On November 17, 2018 , Kevin Perese, a senior adviser in CBO's Tax Analysis Division, and Patrick Landers, formerly of CBO, presented at the National Tax Association’s 111th Annual Conference on Taxation. This presentation summarizes some initial work on allocating state and local taxes to U.S. households as part of CBO’s analyses of the distribution of household income. CBO plans to allocate three sources of state and local taxes to U.S. households: property taxes, individual income taxes, and consumption taxes (which consist of general and selective sales taxes). The presentation reviews the theoretical incidence for those tax sources and describes how CBO plans to allocate them to households. The work is in an early stage and was presented for feedback and critical comments. The results in the presentation are preliminary.

1. Congressional Budget Office
National Tax Association’s 111th Annual Conference on Taxation
New Orleans, LA
November 17, 2018
Kevin Perese, Tax Analysis Division
Patrick Landers, formerly of CBO
Allocating State and Local Taxes to
U.S. Households
As developmental work for analysis for the Congress, the information in this presentation is preliminary and is being circulated to stimulate discussion and critical comment.

2. 1
CBO
Why is CBO interested in allocating
state and local taxes to U.S.
households?

3. 2
CBO
Source: Bureau of Economic Analysis, National Income and Product Accounts, Tables 3.2 and 3.3.
First, CBO seeks to allocate state and local taxes to
households for the sake of balance and completeness,
because the agency already allocates spending for
some jointly administered state and federal programs
to households, namely:
 Medicaid
 Unemployment insurance
Second, CBO seeks to allocate state and local taxes
because they are sizable and can significantly affect
the distribution of income after transfers and taxes.
Two Reasons
Government Receipts, 2014

4. 3
CBO
What components of state and local
taxes does CBO intend to allocate to
U.S. households?

5. 4
CBO
CBO’s Goal Is Not to Do State-Level Tax Analyses

6. 5
CBO
CBO Currently Presents National Distributions . . .
Income After
Means-Tested Transfers
and Federal Taxes

7. 6
CBO
. . . and Plans to Continue
Income After
Means-Tested Transfers
and Taxes

8. 7
CBO
Source: U.S. Census Bureau, Annual Survey of State and Local Government Finances.
State and Local Revenues, by Source, 2014

9. 8
CBO
How will CBO allocate those
components of state and local taxes
to U.S. households?

10. 9
CBO
1. Property Taxes: Three Competing Theories
Component Incidence
Land Landowners
Improvements Uncertain
Component Incidence
National average Capital owners
Local variations Excise tax effects
Component Incidence
User fee for local
government services
None
Capital View
Benefit View
Traditional View

11. 10
CBO
CPS = U.S. Census Bureau’s Current Population Survey; SOI = Internal Revenue Service’s Statistics of Income.
1. Property Taxes: CBO’s Approach
Divide property into three components:
Component Incidence Allocator
Owner-occupied residential
property
Taxpayer Itemizers: SOI
Nonitemizers, nonfilers: CPS
Personal property Taxpayer Household share of income
Business property Capital owners Household share of capital income
Assume local variations cancel out at the national level.
Capital View Variant

12. 11
CBO
2. Individual Income Tax
Itemizers: Use reported state
and local income tax deduction
from SOI.
Nonitemizers: Use estimated
state income tax based on
Bakija state income tax
calculator.
Fairly Straightforward
State Individual Income Tax, by State, 2013

13. 12
CBO
3. Consumption Taxes (General and Selective Sales Taxes):
Two Competing Methodologies
Income + Transfers – Taxes – Savings = Consumption
Allocate tax on the basis of this measure.
Uses Method
Income + Transfers – Taxes – Savings = Consumption
Allocate tax on the basis of this measure.
Sources Method

14. 13
CBO
What are some (very) preliminary
results?

15. 14
CBO
ITEP = Institute on Taxation and Economic Policy.
Average State and Local Property Tax Rates,
by Income Group and Research Organization

16. 15
CBO
ITEP = Institute on Taxation and Economic Policy; TPC = Tax Policy Center.
Average State and Local Individual Income Tax Rates,
by Income Group and Research Organization

17. 16
CBO
ITEP = Institute on Taxation and Economic Policy.
Average State and Local Consumption Tax Rates,
by Income Group and Research Organization
CBO’s current state and local consumption tax
methodology produces unrealistic results.