The Biden administration has proposed several tax increases on businesses, whether structured as C corporations subject to the corporate income tax or passthrough entities such as S corporations, partnerships, or sole proprietorships that are subject to the individual income tax. It is important to remember that those business taxes ultimately fall on people, including business owners and employees all across America.
Based on individual tax return data from the IRS at the congressional district level, the Tax Foundation’s new Interactive Tax Map shows how individuals across the country would be impacted by the tax increases.
Biden’s plans contain several tax proposals that in total would increase business income taxes by more than $2 trillion over 10 years, including:
Corporate tax increases
- Raise the corporate tax rate to 28 percent
- Raise taxes on the foreign earnings of U.S. corporations
Passthrough business increases
- Impose Net Investment Income Tax (NIIT) on active pass-through income above $400,000
- Make the active passthrough loss limitation permanent
Individual income tax increase
- Raise top individual income tax bracket to 39.6 percent
Capital gains tax increase
- Tax unrealized capital gains at death over $1 million and impose a 39.6 percent tax rate on capital gains over $1 million
The proposed corporate tax increases are large, amounting to about $1.7 trillion over 10 years. Economists generally find that the burden of corporate taxes falls on some combination of capital and labor income, and we assume the burden initially falls largely on capital income and in the long run falls evenly on capital and labor income. As such, after distributing the proposed corporate tax increases to capital and labor income reported on individual tax returns, we find it would increase the average tax burden per filer in every state, with tax increases in 2022 ranging from $416 per filer in West Virginia to $1,490 per filer in Massachusetts. In 2031, average tax increases per filer would range from $706 in West Virginia to $1,729 in Massachusetts.
Besides Massachusetts, 10 other states would see average tax increases in excess of $1,000 per filer in 2022: Connecticut, New York, New Jersey, Wyoming, California, Florida, Washington, Colorado, Illinois, and Nevada. By 2031, most states (34) would see average tax increases of $1,000 or more.
Every state has a substantial passthrough business sector, and the two proposals clearly aimed at passthrough business income, amounting to about $220 billion in new taxes over 10 years, would raise tax burdens in every state depending on the amount of passthrough business income reported in each state. Average tax increases in 2022 would range from $32 per filer in West Virginia to $154 per filer in New York, growing to $104 in West Virginia and $503 in New York in 2031.
Raising the top individual income tax rate to 39.6 percent would raise $116 billion over 10 years, affecting a large share of passthrough business income as well as other sources of investment income and wages. This provision would raise tax burdens in every state over the next three years, with average tax increases in 2022 ranging from $45 per filer in West Virginia to $360 per filer in Connecticut.
Lastly, taxing unrealized capital gains at death and raising the capital gains tax rate would raise $213 billion over 10 years, impacting investors and business owners in every state and limiting the ability of many types of businesses to get funding and to remain viable from one generation to the next. The proposal would cause tax burdens to grow over time in every state, resulting in average tax increases ranging from $42 per filer in West Virginia to $503 per filer in Connecticut in 2031.
The Biden administration has targeted U.S. businesses, including corporations and passthrough entities, to raise revenue to fund new spending. However, businesses are comprised of people, which means individual taxpayers across America will end up footing the bill.
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