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OLR Research Report


February 13, 2003

 

2003-R-0165

"PIGGYBACK" INCOME TAXES

By: Judith Lohman, Chief Analyst

You asked for information about recent income tax law changes in the last three states with state income taxes that “piggyback” on the federal income tax. The states are North Dakota, Rhode Island, and Vermont.

SUMMARY

In 2001, North Dakota, Rhode Island, and Vermont had state income tax rates that were set at a percentage of a taxpayer's federal income tax liability. Such taxes are called “piggyback” taxes because they incorporate all the federal calculations and deductions. The revenue a state receives from such a piggyback tax depends heavily on the federal tax law provisions in effect for a particular taxable year. In 2001, Congress enacted the “Economic Growth and Tax Relief Reconciliation Act of 2001”, which cut federal taxes by an estimated $1.35 trillion over a 10-year period. The act included phased-in reductions in federal marginal income tax rates, additional and increased tax credits, and other individual tax reductions.

The federal reductions caused the three remaining states that had pure piggyback systems to “decouple” their state income taxes from the federal law in order to avoid revenue losses stemming from the federal act. But although the three states no longer tie their taxes to federal income tax liability, all three state taxes retain piggyback features.

NORTH DAKOTA

Before 2001, North Dakota's state income tax rate was 14% of federal tax liability. According to Rick Clayburgh, North Dakota's tax commissioner, passage of the federal tax cut caused the state's governor and legislature to be “concerned with the potential for a shortfall in state revenue if our state income tax remained tied directly to the federal income tax liability.” The legislature revamped the state's tax in 2001 and the new law went into effect with the 2002 tax year.

Under North Dakota's new income tax, the starting point for computing tax liability is taxpayer's federal taxable income. The law requires taxpayers to make certain adjustments to federal taxable income to arrive at North Dakota taxable income. The law provides two tax computation methods. Taxpayers may use the method that produces the lowest tax liability. Most taxpayers use the so-called simplified method, which has five tax brackets, which must be adjusted annually for inflation. Brackets and tax rates for 2002 are shown in Table 1.

Table 1: 2002 North Dakota Income Tax – Simplified Method

TAX RATE

NORTH DAKOTA TAXABLE INCOME

(Federal taxable income with adjustments)

Single

Married Filing Jointly

Married Filing Separately

Head of Household

From

To

From

To

From

To

From

To

2.1%

$1

$27,950

$1

$46,700

$1

$23,350

$1

$37,450

3.92%

27,951

67,700

46,701

112,850

23,351

56,425

37,451

96,700

4.34%

67,700

141,250

112,851

171,950

56,426

85,975

96,701

156,600

5.04%

141,251

307,050

171,951

307,050

85,976

153,525

156,601

307,050

5.54%

Over $307,050

Over $307,050

Over $153,525

Over $307,050

(North Dakota Century Code 57-38-30.3)

RHODE ISLAND

Before 2001, Rhode Island's income tax rate for the 2002 tax year was set at 25% of federal tax liability. In 2001, the state legislature changed Rhode Island taxable income to federal taxable income, with certain adjustments. In addition, it set tax rates at a percentage of federal income tax rates in effect immediately prior to enactment of the Economic Growth and Tax Relief Reconciliation Act of 2001. The tax rate for 2002 is 25% of those federal tax rates. The decoupling law requires the Rhode Island tax administrator to adjust the federal rate schedules annually for inflation. (RI Code, 44-30-2.6)

VERMONT

Prior to changes enacted in 2002, Vermont's income tax rate was 24% of federal tax liability. Vermont's new income tax, which applies for tax years starting on or after January 1, 2002, is based on federal taxable income with certain adjustments. Tax rates for individual taxpayers are shown in Table 2.

Table 2: Vermont Income Tax

TAX RATE

VERMONT TAXABLE INCOME

(Federal Taxable Income with adjustments)

Married Filing Jointly

Head

of Household

Single

Married Filing Separately

From

To

From

To

From

To

From

To

3.6%

$1

$46,700

$1

$37,450

$1

$27,950

$1

$23,350

7.2

46,701

112,850

37,451

96,700

27,951

67,700

23,351

56,425

8.5

112,851

171,950

96,701

156,600

67,701

141,250

56,426

85,975

9.0

171,951

307,050

156,701

307,050

141,251

307,050

85,976

153,525

9.5

Over $307,050

Over $307,050

Over $307,050

Over $153,525

(Vermont Stats Ann., 32-5822)

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