Unless Congress acts soon, 2011 will bring with it higher federal taxes as the tax cuts enacted under President George W. Bush expire. Some highlights:

• The 10 percent tax rate for taxable income up to $8,500 will disappear into the 15 percent tax rate.
• The “marriage penalty” will return in the standard deduction and tax brackets.
• The long-term capital gains tax rate (on assets held for one year or more) will increase to 20 percent from 15 percent.
• The child tax credit will be halved to $500 from $1,000.
• Most marginal income tax rates will increase by 3 percentage points except the top tax rate, which will increase from 35 percent to 39.6 percent.
• In short, this means Oklahomans will have to scale back their family budgets (yet again) in order to accommodate an ever-expanding federal budget.

Chart 1 illustrates the average spending by Oklahoma household if the Bush-era tax cuts are extended.

If the Bush-era tax cuts expire, the federal tax bill in FY 2012 will climb by $1,929—to $19,787. This higher federal tax bill will mean Oklahomans will have fewer dollars for all other spending. Chart 2 shows the spending reductions (assuming an across-the-board cut in household spending).

Of course, the expiration of the Bush-era tax cuts—that is to say, the onset of the Obama tax hikes—will mean different things for different people. Let’s consider three examples (each assumes use of the standard deduction):

• A single taxpayer earning $45,000 will have an increase in his or her federal income tax of $455—to $5,455 from $5,000. This is an increase of 9.1 percent.
• A married couple with two children earning $90,000 will have an increase in their federal income tax of $3,170—to $9,860 from $6,690. This is an increase of 47.4 percent.
• A retired couple with investment income ($5,000 in long-term capital gains, $5,000 in dividends, $24,000 in Social Security and a $20,000 pension) will have an increase in their federal income tax of $1,785—to $2,270 from $485. This is an increase of 368 percent.

Rather than asking Oklahomans to further tighten their belts, the federal government should learn how to tighten its own belt.

Methodology

The consumption data are based on the 2008 Consumer Expenditure Survey (CES) published by the U.S. Department of Labor’s Bureau of Labor Statistics. While the CES only publishes data by region, the estimate for Oklahoma was created by allocating the regional data based on Oklahoma’s share of personal income for the southern region. The data were extrapolated to 2012 using the Consumer Price Index forecast from the Congressional Budget Office.

The FY 2012 state and local tax collection was extrapolated from data from the U.S. Department of Commerce’s Census Bureau.

The FY 2012 federal tax collection data are from the Congressional Budget Office. The estimate for federal taxes paid by Oklahomans is based on data from the Tax Foundation:http://www.taxfoundation.org/sites/ocpathink/sr139.pdf

The federal income tax estimates are from the Tax Foundation: http://www.mytaxburden.org

In Chart 1, all expenditures are estimated for FY 2012, which is the first full year under the expired tax cuts.

Calculations do not adjust for any feedback loop between federal and state tax codes.

Economists J. Scott Moody (M.A., George Mason University) and Wendy P. Warcholik (Ph.D., George Mason University) are OCPA research fellows.