After the Tax Policy Center published its new analysis of the House Ways & Means Committee’s budget reconciliation tax plan, commentators asked two questions:
- Why did TPC suddenly create two sets of distributional tables: One that includes all major provisions of the bill and another that includes the individual income tax, the payroll tax, and the estate tax, but excludes the corporate income tax and excise taxes?
- Why didn’t TPC include the bill’s proposed increase in tobacco taxes when it showed how many taxpayers in each income group would pay more under the bill?
TPC’s primary distributional estimates show all major tax provisions and additional tables provide an alternative view. TPC has been producing two sets of tables for some time, such as this 2018 piece examining potential impacts of the Tax Cuts and Jobs Act and this year to inform the debate over President Biden’s pledge to not raise taxes on anyone making less than $400,000 annually.
Corporate and excise taxes
There are reasonable differences in how people interpret Biden’s promise: Did he mean no one making $400,000 or less would pay any higher taxes, whether direct or indirect? Or did he mean no one would pay higher direct taxes, such as individual income, payroll, or estate and gift? TPC does not know which he meant (Biden never has said) so it produced both sets of tables. Interested parties can choose which they prefer.
TPC models excise and corporate taxes in a similar way. For example, raising either tax reduces incomes such as wages and profits. As such, excise taxes raise very similar issues of timing, distributional effects, and interpretation that occur with corporate taxes. Here is an explanation of TPC’s excise tax methodology.
Tobacco taxes
The second concern is primarily about the tobacco tax. While Biden never proposed such a tax hike, the Ways & Means Committee did add one. TPC models tobacco taxes in the same way as other excise taxes and produces its best estimate of the long-run effects.
However, this method does not produce a good estimate of the short-run effects on individuals of a narrowly-based levy such as the tobacco tax, mostly because those effects depend more directly on how much tobacco each person buys. That’s why TPC included the tobacco tax in estimates of the overall effects of the Ways & Means bill but excluded it from the tables that show the number of people who would pay more or less under the legislation.
TPC also excluded dozens of other provisions from those tables because it cannot accurately assign them to individual taxpayers. Many are business taxes that would predominantly affect high-income taxpayers.
It is worth noting that the overall effect of the tobacco tax is very small. On average, a household would pay about $50 more in 2022.
TPC’s tax model is a sophisticated and ever-evolving tool. But, like all models, it has its limits.
