Wednesday, February 12, 2014

Locke Foundation's "Massachusetts Miracle"

Last month, the John Locke Foundation released a report, "Tax Cuts for All," that purported that the tax reform that North Carolina enacted in 2013 would result in lower average net taxes for every income group in the state by 2015. For the report, the JLF relied on numbers computed by the Beacon Hill Institute at Suffolk University in Massachusetts.

The numbers look miraculous.

Contrary to some other analyses, the JLF and its Massachusetts partner find that total taxes paid by every income group will be lower in 2015 than they would have without the reform. Specifically, they estimate that 
  • households with incomes below $25,000 will save a total of $79 million,
  • households with incomes of $25,000 to $50,000 will save $68 million,
  • households with incomes of $50,000 to $75,000 will save $58 million,
  • households with incomes of $75,000 to $100,000 will save $78 million,
  • households with incomes of $100,000 to $200,000 will save $201 million, and
  • households with incomes above $200,000 will save $369 million.
The enormous tax savings for the small number of households in the top income category would be great news for them, but the more modest projected savings for other households would also be good news (just not as much good news as the very, very rich).

The miraculous part is that numbers suggest that the NC tax changes provide average tax savings across the income distribution.

However, there's just a teensy, weensy problem with the analysis--the numbers don't add up. Or rather, the estimated $853 million in total JLF savings across income groups in 2015 adds to far more than the anticipated savings from NC's official budget analysis.

The report claims to rely on many figures and estimates provided by the Fiscal Research Division of the NC General Assembly. But the FRD calculated that the tax package would only reduce revenues by $501 million in fiscal year that runs July 2014-June 2015 and $760 million in the fiscal year that runs from July 2015-June 2016. Thus, the 2015 calendar year savings would be somewhere between $501 and $760 million.

Yet the JLF and its Massachusetts partner find $853 million in savings.

Talk about your Massachusetts miracles!

Update (2/12/14, 2:15 p.m.): The JLF/Beacon Hill numbers have become more miraculous.

The FRD estimates that state revenues will drop $501-$760 million in 2015. However, the funds coming from taxpayers' pockets will only fall $434 to $706 million because the expansion of the sales tax also increases local government tax receipts.

Also, the JLF/Beacon Hill estimates don't treat the elimination of the state Earned Income Tax Credit as tax reform (low-income families are likely to see things differently). The elimination of the state EITC will cost low-income households at least $100 million per year.

These changes add more than $150 million to the discrepancy between the JLF/Beacon Hill numbers and the official state projections.

2 comments:

Paul Bachman, Director of Research at the Beacon Hill Institute said...

The Beacon Hill Institute would like to take the time to respond to the “Massachusetts Miracle” post by Professor Ribar from Wednesday, February 12, 2014.
Professor Ribar contends that our estimate of the tax savings is larger than those produced by Fiscal Research Division (FRD) due to the new tax reform law. In doing so, he makes the mistake of comparing the FRD estimate of the effect of the tax law change on the state budget with our estimate of tax laws effect on households by income bracket. For example, the law transfers $209 million of the franchise tax and tax on piped natural gas to municipalities in fiscal year 2015-20016, which reduces the impact of the law on the state budget, but has no impact on the experience of households that are subject to the tax.
Moreover, we estimate the savings for calendar year 2015, while the FRD calculates the revenue changes for fiscal years.
Professor Ribar’s second post on February, 12 at 2:15 pm is simply wrong. We do, in fact, subtract $102.5 million from bottom two tax brackets to account for the elimination of the Earned Income Tax Credit, which we include in the row labeled “credits” in our table.

Paul Bachman, Director of Research at the Beacon Hill Institute said...

The Beacon Hill Institute would like to take the time to respond to the “Massachusetts Miracle” post by Professor Ribar from Wednesday, February 12, 2014.
Professor Ribar contends that our estimate of the tax savings from the new tax reform law is larger than those produced by Fiscal Research Division (FRD). In doing so, he makes the mistake of comparing the FRD estimate of the effect of the tax law change on the state budget with our estimate of tax laws effect on households by income bracket.
For example, the law transfers $209 million of the franchise tax and tax on piped natural gas to municipalities in fiscal year 2015-20016, which reduces the impact of the law on the state budget. But this has no impact on the experience of households that are subject to the tax.
Moreover, we estimate the savings for calendar year 2015, while the FRD calculates the revenue changes for fiscal years.
Professor Ribar’s second post on February, 12 at 2:15 pm is simply wrong. We do, in fact, subtract $102.5 million from bottom two tax brackets to account for the elimination of the Earned Income Tax Credit, which we include in the row labeled “credits” in our table.


Paul Bachman,
Director of Research at the Beacon hill Institute