Ordinary income includes wages, salaries and the exercise of stock options. In 2012 the top marginal tax rate was federal 35 percent, but in 2013 that rose to 39.6 percent on taxable incomes above $400,000 ($450,000 for married different-sex couples). In addition, there is a new Medicare surcharge tax of 0.9 percent on salaries and other earned income above $200,000 for singletons ($250,000 for married couples).
The top tax rate on investment income also rose, from 15 percent to 20 percent, prompting many people to sell profitable investment at the close of 2012. And capital gains are extremely concentrated, IRS data show. In 2010, just 7,747 taxpayers—out of 143 million—reported 38 percent of all capital gains. High-income taxpayers also pay a 3.8 percent Medicare tax on most of their capital gains, dividends, interest, rents, and most royalties.
That means that the rise in revenues that helped reduce the 2013 deficit may not owe much to broadly-shared growth—and a good bit of it may just reflect the richest households shifting the earnings away from future years into 2012. A similar surge occurred in 1986, when wealthy Americans took income to avoid paying more the following year once the Tax Reform Act took effect.
That could be especially problematic for state governments, which have to balance their budgets and are vulnerable to swings in payments from rich households. The Nelson A. Rockefeller Institute of Government, which studies state finances, warned in a May 8 report that a surge in state tax revenues may be a one-off event driven by changes in federal policy. (The report came out a week before the widely cited CBO revisions, but got little play.)
The higher-than-expected revenues could be a sign that the economy in 2012 “was stronger than previously believed,” wrote researchers Don Boyd and Lucy Dadayan. But another possibility is that “the temporary surge in income may mask underlying weakness in the economy. Over the longer term, this could be bad news.”
That’s a perspective that merits more attention in all the budget and deficit coverage—but particularly for state budgets.
What would that look like? Consider this generally sunny account of California’s fiscal picture a week before the Rockefeller report came out, by Chris Merrigan of the Los Angeles Times. The article mentions up high that April 17 was the “third-highest single-day collection in California history,” but puts this warning deep down
Meanwhile, lawmakers, state officials and financial experts have cautioned that the spike in revenue may not hold.
It’s possible that Californians, fearing federal income tax hikes stemming from the budget standoff in Washington, cashed out investments late last year. Jerry Nickelsburg, senior economist at the UCLA Anderson School of Management, said federal statistics suggest many people did so.
That kind of cautionary note should go high up, even in the lede or second graf.
And as a general rule, reporters should always question any number that is sharply larger, or smaller, than expected to ascertain if it is a blip or part of a trend.