Income inequality strains Social Security’s tax base. Social Security’s funding shortfall is often tied to demographics, but rising income inequality also is weakening the program’s finances. The program taxes earnings only up to $184,500, so faster income growth among high earners has pushed more wages above the taxable cap. The trustees report that the share of total wages subject to Social Security taxes has fallen from nearly 87 percent in 1984 to about 83 percent today. Without changes, Social Security’s trust fund is projected to be depleted by the end of 2032, which would trigger a 22 percent cut in monthly benefits. Some proposals would eliminate or phase out the tax cap or restart payroll taxes above a higher income threshold.
California prepares software and health plan taxes. California lawmakers and the governor are preparing to implement two major tax increases as soon as July 1. One would update a tax on health plans, which is expected to increase costs for people with private insurance by about $100 per year. The other would apply the sales tax, starting at 7.25 percent, to software-as-a-service products such as Microsoft Office, QuickBooks, Workday, and Slack. Supporters say taxing digital software modernizes the state’s tax code, which already applied to physical software. Business groups warn the tax could raise costs throughout the economy because companies rely on software for payroll, cybersecurity, accounting, and other basic operations.
Michigan refund delays follow system overhaul. About 250,000 Michigan tax filers—5 percent of those who filed on time—are still waiting for refunds, even though the state has processed roughly 95 percent of returns filed on time. The Michigan Department of Treasury says delays are tied partly to its transition from a 40-year-old mainframe to a new processing system. The new system conducts more detailed return reviews and flags missing data, mismatched information, math errors, and possible fraud. Treasury has processed more than 5.12 million individual income tax returns and issued more than $3.43 billion in refunds, with an average refund of $901. But the transition also led to about 27,000 erroneous notices suggesting taxpayers owed money when they did not.
Tune in Thursday for the IRS/TPC tax administration conference. Registration remains open for the 16th Annual IRS/TPC Joint Research Conference on Tax Administration. The hybrid conference brings together researchers from the IRS, other government agencies, academia, and private organizations to discuss new analyses aimed at making tax administration more effective. It is the only annual conference focused specifically on tax administration research. You can register here for the June 25 event.
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