Modeling State Taxes and Federal Interactions
The Tax Policy Center (TPC) uses its state-of-the-art microsimulation model to provide comprehensive, rigorous, and objective analyses of federal tax policy changes and major reform proposals. The State and Local Finance Initiative is expanding the TPC model to include effects of state tax policies and interactions between the state and federal tax systems. These enhancements will allow us to answer such questions as how proposed federal tax changes affect residents of individual states, and what is the combined effect of federal and state taxes on families of various sizes and income levels.
While both federal and state income taxes are generally progressive, state systems are much less progressive than the federal system—and the degree of progressivity varies widely among the states. Recent federal tax increases offered a subsidy to states via the federal deduction for state income taxes, but more states lowered rates than raised them.
With presidential candidates and congressional leaders debating taxes, there is renewed interest in how federal tax reform could affect the states. The effects of these federal proposals on individual tax burdens would vary across states, as would their effects on state tax revenues and state economies. Event materials include papers on the state and local tax deduction and TPC’s microsimulation model.
While federal and state final income tax payments are always a surprise, events in 2012 compounded the normal uncertainty in 2013 and 2014. This brief examines how the timing of events like the fiscal cliff affects state budget outlooks and how state economists grapple with uncertain federal policy affecting income tax revenue.