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Who Says Taxes Aren’t High Enough?

July 17, 2009

If Health Surtax Is 5.4 Percent, Taxpayers in 39 States Would Pay a Top Tax Rate Over 50%

by TF Staff

Fiscal Fact No. 178

Introduction
New taxes to fund the federal government’s plan for higher health insurance spending continue to be debated in Washington. According to a new Bloomberg report, the top surtax rate will be 5.4 percent in the House plan.[i] That will be the top rate in a three-tiered surtax aimed at high-income tax returns:

1 percent surtax on AGI between $350,000 and $500,000 (singles between $280,000 and $400,000)

1.5 percent surtax on AGI between $500,000 and $1,000,000 (singles between $400,000 and $800,000)

5.4 percent surtax on AGI beyond $1,000,000 (singles beyond $800,000)

States have been raising taxes on this same group, leading to concern over how high the combined tax rates would be in each state, especially in the growing number of states with double-digit tax rates. Some commentators merely sum the rates at the federal, state and local level to give a statutory total tax rate. A more accurate method is to calculate the effective marginal tax rate, which takes into consideration deductions and adjustments. For a description of the difference between effective marginal tax rates and effective average tax rates, see Average vs. Marginal Tax Rates Revisited.

In Table 1 below we present calculations of the effective marginal tax rate on top earners. We use assume that the 2008 weighted local average for each state applies to 2011, the top federal taxable income rate will rise as scheduled to 39.6 percent, the top state tax rate in each state will follow current 2011 scheduled law, and a new House plan for 5.4 percent surtax on AGI earned at very high-income levels will become law.

Table 1
Top Effective Marginal Rates under Proposed Health Care Surtax by State
Sorted by Combined Top Tax Rate in 2011

State

Avg. Local Rate

Top
State Rate (2011)

Top Federal Ordinary Rate

New
Surtax

Medicare
Tax

Combined
Top Rate

Rank

Oregon

0.36%

11.00%

39.6%

5.4%

2.9%

57.54%

1

Hawaii

0.00%

11.00%

39.6%

5.4%

2.9%

57.22%

2

New York^

1.70%

8.97%

39.6%

5.4%

2.9%

56.92%

3

California

0.00%

10.30%

39.6%

5.4%

2.9%

56.58%

4

Rhode Island

0.00%

9.90%

39.6%

5.4%

2.9%

56.22%

5

Maryland 2.98% 6.25% 39.6% 5.4% 2.9% 55.61% 6
New Jersey 0.00% 8.97% 39.6% 5.4% 2.9% 55.46% 7
Vermont

0.00%

8.95%

39.6%

5.4%

2.9%

55.36%

8

Minnesota

0.00%

7.85%

39.6%

5.4%

2.9%

54.36%

9

Idaho

0.00%

7.80%

39.6%

5.4%

2.9%

54.32%

10

North Carolina

0.00%

7.75%

39.6%

5.4%

2.9%

54.27%

11

Wisconsin

0.00%

7.75%

39.6%

5.4%

2.9%

54.27%

11

Ohio

1.82%

5.93%

39.6%

5.4%

2.9%

54.27%

13

Delaware

0.16%

6.95%

39.6%

5.4%

2.9%

53.69%

14

Arkansas

0.06%

7.00%

39.6%

5.4%

2.9%

53.65%

15

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