An inconvenient tax truth: We’ve had plenty of tax cuts

Tea Party activists like these in Flagstaff, Ariz., oppose higher taxes, but in fact fewer and fewer of us actually pay income taxes.
REUTERS/Joshua Lott
Tea Party activists like these in Flagstaff, Ariz., oppose more taxes, but in fact fewer and fewer of us actually pay income taxes.

It’s a safe bet that anti-tax fever will inflame the grassroots, given today’s filing deadlines for federal and Minnesota income taxes.

Expect the heat to persist all year.

For one thing, it’s a high-stakes election year. For another, the energetic “Tea Partiers” are fanning this particular political flame. In one of many scheduled actions, a Minnesota arm of the Tea Party Patriots is organizing a rally  at the state Capitol today.

The truth is, though, that fewer and fewer of us actually pay income taxes, according to data compiled by the Tax Foundation  a conservative-leaning think tank in Washington D.C.

Further, most of us just got a tax cut. But – to the great frustration of the Obama administration – we didn’t seem to notice it. Only 12 percent of those asked in a recent CBS News/New York Times poll  said taxes had decreased. Of those who support the Tea Party, only 2 percent thought taxes had gone down.

Robert Hendin speculated in the Political Hotsheet at CBS News  that one reason the cuts enacted in 2009 got so little notice was because they were relatively puny potatoes.

“Most families saw about $70 more in take home pay every month,” he said. “Individual workers saw about $13 more a week.”

But if you count all of the various tax breaks enacted last year, they touched 98 percent of working Minnesota families, according to data released this week by Rep. Tim Walz, D-Minn.

 Those tax breaks include:

  • Making Work Pay credit: 95 percent of working families are receiving this credit, which means $400 less in taxes for individuals and $800 less for married couples.
  • College expenses: Families and students can claim up to $2,500 to pay for college expenses.
  • First home purchase: Various deductions of up to $8,000 are available.
  • Energy efficiency incentives: If you took steps like adding energy-efficient windows, you can claim a credit of up to $1,500.
  • New vehicle purchases: If you bought a new vehicle between Feb. 17 and Dec. 31 of last year, you can deduct the state and local sales taxes from your federal tax return.
  • Tax-free unemployment benefits: If you were out of work last year, the Recovery Act made the first $2,400 in unemployment benefits tax-free.

Another possible reason so many Americans shrugged off these cuts is that they were confused by raging debate over Obama’s desire to end the Bush-era tax cuts for wealthier families when they expire next year.

It wouldn’t be the first time in American politics that chatter overtook reality.

Growing ranks of nonpayers

Whatever the political reality, tax day is upon us again. And some 142 million Americans are expected to file tax returns for 2009 income.

That’s a hefty number. But here’s the interesting twist: Roughly one in three of the filers will be “nonpayers,” according to a report on the Tax Foundation’s research findings.

 



Thanks to legal deductions and credits, those people will be filing to reclaim every dollar that was withheld from their paychecks last year. And some actually will claim more than they paid because they qualify for the earned income tax credit.

“Nonpaying status used to be a sure sign of poverty or near-poverty, but Congress and the President have changed the tax laws to pull much of the middle class into the growing pool of nonpayers,” Scott Hodge, the Tax Foundation’s president, said in reporting the research.

“The income level at which a typical family of four will owe no income taxes has risen rapidly, now topping $51,000,” he said.

The foundation’s analysis of IRS data for the 2008 tax year shows that a record 51.6 million filers – more than 36 percent of those who filed a return for that year — had no income tax obligation. That’s a sharp departure from historic levels: Between 1950 and 1990, the percentage of tax filers whose entire tax liability was wiped out by deductions and credits averaged 21 percent.

“Since the early 1990s, however, lawmakers have increasingly used the tax code instead of government spending programs to funnel money to groups of people they want to reward,” Hodge said. “Credits have been enacted to subsidize families with children, college students, and purchasers of hybrid cars, just to name a few of the most well known.”

The most significant resulting loss to the federal treasury was the $500 per-child tax credit enacted in 1997. It had been championed by leaders of the Republican takeover of Congress in the 1990s, and ultimately embraced by then-President Bill Clinton too. 

The 2001 and 2003 tax legislation doubled the value of the credit to $1,000 and added a refundable component.

The upshot was that by tax year 2008, some 25.3 million filers received $30.7 billion in child tax credits, with more than 18 million of these filers getting $20.5 billion in refundable checks.

Add another $51.6 billion that was refundable under the earned income tax credit. Then toss in billions more that filers saved thanks to the Bush tax cuts in 2001 and 2003.

All of those breaks and more helped erase tax bills for legions of Americans.

Bowing to demands

When the numbers are totaled for 2009, they’re likely to show as many or more nonpayers than in 2008, Hodge predicted, because of President Obama’s new tax credits targeted at lower- and middle-income taxpayers.

Some other tax watchdogs set the nonpayer tally even higher than last year’s 36 percent. Analysts at the Tax Policy Center  estimate that 45 percent of American households will owe no federal taxes this year.  

For all the furor we’ll hear over taxes between now and Election Day, the truth is that politicians have bowed to demands for tax cuts to the point where Hodge sees “serious doubts about ability of the income tax system to continue funding the federal government’s ballooning expenditures.”

Neither party in Washington really wants to open a deep discussion about that prospect.

Meanwhile, some of us still will write checks and line up at the Post Office to mail them today.

Here are a few income and tax facts to ponder while you wait in line:

The Internal Revenue Service expects  to get 2.6 million returns from individuals in Minnesota for the tax year 2009.

The vast majority of the Minnesota returns (more than 1.9 million) will be filed electronically.

Minnesota ranked  11th among states in income per person in 2007. The top states were Connecticut, New Jersey, Massachusetts, New York and Maryland.  

Minnesota ranked fifth from the bottom of states in terms of the federal money that flowed back per person in 2008. States that got the most per person were Virginia, Maryland, Alaska, Kentucky and New Mexico. 

Sharon Schmickle writes about national and foreign affairs and science. She can be reached at sschmickle [at] minnpost [dot] com.

Comments (20)

  1. Submitted by Ron Gotzman on 04/15/2010 - 09:14 am.

    Sharon,

    The “tea-party” movement is not just “anti-tax.” It is anti-spending, anti-debt, anti-bailout, and anti-big government.

    For you to characterize the “tea-party” movement as just “anti-tax” is uniformed and unfair.

  2. Submitted by Greg Kapphahn on 04/15/2010 - 09:27 am.

    Whatever they’re for, or against, I suspect the Tea Party crowd will, today, certainly look and sound as if they’re the kinds of people who would still be complaining loudly if they paid $5/year in taxes.

    I’d suggest that they might want to set up a registration table at which those who are coming to the rally sign up to forgo all their federal benefits.

    If doing so were required of those who attend, we’d finally see how many of these Tea Partiers have even a whiff of integrity in all their raucous, hysterical “lock and load” and “reload” noise making.

  3. Submitted by Brian David on 04/15/2010 - 09:28 am.

    Articles like this are crucial in this current political climate. People will often look at easy to understand numbers, such as the straight income tax rate, and come away with misleading views of what is really being payed. This is the cause behind the oft mentioned ‘second highest corporate tax rate in the world’ line, a statement that is true when talking about the statutory rate, but which is not when discussing the actual taxes paid by corporations. It is, of course, worth discussing whether the real taxes paid by individuals and businesses is still too high, but let us at least avoid basing that discussion on misleading talking points.

  4. Submitted by Richard Schulze on 04/15/2010 - 09:59 am.

    It certainly doesn’t help that the public has a fetishistic love for “tax cuts”, ignoring that many of these cuts are merely a disguised form of government spending. How many times have I seen a new tax plan that would cut taxes for millions of Americans, never mind that many of these Americans already have no net federal income tax liability? Both Republicans and Democrats are guilty in this area.

    I’m all in favor of progressive taxation, but lets call it for what it is. The bulk of these credits and deductions are really no different than government assistance programs, whether it be for the working poor or favored corporate interests. Treating them otherwise drastically distorts the picture of our nation’s total tax burden. It also turns fiscal responsibility on its head – de facto cuts to government spending turn into tax-hikes. How long before the military starts funding its weapons programs with tank and bomber tax-credits:

    “Senator John Doe voted against the F-22 tax credit. Senator John Doe wants to raise America’s taxes. Senator Doe, why do you hate America?”

  5. Submitted by Jeff Klein on 04/15/2010 - 10:28 am.

    “It is anti-spending, anti-debt, anti-bailout, and anti-big government.”

    Oh, that’s why we heard so much from them during the Bush administration then.

  6. Submitted by Mohammed Ali Bin Shah on 04/15/2010 - 11:03 am.

    So, more people pay less, leaving a larger burden on fewer people. and this is fair how?

    People actually get paid by the government n(other taxpayers) in the form of credits. How is this fair or even legal?

    Sin taxes are up. Property taxes are up. Fees are up. Gas taxes are up.

    And in MN, our spending has been increasing 20% every biennial budget. Has our population increased that much? No. Has inflation increased that much? No? Have state salaries and benefits increased to levels 26% above average private sector jobs? Yes!

    Sharon’s view of the tea party as just anti-tax was indeed unfair, but viewing it as anything different would cause LIBDEMs to see how out of control spending really is.

  7. Submitted by Paul Udstrand on 04/15/2010 - 11:13 am.

    Just a quick note: I posted this story on my Face Book wall, but the only image (thumbnail) I could really use was a weather thing with the current temp on it, nothing else was really appropriate. Might want to associate a standard Minnpost image with your stories.

  8. Submitted by Richard Schulze on 04/15/2010 - 11:26 am.

    That’s the irony Jeff.

    I wholeheartedly believe in the concern of anyone at large deficits now, provided that they were likewise concerned by large deficits run by republican presidents who didn’t even have the excuse of a not-so-great recession. Otherwise, I think we know what’s going on.

  9. Submitted by Thomas Swift on 04/15/2010 - 11:50 am.

    Oddly enough, CNN is featuring this same story today.

    http://www.cnn.com/2010/OPINION/04/15/hodge.non.taxpayers/index.html

  10. Submitted by Ross Willits on 04/15/2010 - 12:13 pm.

    Thank you for this article. This was everything that yesterday’s article reprinted from the Christian Science Monitor was not. Excellent, well-researched work. Thanks.

  11. Submitted by Jeremy Powers on 04/15/2010 - 12:49 pm.

    I certainly noticed my taxes went down. A lot! I’m a small businessman and I do my own taxes so I noticed that I even got an extra credit for putting money away in a SEP IRA. As a result, I dug out my checkbook and started writing some checks to charity — the local food bank got a good sized one.

    I am concerned about the deficit — as we all should be. But I agree that, faced with the worst economic downturn in my 55 years, Obama and Congress did just about everything right. Now is when you rish deficit spending to prevent the complete collapse of the economy, which as I get older I understand just how fragile it is. My only Congressional anger was over TARP, which was a G.W. Bush plan, rubber stamped by a Democratic Congress.

  12. Submitted by Eric Ferguson on 04/15/2010 - 01:49 pm.

    MOhammed, “So, more people pay less, leaving a larger burden on fewer people. and this is fair how?”

    It’s not true. Notice that people who complain that the rich pay too many taxes always count only the federal income tax. They conveniently leave out all the other taxes, so they can propagate the lie that many people don’t pay taxes. There’s nobody who doesn’t pay taxes.

  13. Submitted by Sharon Schmickle on 04/15/2010 - 01:52 pm.

    Ron and Mohammed,
    The article doesn’t say taxes are the only Tea Party issue. It says these groups are influential this year on this particular issue. And it says that one of the Tea Party groups in Minnesota is staging a rally at the Capitol today, the day of the tax filing deadline.

    This is not a definitive article on Tea Party sympathizers, but one that mentions them in connection with the topic of the day.

    Hope that clears up that issue. And thanks for your interest in the article.

    Sharon Schmickle

  14. Submitted by Bernice Vetsch on 04/15/2010 - 02:43 pm.

    Mohammed (#6). Except for the tax on gasoline, the taxes and fees you correctly identify as rising are those that cities, small towns and counties had to raise year after year as Governor Pawlenty cut the monies DUE TO THEM and needed by them to maintain such services as school systems, streets and roads, parks and recreations, public hospitals, and even police and fire protection.

    The property tax we pay to the state is supposed to be divided between the state and local governments, with more money going to small towns that can’t afford such things as a new water treatment plant, for instance, and to large cities with many non-English-speaking immigrants and many people with low incomes.

    You can thank Governor Pawlenty and the others who apparently don’t care that government must have sufficient revenue to meet the real needs of regular folks for these raised taxes. You can read more about the anti-tax movement at the web site of its founder, Grover Norquist, http://www.atr.org.

  15. Submitted by Ron Gotzman on 04/15/2010 - 03:46 pm.

    Sharon,

    When these so-called “tax cuts (credits)” expire, will you be writing an article talking about “plenty of tax-increases?”

  16. Submitted by Bernice Vetsch on 04/15/2010 - 05:10 pm.

    Ron: Those won’t be tax increases. They’ll just mark the end of artificially low revenue collections thanks to the expiration of the ill-advised cuts.

  17. Submitted by Richard Schulze on 04/15/2010 - 10:02 pm.

    Oddly enough, there were just “several hundred patriots” @ the MN state capital today. Even on such a beautiful day, it was not a very well attended event.

  18. Submitted by David Willard on 04/15/2010 - 10:07 pm.

    IRS data shows that in 2007—the most recent data available—the top 1 percent of taxpayers paid 40.4 percent of the total income taxes collected by the federal government. This is the highest percentage in modern history. By contrast, the top 1 percent paid 24.8 percent of the income tax burden in 1987, the year following the 1986 tax reform act.

    Remarkably, the share of the tax burden borne by the top 1 percent now exceeds the share paid by the bottom 95 percent of taxpayers combined. In 2007, the bottom 95 percent paid 39.4 percent of the income tax burden. This is down from the 58 percent of the total income tax burden they paid twenty years ago.

    To put this in perspective, the top 1 percent is comprised of just 1.4 million taxpayers and they pay a larger share of the income tax burden now than the bottom 134 million taxpayers combined.

    Some in Washington say the tax system is still not progressive enough. However, the recent IRS data bolsters the findings of an OECD study released last year showing that the U.S.—not France or Sweden—has the most progressive income tax system among OECD nations. We rely more heavily on the top 10 percent of taxpayers than does any nation and our poor people have the lowest tax burden of those in any nation.

  19. Submitted by Dan Gerber on 04/16/2010 - 02:09 am.

    A number of things to note here: Looking at last year’s form vs this year’s, my federal tax went from $340 to $13; EIC from $2,472 to $62 (my daughter is out of college and living at home); the child tax credit is gone for a number of years because of her age. I did benefit from the “making work pay” for 2009. According to the tax program I use, my nominal federal rate is 10%, effective rate 0. I filed both federal and state electronically and received direct deposits for them in about a week. My property tax
    refund will be direct deposit and was e-filed as well.

    My parents made the annual trip with the “shoe box”
    of papers to do their return, and my dad mentioned
    a friend of theirs saying “you don’t have to file.”
    After looking it up at the IRS and checking my tax
    program, it is quite likely the case for them. There
    was no federal liability and a nominal state refund.
    He insisted on paying me for the effort, and that
    was more than his state refund.

    Where is a lot of the money going that would take
    care of social needs, infrastructure, eduaction,
    health care, etc? The wars in Afghanistan and Iraq
    have cost Americans an average of more than $7,000 per person since 2001. Dare I say “peace dividend”?
    Mayor Ryan of Binghamton, NY plans to install a
    “cost of war” counter at city hall to show residents
    what war is costing their city.

    http://www.democracynow.org/2010/4/15/war_counter

    Note that treating Gulf War vets is $8 billion, a
    *much* shorter war than the two present ones, and that the $7,000 doesn’t include treating vets of
    the current wars.

  20. Submitted by Richard Schulze on 04/16/2010 - 07:13 am.

    Nice post Dan, your preaching to the choir.

    Were our nation’s affluence unbounded, the lives of our young soldiers of no value, and the rest of our global interests happy to idle while we mess around in the Middle East, it might be a nice hobby to play this game a bit longer.

    Show me the cost/benefit trade-offs, the opportunity costs in global presence and global readiness, the wear and tear on Army, Guard, and Reserve, the cost in dollars and lives, the price the American people have to pay to meet your good goals. And do show how this fits with vital national interests.

    $300 billion taxpayers dollars budgeted for 2010 in Afghanistan, according to Congressional Research Service.

    Total US spending including 2010 estimated at $739.8 by Infoplease.

    1,017 US military personnel have been killed in Afghanistan, per database maintained by Washington Post.

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