A declaration about how Texans have benefited from a federal tax deduction led Austin economist Stuart Greenfield to call for the Texas Truth-O-Meter.
Greenfield asked us about the accuracy of a statement by U.S. Rep. Kevin Brady, R-Houston, in a Dec. 17, 2014, press release issued after the U.S. Senate agreed with the House to extend the ability of Texas taxpayers to deduct sales taxes on federal income tax returns.
Brady, a senior member of the tax-writing House Ways and Means Committee, said: "Texas families have kept more than $10 billion in their family budgets since we successfully fought to restore Texas' sales tax deduction a decade ago."
Greenfield speculated the $10 billion figure was an overstatement.
Congressman’s back-up information
To our inquiry, Brady spokeswoman Tracee Evans pointed out a news story posted online Sept. 22, 2014, by the Dallas Morning News. That story said that according to the Texas state comptroller’s office, if Congress failed to extend the option of deducting state and local sales taxes, Texans would owe an extra $1.2 billion to the IRS in April 2015.
Evans emailed us: "If it’s $1.2 billion a year, extrapolate that over ten years and what do you get?"
In most states, the News’ story noted, taxpayers can deduct state income tax payments from their federal tax bill. And since 2004, Congress has let taxpayers in states with no income tax — Texas and six others — deduct state and local sales taxes instead.
In 2012, the story said, 2.3 million Texas filers (about one in five) used the sales tax deduction with the average deduction for those who claimed it being $1,906, according to a September 2014 Pew Charitable Trusts report.
We asked the comptroller’s office about the cited estimate. By phone, spokesman Chris Bryan said its revenue-estimating experts reached the $1.2 billion figure by taking the total amount deducted by Texans for sales tax in 2012 -- $4,353,996,000 -- and multiplying that by what its experts calculated to be the average marginal tax rate that year, 27 percent. So, the calculation suggests, Texans who took the deduction in 2012 reduced their federal income taxes by an estimated $1.18 billion all together. (We ran the same numbers, starting from an IRS chart showing federal taxes paid by Texas residents in 2012, reaching the same result.)
In October 2007, Evans pointed out, State Comptroller Susan Combs estimated the deduction was saving Texans $1 billion a year. Bryan told us, though, the office doesn’t routinely estimate the effect of the deduction and doesn’t have a 10-year impact figure.
Greenfield, apprised of the comptroller’s approach, said its methodology and Brady’s cumulative figure seemed to add up after all.
Texas tax expert: Beneficiaries tend to be higher-income earners
Separately, Dick Lavine, a tax analyst for the liberal Austin-based Center for Public Policy Priorities, stressed by email that Texans at higher income levels disproportionately enjoy the deduction, which only helps taxpayers who itemize deductions. In 2012, 39 percent of Texas filers with adjusted gross incomes of $75,000 to $100,000 took the deduction; 14 percent of filers with earnings of $25,000 to $50,000 did so.
Lavine pointed out, too, that Texans deducted $3.2 billion in 2004, the first year the deduction was restored, which might indicate the value of the deduction in reduced taxes over 10 years might be less than $10 billion, he said, especially if the marginal tax rate on average was 25 percent.
To reach a savings estimate of our own, we added up all the sales tax deductions claimed by Texas residents for 2004 through 2012, as reported by the IRS. A figure for 2013 has yet to be posted by the agency so we reached an estimate for that year based on averaging what Texans deducted in 2010, 2011 and 2012. All this ultimately led us to estimate the Texas deductions over the decade totaled nearly $40 billion.
Next, we calculated the likely tax savings -- that is, money not paid by Texas residents to Uncle Sam thanks to these deductions. Assuming the 27 percent marginal tax rate applied by the comptroller’s office to 2012, the deduction would have left $10.8 billion in Texas pocketbooks over the 10 years. At a 25 percent marginal rate, Texans’ money not spent on federal taxes would have amounted to nearly $10 billion ($9.998 billion, by our calculation.)
Asked to comment on our calculations, Alan Cole, an economist for the Washington, D.C.-based Tax Foundation, a non-partisan tax policy research organization, emailed that he would have taken a similar tack. He also cautioned, though, that individuals who take the deduction tend to earn more and hence have higher marginal tax rates, which could justify a larger 10-year savings estimate.
Brady said: "Texas families have kept more than $10 billion in their family budgets since we successfully fought to restore Texas' sales tax deduction a decade ago."
While that’s a squishy figure -- an estimate that can’t be pinned as a fact unless you somehow divine every Texan’s marginal tax rate for each of the 10 years, for starters -- it appears to be reasonable. It’s also so that families that had these savings were mostly better off; lower-income taxpayers tend not to itemize deductions.
We rate the statement True.
TRUE – The statement is accurate and there’s nothing significant missing.
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