Due to the COVID-19 pandemic and the U.S. government’s policy response to it, roughly six in 10 Americans paid no federal income tax last year.
According to an Aug. 18 report from the Urban-Brookings Tax Policy Center (TPC), nearly 107 million households, or about 61%, owed no income tax or even received tax credits from the government.
And for 2021? The report projects the share or non-payers will decline to about 102 million, or 57% before returning to pre-pandemic levels in 2022 and continue to decline after that, assuming the economy continues to rebound and several temporary tax benefits expire as scheduled.
TPC estimates that the number of households that pay no federal income tax will fall to about 75 million next year, or a bit less than 42%. By 2026, the percentage of non-payers will fall to about 40% under current law. The share of Americans who pay no federal income taxes has hovered around 44% for most of the last decade.
Last year, TPC says the share of non-payers increased by roughly 40% from the pre-pandemic year of 2019, due to a combination of a poor economy and multiple rounds of tax-based assistance to hard-pressed households.
No mystery that the pandemic caused the huge spike.
“Twenty million workers lost their jobs. Many were low-wage workers who were paying very little income tax before the pandemic hit,” TPC Senior Fellow Howard Gleckman says in the analysis. “In addition, the federal government responded to the economic slump by distributing three rounds of Economic Impact Payments (stimulus checks), starting in April, 2020. Because they were designed as refundable tax credits, they had the effect of significantly reducing tax liability in both 2020 and 2021. And the payments flipped some households from paying income tax to not doing so.”
Gleckman also cited the impact of congressional moves to significantly increase the size and scope of the Child Tax Credit in 2021, as well as the Earned Income Tax Credit and the Child and Dependent Care Tax Credit.
“All of these are refundable credits that may have wiped out federal income tax liability for millions of families or even made it possible for them to receive credits that exceed their tax liability,” the report stated.
If further states that effectively, no household making less than about $28,000 will pay federal income tax this year, nor will three-quarters of those making between $28,000-$55,000. Among middle-income households, about 43% will pay no federal income tax.
Gleckman concluded by saying that while the number of households who paid no income tax last year truly was eye-popping, it is only temporary.
And keep in mind that many of those who went from paying some federal income tax to paying none may have had a relatively small reduction in taxes.
“Imagine somebody who would have owed $1,500 in 2020 income tax until they got two stimulus payment—$1,200 in April and $600 in December. That threw them into the category of non-payers,” the report said. “While the payments resulted in a large percentage increase in their after-tax income, the dollar amount of their tax cut was only a tiny fraction of a high-income filer who received a tax cut of, say, $30,000 from the 2017 TCJA yet still owed some tax.”
Impact on tax debate uncertain
Democrats (and Independent Vermont Senator Bernie Sanders) on Capitol Hill have recently been pushing for higher taxes on the wealthy. President Joe Biden also wants to raise taxes on high-earning individuals while repeatedly emphasizing he won’t raise taxes on anyone making less than $400,000.
Biden has floated raising the top individual income tax bracket from 37% (where the TCJA set it in 2017) back to 39.6% for households making $400,000 or more in income, a provision that may or may not end up being a part of the $3.5 trillion reconciliation budget bill outline being pursued by Democrats alongside the bipartisan infrastructure bill.
Republicans counter that the tax structure already relies heavily on revenue from a small percentage of high earners while many Americans pay little or no taxes. According to the TPC, the top 20% of taxpayers paid 78% of federal income taxes in 2020, up from 68% in 2019. The top 1% of taxpayers paid 28% of taxes in 2020, up from 25% in 2019.
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