get taxed at high rates, but so does everyone else: The average American worker’s total tax burden is 31.7 percent of earnings, compared with 42.9 percent for the average Swede. The Swedes actually tax corporations less: 19.8 percent, compared with 34.2 percent in the United States in 2017, the last year for which we have comparative data — and yes, that’s after all the loopholes and deductions have been accounted for. The American rate will be lower after the 2017 tax bill, but it’s still unlikely to be as low as Sweden’s.

Estate tax? In the United States the average effective rate is 16.5 percent. In Sweden, it’s zero.

Back to expenditures,

On the spending side, Sweden does not target much of its spending specifically to the poor. Tax revenue is spent on universal programs, like health care, which benefit most those who live longest; free college tuition takes from those who do not go to college and gives to those who do. Many aspects of welfare state spending in Sweden — as in other European countries — are linked to income, so that the more you earn, the more you receive in benefits. This is enormously effective, because it gives an incentive to Swedes to work hard and earn more.

Sensible incentives? Discuss.

Small business optimism shows slight uptick, but still stabilizing below recent highs. Top concern is finding skilled workers.

The National Federation of Independent Business has released its February Small Business Optimism Index. The numbers are little changed.

The NFIB Small Business Optimism Index improved modestly in February, increasing 0.5 points to 101.7. Views about future business conditions and the current period as a good time to expand improved as did plans to make capital outlays.  Earnings trends weakened, as a million laid off workers and others affected by the shutdown cut back on spending. The loss of sales falls right to the bottom line. Worker compensation and selling prices were lower in February than they were in January, but job openings rebounded remaining at historically high levels. The Uncertainty Index fell 1 point to 85, a small decline but still showing a lot of residual uncertainty from the government shutdown.

At Calculated Risk (from which the above graph is taken), Bill McBride says,

Most of this survey is noise, but there is some information, especially on the labor market and the “Single Most Important Problem.”…

Usually small business owners complain about taxes and regulations (currently 2nd and 3rd on the “Single Most Important Problem” list).  However, during the recession, “poor sales” was the top problem. Now the difficulty of finding qualified workers is the top problem.

We’re not as inclined to dismiss the survey’s optimism findings, as we remain concerned about the trend of declining optimism and the tightening of the labor market.

NFIB identifies the key workforce problem.

Owners are trying to hold on to the employees they have. Fifty-seven percent reported hiring or trying to hire (up 1 point), but 49 percent reported few or no qualified applicants for the positions they were trying to fill (unchanged). Twenty-two percent of owners cited the difficulty of finding qualified workers as their Single Most Important Business Problem, only 3 points below the record high. Thirty-seven percent of all owners reported job openings they could not fill in the current period, up 2 points from January and 2 points below the record high.

Challenging times for businesses of all sizes.

State treasurer Duane Davidson warns of recession risk, says state reserves are falling short of recommended level.

State Treasurer Duane Davidson last week told the Association of Washington Business Lobby Lunch that the state is not prepared for the inevitable downturn. (Reserve discussion begins about 8:50.)

The AWB Fast Facts reports,

“We’ve got growth that’s unprecedented, in the country,” Davidson said. “…And yet we continue to tamper with transfers out of the rainy-day fund.” The Government Finance Officers Association generally recommends that state and local governments set aside 15 percent or at least three months of general fund spending in case of a downturn, he noted.

“We’re not there yet,” he said. And there will be a recession, he added, it’s just a matter of when.

“And I don’t think right now, the state is equipped, basically, to face that,” he said.

With three-quarters of business economists predicting a recession in the next two years, the coming slowdown should be at the forefront of state lawmakers’ budget considerations. 

Baseball & Income Taxes. Los Angeles Times reports Bryce Harper saves tens of millions by not signing in California.

Bryce Harper recently signed a big – really big – contract to play baseball in Philadelphia

Bryce Harper played the outfield for the first time since signing a record $330 million, 13-year contract with the Philadelphia Phillies.

Columnist George Skelton writes in the Los Angeles Times that Harper’s decision to play in Philly made a lot of financial sense

For Major League Baseball players, three teams are at the bottom of the standings on state taxes: the Los Angeles Dodgers, San Diego Padres and San Francisco Giants.

That’s because California is in a league of its own on personal income taxes. We’ve got by far the highest state rate in the nation, topping out at 13.3%.

By contrast, Pennsylvania has a low flat rate for every taxpayer regardless of income. It’s just 3.07%. That’s one reason why superstar slugger Bryce Harper signed an eye-popping 13-year, $330-million contract last week with the Philadelphia Phillies, spurning the Dodgers and Giants.

It was the largest free-agent deal in the history of North American sports.

Taxes matter, as Harper’s agent points out.

Harper will save tens of millions in taxes by signing with the Phillies instead of a California team.

“With a contract of that magnitude, it’s dramatic,” Scott Boras, Harper’s agent, says of the taxes. “It could be almost a full year’s compensation.”

It’s an interesting column. Coming soon: Opening day, March 28. 

Mixed signals: slow retail sales growth, optimistic manufacturers, and a warning in unemployment rates

The weak begins much as last week ended: With analysts trying to unravel the mixed signals flowing from recent economic data. We’ll start with the graph above, from a Bloomberg column by Justin Fox, who looks to unemployment rates for signs of a coming recession.

Amid a February jobs report in which an unexpectedly small gain of 20,000 payroll jobs was the big news, the 3.8 percent unemployment rate got less attention…

What might signify something, though, is that the unemployment rate was also 3.8 percent last May, August and October…

So the unemployment rate has been pretty much flat for almost a year. Smooth out the noise using three-month moving averages, and it looks like it might even be trending upward a little.

Fox writes,

If the unemployment rate were to rise in the coming months, though, that would flash a pretty big warning signal.

Yes, every recession since World War II has been preceded by or coincided with a trough in the unemployment rate. Since 1957, Federal Reserve Bank of St. Louis economist Kevin L. Kliesen calculated last year, the average lag between the unemployment rate hitting bottom and the start of a recession (as determined by the National Bureau of Economic Research’s Business Cycle Dating Committee) has been 11 months.

There’s more; we recommend the column. Fox acknowledges weaknesses in the unemployment rate as a leading indicator,  concluding with a “but yet.” And, we’ve pointed out, three-quarters of business economists are projecting a recession in the next two years.

The Wall Street Journal also looks at last week’s employment numbers.

Pessimists had a good day Friday as the labor report for February came in at a paltry 20,000 net new jobs even as wages rose at the fastest clip in a decade. The hiring slowdown may be partly a statistical blip, but it is probably also a sign of slower first-quarter growth amid global uncertainties.

The big question is whether the February report is a one-month exception, as happens periodically, or a sign of a more serious growth slowdown. Investors are understandably wary as Europe slouches toward recession, growth slows in China (see nearby), and the Brexit deadline looms without a deal. The yield on the 10-year Treasury has fallen 13 basis points over the last week, and the 2019 stock rally has stalled. The trends on wages and investment should keep the economy going, but the jobs report shows there is less margin to tolerate policy mistakes like tariffs.

The National Association of Manufacturers says, “Don’t panic.”
…it is important to not read too much into these data, as the labor market continues to be strong overall. The U.S. economy has generated a robust 209,080 jobs, on average, each month over the past 12 months, with manufacturers hiring more than 20,000 workers per month, on average, since February 2017…
 
Manufacturers are experiencing a tight labor market that is not expected to go away anytime soon, as businesses face concerns about finding the skilled workers they’ll need to continue growing. In the most recent NAM Manufacturers’ Outlook Survey (released earlier this week), 9 in 10 manufacturers expressed a positive outlook for their business—hitting nine consecutive quarters of record optimism—but the inability to attract and retain workers continues to be the top concern for the sixth consecutive quarter. There are nearly half a million available manufacturing jobs in the United States.
Today’s report on retail sales, while a marked improvement on the disappointing holiday sales figures, is nonetheless underwhelming. 

Advance estimates of U.S. retail and food services sales for January 2019, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $504.4 billion, an increase of 0.2 percent (±0.5 percent)* from the previous month, and 2.3 percent (±0.7 percent) above January 2018.

The Associated Press reports,

U.S. retail sales rose slightly in January after a sharp drop in December, reflecting caution taken by consumers amid a government shutdown and volatile stock market…

The economy has stumbled after healthy growth last summer and fall. Weaker economies overseas, the U.S.-China trade fight, and the 35-day government shutdown dented consumer and business confidence. Economists believe growth could fall to a 1 percent annual rate or below in the first three months of this year.

After December’s report, the growth in sales was welcome. 

Gene Balk reports in the Seattle Times that the slowdown has hit metro Seattle.

For the second consecutive year, the number of driver’s licenses issued to new King County residents from out of state declined, according to records from the Washington Department of Licensing.

It’s starting to look like 2016 was peak boom. That year, more than 76,000 licenses were issued to folks moving to the county from somewhere else in the U.S. or from another country…

Pierce and Snohomish counties also experienced double-digit declines from their 2016 highs.

Overall, we agree with NAM: There’s no need to panic. But there’s plenty of reason to be cautious. And, we hope that caution extends to state budget writers. The beginning of a downturn is no time for major increases in state spending commitments.