Where Tax Reform Will Impact

Income Tax Pay 10% or $200


Federal Tax Returns


IRS Statistics of Income

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  • Incomes & Spending
    • Federal Tax Returns
      • Sources of Income
      • Deductions
      • Credits and Payments
      • Taxes Filed, Taxes Paid

With both houses of Congress putting the last touches on the sweeping and controversial overhaul of the income tax code, it’s possible to look at data from the IRS to see where different proposed changes might have substantial impacts.

As a caveat, as of today (December 4th) even though the Senate and House have both passed some form of the tax reform bill, the two bills are different, and the final bill has not yet been finalized. I’m getting most of my information from this article at the New York Times.

Also, if you haven’t read it yet, look at our earlier post on the Federal Historic Tax Credit, which could be on the chopping block, affecting a wide range of communities.

IRS Statistics of Income data takes all the data from individuals’ annual income tax returns and aggregates them to zip codes, counties, and states, giving you a sense of what kinds of taxes were paid in different areas. (We’ve written about it before.) Virtually every line on the 1040 form has an associated indicator, letting you see where different types of income, taxes, deductions, and credits were applied.

One thing the tax bill would do is raise the standard deduction, so fewer people would itemize their taxes. Already, about 70% of filers choose the standard deduction over itemizing, because they aren’t eligible for enough tax deductions to make itemizing worth it. What this means is that filers who don’t itemize don’t have the tax incentives that various deductions offer. Someone may still choose to donate to charity, for example, but they’ll no longer have the tax incentive to do so. (Keep in mind, deductions are different than credits. Credits can still be taken by people who take the standard deduction.)

So what might a map of itemized deductions tell us? In areas with a low itemization rate, people who already take the standard deduction may end up with lower taxable income (though that may be affected by changes in the actual tax rate). In areas with a higher itemization rate, the rate of itemization has potential to drop with the new high standard deduction. This could mean, among other things, less tax incentive to donate to charity, or own a home with a mortgage.

Here you can see the high itemization rate in the wealthy Denver suburbs, with a lower rate (more people taking the standard deduction) within the city, and in the more rural areas outside the metro area.

Among people who did itemize, you can look at what the average amount of itemized deductions was. The lower the average deduction, the more people will likely move to the standard deduction.

One deduction that’s proposed to be eliminated is the state and local tax deduction. You can see how eliminating the state income tax deduction disproportionately affects people in different states:

To a lesser degree, this also affects people in states with low income taxes and higher sales taxes:

It appears that some deductions will remain in place for property taxes, though it could be reduced. This map shows the average amount that itemizers deduct for real estate taxes (among those who deduct for real estate taxes). Again, there are clear differences along state lines.

From a data perspective, raising the standard deduction will reduce the effectiveness of looking at some of these indicators. Right now, this data is a great way to see where people are making charitable contributions, based on how much they’re deducting. If fewer people deduct their charitable contributions (because they’re taking the standard deduction) they may or may not still be making contributions, but that’s no longer being reflected in the data.

Similarly, this data has been a good way to see differences in state tax rates in different areas of the country. With that deduction removed, this data will no longer be available.

This is one of the perils of administrative data (as opposed to survey data). If the reason for the data being collected goes away, the data goes away as well. (Which is why funding for survey data like the Census is so important!)

There are countless more areas where data will inform who’s affected by changes in the tax code, and we’ll be looking at those as the proposal continues to make its way through Congress.

It’s also worth noting that such a large reduction in revenue could result in reductions of funding for various services, like Medicare. If those reductions begin to be proposed, we’ll have data on that as well.


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