![]() ![]() “The COVID-19 restrictions put the unintended consequences of tax policies in the spotlight, even in a state like North Carolina,” Goldman says. North Carolina had the seventh most stringent set of restrictions, whereas Oklahoma had the third least stringent restrictions. The two states differed in their approach to COVID-19 restrictions. However, North Carolina increased tax collections in 2020 by 2.1%, and Oklahoma decreased tax collections by 4%. For example, states like North Carolina and Oklahoma have a flat tax rate across all taxpayers. The effect also occurred in states with flat tax rates but varying COVID-19 restrictions. Washington increased tax collections by 2.5% on the previous year. In contrast, Washington also has no state income tax, but had the ninth most stringent COVID-related restrictions. ![]() On the other hand, a state like Florida, which collects no state income tax and had the fifth least stringent COVID-related restrictions, saw an 11.3% decline in income tax collections in 2020. Vermont saw a 2.2% increase in tax collections from 2019 to 2020. Another example, Vermont, has the third most progressive state income tax structure and the second most stringent COVID-related restrictions. In 2020, the state saw a 1.2% increase in tax collections compared to 2019. in terms of most stringent COVID-related restrictions. California was also ranked fifth in the U.S. (there is a 9.3% difference in tax on somebody with $25,000 of income versus somebody in the highest tax bracket). All else equal, these policies resulted in an increase in state tax collections.”Ĭalifornia is a good example of Goldman and Sadka’s findings: it has the most progressive income taxes in the U.S. So workers in lower-earning positions lost their jobs due to the state’s COVID-19 restrictions, while these same policies tended to benefit higher-earning workers. Those jobs also tend to pay higher wages. “In the case of the pandemic, COVID-19 restrictions unintentionally favored people whose jobs weren’t dependent on being in a face-to-face environment. “It seems counterintuitive, but progressive income tax rates can prolong the use of policies that increase inequality because the policies less adversely impact state budget deficits,” Goldman says. This can inadvertently lead to policies that favor higher earners. For example, under a progressive income tax rate structure, someone getting a $1,000 increase in income on a $1 million salary is going to contribute much more in tax revenue than someone getting a $1,000 increase on a $20,000 salary. ![]() States with progressive income tax rates do better when higher earners make more. However, their study also points out that progressive income tax rates and COVID-19 restrictions lead to more income inequality, a significant unintended consequence.Ī progressive income tax structure means that the more you make, the higher percentage of your income you pay in taxes – it’s how the federal government calculates income tax. Their study highlights that the overall effect on tax collections across all states was essentially a “break even,” and nearly half of the states’ income tax collections increased from 2019 to 2020. They found that states with progressive income tax rates and more restrictive COVID-19 policies performed better in terms of state income tax collections relative to states with flat income tax rates and less restrictive COVID-19 policies. Nathan Goldman, assistant professor of accounting in NC State’s Poole College of Management, and Gil Sadka, from UT Dallas’s Jindal School of Management, looked at the correlation between income tax rate structures, pandemic restrictions, and state income tax revenues during 2020. The researchers specifically point to a combination of progressive income tax rates and COVID-19 restrictions as the reasons and explain how these factors could increase tax revenue – at the expense of greater income inequality. These outcomes ran counter to estimates made during the year, but a new analysis from researchers at NC State and the University of Texas at Dallas reveals one possible explanation. state tax revenues in fact, 22 states saw tax revenues increase during 2020. The pandemic has been bad for business, but it hasn’t necessarily been bad for U.S.
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