Wednesday, December 19, 2007

Two Other Factors to Throw Into the Equation

1- State income taxes can be deducted from federal income returns but sales taxes cannot - score one for income taxes. (Correction: through this tax year only - though it may be extended -you can choose to deduct either state sales tax or state income tax but not both. With a new sales tax and reduced income tax however, it likely means a lower deduction on your federal return)

2- However, income taxes that are too high can (and apparently do) influence wealthier households' location decisions and can make it harder for businesses to hire in a national job market. Oregon has one of the highest income tax rates in the country: 9% for income above $6,850 (only Vermont has a higher upper tax rate, 9.5%, but it is for over $330,000. California can get higher on income in excess of $1 million).

8 comments:

darrelplant said...
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jessibeaucoup said...

Actually, taxpayers have the option of deducting sales tax or income tax - but they can not deduct both. http://www.irs.gov/newsroom/article/0,,id=165636,00.html

Also, I think the state rate is 6% up to around $13,300 in taxable income. But, I could be wrong - could you please provide a link to your information?

jessibeaucoup said...

Never mind - I see now that you did provide a link and that I was incorrect on the current tax rates.

Patrick Emerson said...

jessibeaucoup: I stand corrected, but but since the federal option is either/or unless we switch enitrely to sales taxes, a sales and income tax combined would mean lower deductions on our federal taxes.

The hyperlinked text in the post takes you to the data on tax rates.

darrelplant: Nope, that is not what I said. Just mentioned the fact that people respond to incentives and high income taxes are a disincentive to locate in Oregon. May matter, may not, but high income households contribute a lot to state revenues.

jessibeaucoup said...

It is either/or but that only would reduce the deduction if you are reducing income tax rates while adding a sales tax. If you are adding sales tax but keeping the income tax the same, the deduction would be unchanged.

Patrick Emerson said...

All along I have assumed a sales tax woudl coincide with a reduction in income taxes - and this reduction woudl have to be larger for lower income hoseholds to counteract the regressive nature of sales taxes.

jessibeaucoup said...

Side note - I figured out why your tax rate limits didn't jive with my memory. The limts that you use are for single filers. Joint and head of householders can double the limits (which would be around 13k).

I've always been strongly anti-sales tax for a variety of reasons. First, the regressive nature if it is not tweaked with exemptions and/or credits. Secondly, I lived in a state with sales tax from ages 10 to 15 and it was very confusing to me to make purchases.

I am also concerned that a sales tax that starts out as being combined with a reduction in income tax and with a progressive bent to it won't stay that way. Our Federal tax code is constantly being tweaked based on the administration in power and I worry that getting a progressive sales tax enacted is just a way to slowly amend it to be regressive. Perhaps I'm being overly cynical here.

I do understand the value and need of a stabile tax base but I would prefer to elimiate the kicker checks and create a rainy day fund rather than enacting a sales tax.

Patrick Emerson said...

Yes, I can definitely see the appeal of only the income tax in therm of how easy it is to talk about regressivity/progressivity. Other than the kicker law, the Oregon tax system is pretty straightforward. Once you add complexity things can start being altered more easily - especially with our referendum system.

Hmmmm...