Topic:
ECONOMIC CONDITIONS; INCOME TAX; MUNICIPALITIES; TAXATION (GENERAL);
Location:
MUNICIPALITIES; TAXATION;
Scope:
Federal laws/regulations;

OLR Research Report


April 6, 2001

 

2001-R-0352

FEDERAL TAXES AND BRIDGEPORT'S ECONOMY 1980-1990

 

By: Jack J. Burriesci, Legislative Fellow

You wanted to know how federal tax policy changed during the 1980s and how that change affected the amount of revenue generated in Bridgeport. You also wanted to know what the change in per capita income and the unemployment rate was for Bridgeport from 1980-1990.

SUMMARY

1998 Congressional Budget Office (CBO) reports identified changes to the tax code that resulted in a slightly less progressive federal income tax during the 1980s. The changes reduced individual marginal income tax rates and increased Social Security tax rates for most taxpayers. Internal Revenue Service (IRS) statistics of federal income tax revenue from Bridgeport for the period in question are unavailable.

From 1980 to 1990, per capita income in Bridgeport increased 116.3% while the unemployment rate increased 15%.

FEDERAL INCOME TAX CHANGES

Tax Structure

The federal individual income tax is a graduated tax in which the tax rate increases as a person's income increases through different tax brackets. The applicable tax rate at each bracket is called the marginal tax rate. A taxpayer's federal income tax liability is computed by multiplying the taxable income (gross income minus exemptions and deductions), also known as adjusted gross income, that fall within each bracket by the applicable marginal tax rate, minus any tax credits. The tax liability divided by income is called the taxpayer's average or effective tax rate.

Social Security taxes, also known as payroll taxes, are taxed at a single rate on taxable earned income up to a maximum annual amount.

Changes in the tax law affect the way the burden is distributed among individuals and families. The changes that could directly affect that distribution involve the tax threshold, eligible deductions, and marginal tax rates.

Economists generally consider a tax to be progressive if the effective tax rate rises as income rises, regressive if the effective tax rate falls as income rises, or proportional if the rate is equal at all income levels.

Tax Distribution

Distribution of combined federal taxes was more progressive in 1998 than it was in 1984, but was less progressive than in either 1977 or 1980, according to a CBO report (The Changing Distribution of Federal Taxes: A Closer Look at 1980, Washington DC: CBO, July 1998). Most of the change in the distribution of taxes during the 1980s resulted from an increase in Social Security taxes (a regressive tax) and a decrease in individual income taxes (a progressive tax). The combined effect reduces the income tax's progressivity.

Tax Threshold

A major factor in determining the tax burden on lower-income families is the income tax threshold, which is the level at which income becomes subject to tax. The level depends on the personal exemption amount, the number of exemptions, the standard deduction (or zero tax bracket), and certain personal tax credits.

The 1981 Economic Recovery Tax Act required personal exemptions and taxable income brackets to be indexed to the Consumer Price Index (CPI) beginning in 1984. The act did not require the earned income tax credit to be indexed.

The 1986 Tax Reform Act raised the zero bracket amount, which was converted back into a standard deduction, and increased the personal exemption and the earned income tax credit. It also required the earned income tax credit to be indexed to the CPI.

Deductions

The 1981 Economic Recovery Tax Act allowed all workers to set up an individual retirement account (IRA) and increased the maximum amount of allowable contributions. It also established a new 10% deduction for two-income married filers, up to $3,000, against the earnings of the lower-earning spouse.

These provisions were reversed by the 1986 Tax Reform Act, which eliminated the two-earner and the IRA deductions for high-income taxpayers who are covered by private pensions. This act also substantially restricted many itemized deductions.

Marginal Tax Rates

Marginal federal tax rates fell dramatically for most taxpayers between 1980 and 1995, according to the attached CBO report (Six Tax Laws Later: How Individual's Marginal Federal Income Tax Rates Changed Between 1980 and 1995, Washington DC: CBO, May 1998). The proportion of taxpayers subject to statutory rates above 15% shrunk from 75% in 1980 to under 25% by 1995. At the other end of the scale, the proportion of taxpayers subject to rates of 28% or less grew from 77% in 1980 to 96% in 1995.

The 1981 Economic Recovery Tax Act phased in across-the-board reductions in marginal tax rates lowering the top rate to 50% from 70%. The 1986 Tax Reform Act replaced the multi-bracketed formula with a transitional five-bracket formula in 1987 and for subsequent years, a two-bracket formula with 15% and 28% rates. However, the law included a recapture provision that resulted in a 33% marginal rate for certain high-income ranges. Budget agreements in 1990 and 1993 adjusted the tax rates and brackets to the current five brackets, with rates of 15%, 28%, 31%, 36%, and 39.6% respectively.

Social Security Taxes

At the same time the 1981 Economic Recovery Tax Act was reducing individual income tax rates, social insurance tax rates were rising. Most of these changes in Social Security payroll taxes had been enacted in 1977, but did not take effect until the 1980s. Social Security tax rates had risen to 7.65% in 1990, from 6.13% in 1980. In addition, the annual maximum taxable earnings for Social Security had grown to $49,500 in 1990, from $25,900 in 1980.

PER CAPITA INCOME

Table 1 shows Bridgeport's per capita income grew from $6,081 in 1980 to $13,156 in 1990, without adjusting for inflation. This represents a 116.3% increase. By comparison, Connecticut's per capita income grew 41.6% during the same period, from $14,262 to $20,189.

Table 1. Bridgeport's and Connecticut's Per Capita Income

 

1980

1990

% Change

1980-1990

Bridgeport

$6,081

$13,156

116.3

Connecticut

$14,262

$20,189

41.6

Source: US Decennial Census Reports

UNEMPLOYMENT RATE

Table 2 shows Bridgeport's annual average unemployment rate increased from 8.0% in 1980 to 9.2% in 1990, a 15% increase. By comparison, Connecticut's annual average unemployment rate dropped from 5.9% in 1980 to 5.2% in 1990, a 11.9% decrease.

Between 1980 and 1990 Bridgeport's unemployment rate reached a high of 10.5% in 1982 and a low of 5.9% in 1988. During this period the State's unemployment rate reached a high of 6.9% in 1982 and a low of 3.0% in 1988.

Table 2. Bridgeport's and Connecticut's Unemployment Rate

 

1980

1990

% Change

1980-1990

Bridgeport

8.0%

9.2%

15

Connecticut

5.9%

5.2%

(11.9)

Source: Connecticut Department of Labor, Office of Research

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