The State of State (and Local) Tax Policy
Marijuana sales are legal and taxed in nine states. States currently levy three types of marijuana taxes: as a percentage of price (either the retail or wholesale price), based on weight (i.e., per ounce), and based on the drug’s potency (i.e., THC level). Some states use a combination of these taxes.
HOW MUCH REVENUE DO STATE AND LOCAL GOVERNMENTS RAISE FROM MARIJUANA TAXES?
Although prohibited under federal law, marijuana sales are legal and taxed in nine states: Alaska, California, Colorado, Illinois, Massachusetts, Michigan, Nevada, Oregon, and Washington. Marijuana is legal in Maine and Vermont but neither state has established its tax system yet. The District of Columbia also legalized marijuana but Congress currently prevents the city from regulating and taxing sales (figure 1).
Colorado and Washington have collected marijuana taxes since 2014. In calendar year 2018, Colorado collected $267 million and Washington collected $439 million in state marijuana taxes, or roughly 1 percent of state and local own-source revenue in each state. Four other states reported a full year’s worth of state marijuana tax revenue in 2018: Alaska ($15 million), California ($354 million), Nevada ($87 million), and Oregon ($94 million). All totals were less than 1 percent of state and local own-source general revenue. (Note: None of these totals include local tax revenue.)
Medical marijuana is legal in 33 states and some of these states levy a tax on the purchase. But these tax rates are often the same as or close to the state’s general sales tax rate and do not raise much revenue.
HOW DO MARIJUANA TAX RATES DIFFER?
There are three ways state and local governments tax marijuana.
Percentage-of-price. These taxes are similar to a retail sales tax where the consumer pays a tax on the purchase price and the retailer remits it to the state. A few states levy their percentage of price tax on the wholesale transaction, but it is assumed this cost is then passed on to the consumer in the final purchase price. Some states also let localities levy a percentage of price tax—typically with a maximum rate.
Weight-based. These taxes are similar to cigarette taxes, except instead of taxing per pack of cigarettes the tax is based on the weight of the marijuana product. States with this type of tax also typically set different rates for different marijuana products. For example, California levies a $9.65 per ounce tax on marijuana flowers, a $2.87 per ounce tax on marijuana leaves, and a $1.35 per ounce tax on fresh plant material. As with other wholesale taxes, it is assumed most of this cost is passed on to the consumer in the final purchase price.
Potency-based. These taxes are similar to alcohol taxes, except instead of taxing drinks with a higher percentage of alcohol at higher rates (i.e., liquor is taxed at a higher rate than beer), the tax is based on the THC level of the marijuana product. Illinois is currently the only state with a THC-based tax. It taxes products with a TCH content of 35 percent or less at 10 percent of retail price and those with more than 35 percent at 25 percent of retail price. All marijuana-infused products (e.g., edibles) are taxed at 20 percent of retail price.
Some states also levy their general sales tax on the purchase of marijuana in addition to the excise taxes.
How do states use marijuana revenue?
So far, every state that taxes marijuana has dedicated at least a portion of the resulting revenue to specific programs:
- sends half of its revenue to its general fund and half to programs aimed at reducing repeat criminal offences. revenue pays for administrative costs associated with marijuana legalization, and then uses excess funds for programs related to drug use, including economic development, academic studies, and youth programs. revenue is dedicated to education programs. revenue first pays for administrative costs associated with marijuana legalization. Any remaining revenue is then divided among the general fund, programs that supporting criminal justice reform efforts, substance abuse programs, and local government transfers.
- When Maine begins collecting tax revenue, it will evenly split its revenue between public health and safety programs and law enforcement training programs associated with marijuana legalization. distributes its revenue to various public safety programs. revenue is sent to education programs and its rainy-day fund. dedicates its revenue to education programs, drug prevention and treatment programs, and transfers to local governments. dedicates its revenues to health care programs.
Updated May 2020
Dadayan, Lucy. 2019. "Are States Betting on Sin? The Murky Future of State Taxation." “Washington, DC: Urban-Brookings Tax Policy Center.
Marron, Donald. 2015. “Should We Tax Internalities Like Externalities?” Washington, DC: Urban-Brookings Tax Policy Center.
Marron, Donald, and Adele Morris. 2016. “How Should Governments Use Revenue from Corrective Taxes?” Washington, DC: Urban-Brookings Tax Policy Center.
Higher Taxes Are Used to Finance Social Programs
A tax cut does not necessarily help or hurt an economy. You must consider what the revenue from those taxes is being spent on before you can determine the effect the cut will have on the economy. From this discussion, though, we see the following general trends:
- Cutting taxes and wasteful spending will help an economy because of the disincentive effect caused by taxation. Cutting taxes and useful programs may or may not benefit the economy.
- A certain amount of government spending is required in the military, the police, and the court system. A country which does not spend an adequate amount of money in these areas will have a depressed economy. Too much spending in these areas is wasteful.
- A country also needs infrastructure to have a high level of economic activity. Much of this infrastructure cannot be adequately provided by the private sector, so governments must spend money in this area to ensure economic growth. However, too much spending or spending on the wrong infrastructure can be wasteful and slow economic growth.
- If people are naturally inclined to spend their own money on education and healthcare, then taxation used for social programs is likely to slow economic growth. Social spending which targets low-income families is much better for the economy than universal programs.
- If people are not inclined to spend towards their own education and healthcare, then there can be a benefit to supplying these goods, as society as a whole benefit from a healthy and educated workforce.
The government ending all social programs is not a solution to these issues. There can be many benefits to these programs which are not measured in economic growth. A slowdown in economic growth is likely to occur as these programs are expanded, however, so that should always be kept in mind. If the program has enough other benefits, society as a whole may wish to have lower economic growth in return for more social programs.
Throughout history, every organized society had some form of government. In free societies, the goals of government have been to protect individual freedoms and to promote the well-being of society as a whole.
To meet their expenses, government need income, called "revenue," which it raises through taxes. In our country, governments levy several different types of taxes on individuals and businesses. The Federal Government relies mainly on income taxes for its revenue. State governments depend on both income and sales taxes. Most county and city governments use property taxes to raise their revenue.
Our American economy is based on the free enterprise system. Consumers are free to decide how to spend or invest their time and money. The goal of producers is to make profits by satisfying consumer demand. Open competition among producers usually results in their providing the best quality of goods or services at the lowest possible prices.
The free enterprise system does not produce all the services needed by society. Some services are more efficiently provided when government agencies plan and administer them. Two good examples are national defense and state or local police protection. Everyone benefits from these services, and the most practical way to pay for them is through taxes, instead of a system of service fees. Other examples are the management of our natural resources, such as our water supply or publicly-owned land, and the construction of hospitals or highways. Taxes are collected to pay for planning these services and to finance construction or maintenance. Revenue is also collected through user fees, such as at the entrances to national parks or at toll booths on highways and bridges.
Society benefits from a safe and healthy environment. In the free enterprise system, however, there is often little incentive for businesses to pay the extra cost for maintaining this kind of environment. Therefore government imposes regulations on producers such as auto manufacturers, who must install air pollution controls. These controls often add costs to the price of new cars. There are also regulations to control such things as the use of billboards and signs along highways. Other regulations control reclaiming land after strip mining, dumping industrial waste into streams and rivers, and noise pollution at airports.
The free enterprise system is based on competition among businesses. With competition, only the most efficient businesses survive. To ensure that a degree of competition exists, the Federal Government enforces strict "antitrust" laws to prevent anyone from gaining monopoly control over a market.
Some services, known as "natural monopolies," are more efficiently provided when there is competition. The best-known examples are the utility companies, which provide water, natural gas, and electricity for home and business use. Since there is no competition, government agencies carefully regulate the services, prices, and profits of the utility companies.
The free enterprise system assumes that consumers are knowledgeable about the quality or safety of what they buy. However, in our modern society, it is often impossible for consumers to make informed choices. For public protection, government agencies at the Federal, State, and local levels issue and enforce regulations. There are regulations to cover the quality and safety of such things as home construction, cars, and electrical appliances. There are also regulations for financial services provided by banks, insurance companies, and stock brokers. Another important form of consumer protection is the use of licenses to prevent unqualified people from working in certain fields, such as medicine or the building trades.
Our children receive their education mainly at public expense. City and county governments have the primary responsibility for elementary and secondary education. Most states support colleges and universities. The Federal Government supports education through grants to states for elementary, secondary, and vocational education. Federal grants used for conducting research are an important source of money for colleges and universities.
Since the 1930s, the Federal Government has been providing income or services, often called a "safety net," for those in need. Major programs include health services for the elderly and financial aid for the disabled and unemployed. Other major programs include financial aid to families with dependent children, and social services for low income individuals and families.
Taxes in the United States
Taxes on Income
Not all income tax taxed in the same way. For example, taxpayers owning stock in a corporation and then selling it at a gain or loss must report it on a special schedule. This item and any other gains or losses get calculated separately before they get added to other income. By comparison, the interest they earn on money in a regular savings account gets included with wages, salaries and other "ordinary" income. There are also many types of tax-exempt and tax-deferred savings plans available that impact on people's taxes.
Payroll taxes are an important source of revenue for the Federal Government. Employers are responsible for paying these taxes, which include social security insurance and unemployment compensation. Employees also pay into the social security program through money withheld from their paychecks. Some state governments also use payroll taxes to pay for the state's unemployment compensation programs.
Over the years, the amount paid in social security taxes has greatly increased. This is because there are fewer workers paying into the system for each retired person now receiving benefits. Today, some workers pay more social security tax than income tax.
Taxes on Consumption
Excise taxes, sometimes called "luxury taxes," are used by both state and Federal Governments. Examples of items subject to Federal excise taxes are heavy tires, fishing equipment, airplane tickets, gasoline, beer and liquor, firearms, and cigarettes.
The objective of excise taxation is to place the burden of paying the tax on the consumer. A good example of this use of excise taxes is the gasoline excise tax. Governments use the revenue from this tax to build and maintain highways, bridges, and mass transit systems. Only people who purchase gasoline -- who use the highways -- pay the tax.
Some items get taxed to discourage their use. This applies to excise taxes on alcohol and tobacco. Excise taxes are also used during a war or national emergency. By raising the cost of scarce items, the government can reduce the demand for these items.
Taxes on Property and Wealth
The property tax is local government's main source of revenue. Most localities tax private homes, land, and business property based on the property's value. Usually, the taxes get paid monthly along with the mortgage payment. The one who holds the mortgage, such as a bank, holds the money in an "escrow" account. Payments then get made for the property owner.
Some state and local governments also impose taxes on the value of certain types of "personal" property. Examples of personal property often taxed are cars, boats, recreational vehicles, and livestock.
Property taxes account for more than three-fourths of the revenue raised through taxes on wealth. Other taxes imposed on wealth include inheritance, estate, and gift taxes.
The Federal Income Tax
A basic principle underlying the income tax laws of the United States is that people should be taxed according to their "ability to pay." Taxpayers with the same total income may not have the same ability to pay. Those with high medical bills, mortgage interest payments, or other allowable expenses can subtract these amounts as "itemized deductions" to reduce their taxable incomes. Similarly, taxpayers may subtract a certain amount on their tax returns for each allowable "exemption." By lowering one's taxable income, these exemptions and deductions support the basic principle of taxing according to ability to pay.
Those with high taxable incomes pay a larger percentage of their income in taxes. This percentage is the "tax rate." Since those with higher taxable incomes pay a higher percentage, the Federal income tax is a "progressive" tax.
Sales and excise taxes, by comparison, are considered "regressive." Since the goods get taxed at the same percentage, those with lower incomes pay a larger percentage of their income in sales and excise taxes. Federal income taxes are collected on a "pay-as-you-go" withholding system. Most employers must withhold taxes from their employees' paychecks and send the money for deposit into the General Fund of the Treasury. Self-employed individuals and businesses must pay their taxes in regular installments, known as estimated tax payments. Paying taxes through withholding or estimated taxes during the year helps reduce the government's expense for borrowing money. It also provides an easier method for taxpayers to pay their taxes. To keep collection costs down, the Internal Revenue Service expects all taxpayers to comply with the law voluntarily. Most taxpayers figure out how much tax they are supposed to pay and file their income tax return by the date it is due. Without this voluntary compliance, it would cost the Internal Revenue Service a great deal more to collect the same amount of revenue.
Your Federal Dollar
The Federal Government operates on a fiscal year that begins on October 1 and ends on September 30. Most of the Federal Government's revenue comes from personal income taxes. Other sources of revenue include social security and other insurance taxes and contributions, corporate income taxes, excise taxes.
Federal receipts are spent on many programs. Among the largest are social security and Medicare. Another large portion of Federal spending is for national defense, and includes pensions for retired military personnel and defense-related atomic energy activities.
Another major government expenditure is net interest, or interest payments on the public debt less interest received by trust funds and other interest the government receives. The Federal Government borrows money by selling Treasury securities (bills, notes and bonds), United States Savings Bonds , and other securities.
Income security programs, including unemployment compensation, retirement and disability programs, and benefits such as food stamps and housing subsidies, also come from Federal Government revenues. Also, the Federal Government spends money on health care, including assistance for the poor through the Medicaid program, the training of health care professionals, and medical research activities.
Programs for education also get funded by Federal revenues. These programs include education, training and social services such as grants to elementary, secondary, and vocational schools and assistance to colleges and universities. Also included in this category are grants made to state for social services programs.
Veterans and their dependents also receive benefits from the Federal Government. This included pensions, medical services, education training, and life insurance programs.
Transportation is another spending category and includes grants to states and local government for constructing highways, mass transit systems, and airports. Also included in this category are the costs of operating the Coast Guard, regulation of the airways, and assistance to railroads and shipping.
There are many other Federal Government services and activities, including protection of natural resources, environmental protection, and maintenance of recreation areas and public lands. In addition, there is assistance to foreign countries, disaster relief and community and regional development. Other government services are energy research, development, and conservation, and space exploration and other scientific research. The Government must pay for its administrative activities, along with Federal law enforcement and Federal prisons, payments to the Postal Service, aid to small businesses, and mortgage financing insurance. Finally, the Government provides funds for crop subsidies, agricultural research, and conservation of farmland.
Top 20 Worst Ways the Government Wasted Your Tax Dollars
Every year, Oklahoma Senator Tom Coburn and his staff compile an exhaustive volume of wasteful government spending from that year. The 2014 tome is chock full of government waste ranging from the redundant to the downright absurd. Oh, and by the way, the U.S. national debt is approaching $18 trillion.
Here is a list of my personal worst of the worst in federal waste:
Swedish massages for rabbits: $387,000
The National Institutes of Health paid this six figure sum to the
for Complimentary and Alternative Medicine in order to discern whether Swedish massages would be helpful in recovering from an illness.
“A group of rabbits received daily rub downs from a 'mechanical device that simulates the long, flowing strokes used in Swedish massages.'”
Teaching Mountain Lions to Ride a Treadmill: $856,000
The National Science Foundation shelled out nearly a million taxpayer dollars to determine if captive mountain lions could be trained to ride a treadmill. The University of California-Santa Cruz researcher even boasted about receiving the grant saying, “People just didn’t believe you could get a mountain lion on a treadmill, and it took me three years to find a facility that was willing to try.” If anyone was wondering, it took the lions all of eight months to learn.
Studying how many times “hangry” people stab a voodoo doll: $331,000
After teaching mountain lions about treadmills, the National Science Foundation also funded a study to come up with the self evident conclusion that hungry people tend to be more angry and aggressive. They tested this theory by allowing spouses to poke pins into voodoo dolls as their “hanger” grew.
“Over the course of twenty-one consecutive evenings, 107 couples were given a chance to stick up to 51 pins into a voodoo doll representing their spouse. The pin-pushing happened in secret, away from the other partner. Participants then recorded the number of pins they poked into the dolls. Those tests revealed what may already be obvious to many couples: a spouse with low blood sugar was an angrier one, and stuck more pins in the doll.”
Studying the gambling habits of monkeys: $171,000
Another NSF grant funded the study of gambling monkeys. Under the guise of studying the “hot-hand bias” in human gamblers, the
devised a computer game, taught monkeys to play it, and studied how they responded to winning and losing. A doctoral candidate who worked on the study seemed pleased to learn, “Luckily, monkeys love to gamble.” Taxpayers, on the other hand, will not be pleased to find out this study is set to continue through May of 2018.
Producing the children’s musical: Zombie in Love: $10,000
ype="node" title text-decoration: underline font-weight: bold">Funding a “Stoner Symphony”: $15,000
The location of this performance shouldn’t shock anyone. What is sure to shock taxpayers is the amount of their money that was provided to the Colorado Symphony Orchestra to host “Classically Cannabis: The High Note Series.” Not only was the program pot-related, the people were encouraged to inhale (and chow down) while watching.
“One of the three concerts, called Summer Monsoon, advertised on its website this way, ‘Smoke up and fill your belly with Manna’s spiced pork, Sesame Seed Teriyaki Chicken, & Filipino Empanadas.’”
Subsidizing Alpaca Poop: $50,000
In addition to this project making the cut for Sen. Coburn, this little gem was also covered by CNSNews.com last month. The U.S. Department of Agriculture shelled out a hefty sum to help develop and market Alpaca “Poop Packs” for use as fertilizer. This is government waste, literally.
Synchronized Swimming for Sea Monkeys: $307,524
This project garnered the support of three government agencies (National Science Foundation, Office of Naval Research, and U.S.-Israel Binational Science Foundation). In an effort to study the swirl created when sea monkeys move throughout the water, researchers developed a “laser guided,” “choreographed” team of synchronized swimming sea monkeys.
Produce a “Hallucinatory” Roosevelt/Elvis show: $10,000
In what could quite possibly be the weirdest project on this list, the NEA helped fund the production of a show about the hallucinatory journey of a girl pretending to be Elvis and gallivanting around with America’s 26th president.
“In one scene, Ann hallucinates that she is Elvis, and that she and Teddy are romping around their hotel room in their underwear, with Teddy eventually riding around on Elvis’s back as though he were a bucking bronco.”
Funding Climate Change Alarmist Video Game: $5.2 million
As polls show climate change is dead last on the Americans’ list of priorities, the NSF felt the need to help “spur climate change activism.” They paid
to develop a video game entitled “
,” where rising seas cause mass chaos and weather calamities of epic proportions. The story is set to a bunch of voicemails from the future describing the anarchy.
“One caller claims “neo-luddites” are out to kill anyone with scientific knowledge,496 and another paints a cryptic image of a zombie apocalypse saying that ‘when you see them, you will know what to do.’”
Teaching Kids to Laugh: $47,000
The National Endowment for the Humanities funded classes at UCLA and
to teach college students about laughter. In seminar’s like “Why is it funny” student will presumably learn “how laughter plays with our perceptions” and “whether comedy is a ‘guy thing’.”
““As a final project, students will develop either a stand-up routine or a, “comedy piece using the tools of digital storytelling.”
Developing a real-life Iron Man Suit: $80 million
It seems the DoD is attempting to capitalize on the popularity of the Iron Man movies in order to develop its very own real-life replica. Dubbed TALOS (Tactical Assault Light Operator Suit), the Pentagon will spend the next four years trying to build a suit made “of military super-armor to withstand bullets and carry hundreds of pounds, all powered by [a] futuristic energy source.” But, there’s one slight problem, it doesn’t work:
“And while a promotional video for the TALOS program shows bullets ricocheting off a cartoon soldier dressed in the suit, field tests have so far found soldiers struggling to run, dive, and shoot when using the real thing.”
Tweeting at Terrorists: $3 million
The State Department is aiming to fight terrorists in
and al-Qaeda online as well as on the battlefield. Its new program is intended to “counter the sophisticated propaganda machines of terrorist groups around the globe.” However, their Twitter campaign, “Think Again, Turn Away” has been almost universally panned as not only ineffective but also counter-productive.
“A recent commentator in Time Magazine put it more bluntly, saying, ‘this outreach by the U.S. government is not only ineffective, but also provides jihadists with a stage to voice their arguments. ’”
Predicting the End of Humanity: $30,000
As opposed to finding new ways to explore the solar system, NASA is instead spending its budget on a study to predict how the world will end. Researchers from the
and Minnesota came back with an intriguing and politically advantageous answer: Income inequality. They warned that an “unequal distribution of wealth” has “led to civilizational collapse.”
Funding Kids Dressing Like Fruits and Vegetables: $5 million
used $5 million of taxpayer money allowing student to dress up like fruits and veggies in an attempt to promote healthy eating habits. “Students created the term ‘fruved’ to describe ‘the process of eating FRUits and VEgetables.’”
“The students are divided into five teams – amusingly labeled Spinach, Carrot, Banana, Grapes, and Tomato – which are led by costumed mascots.”
Help Parents Counter Kids’ Refusals to Eat Fruits and Veggies: $804,254
In an attempt to aid parents across America whose kids have refused to eat their greens, the NIH has funded a Smartphone game called “Kiddio: Food Fight.” The game is supposed to help parents counter sophisticated childhood rebuttals like “Yuk!”
“Parents will select a vegetable to offer Kiddio and then select a tactic for influencing Kiddio to eat the veggie.”
Lost electronic devices from NASA: $1.1 million
It seems thousands of agency provided electronics are lost in space. NASA hasn't kept track of the thousands of Smartphones, tablets, and AirCards they've provided their employees. At the same time, “Over 2,000 devices – 14 percent of the total owned by the agency– went unused for at least 7 months from 2013-2014.” On the agency’s list of lost items, they've listed “laptops, video tapes, and moon rocks.”
Studying if Wikipedia is Sexist: $202,000
The NSF sent nearly a quarter of a million dollars to NYU and Yale researchers to study if any gender bias existed on the website Wikipedia. Because Wikipedia can be edited by almost anyone, the study followed “accusations of sexism in content and among contributors at Wikipedia.” One example of sexism uncovered by researchers was quite the bombshell:
Wikipedia contributors were biased because they had characterized some female novelists as “American Female Novelists” on Wikipedia, rather than “American Novelists.”
Asking heavy drinkers not to drink through text message: $194,090
Researchers plan to use this swath of taxpayer money to conduct a study wherein they text “heavy drinkers,” warn them not to drink, and monitor whether they do in fact get drunk.
“For example, some study subjects will get a daily 3 P.M. text message reminding them of the consequences of heavy drinking.”
Government Funded Ice Cream: $1.2 million
The USDA is paying dairy farmers to produce ice cream and many other dairy confections:
“In Wisconsin and New York , a farmer cooperative and creamery received a grant to expand production and marketing of organic Greek yogurt. A Missouri farm will be using a grant it received also to produce yogurt, but from sheep’s milk. A farm in
Pennsylvaniareceived a grant as well to expand its yogurt business but will use some of the money to build its Mexican chocolate business.”
Amazon had to pay federal income taxes for the first time since 2016 — here's how much
When Amazon CEO Jeff Bezos tweeted a picture of himself with singer and rapper Lizzo at the Super Bowl in Miami, saying he was "100% Lizzo's biggest fan," the response from the Twitter-sphere was more about his 1% status: Pay taxes, Twitter users said.
But for the first time since 2016, Amazon's critics won't be able to point to the tech giant's nonexistent federal tax bill.
That's because Amazon actually owed money to the federal government in 2019. After two straight years of paying in U.S. federal income tax, Amazon was on the hook for a $162 million bill in 2019, the company said in an SEC filing on Thursday.
Of course, $162 million is still just a fraction of the $13.9 billion in pre-tax income Amazon reported for 2019 — roughly 1.2%, in fact. The federal corporate tax rate is 21%, but as in the past, Amazon likely employed various tax credits and deductions to reduce its federal tax bill. Amazon also reported $280.5 billion in total revenue in 2019.
Amazon has been the subject of much criticism over the fact that the company's final federal tax burden has been particularly lacking in recent years. The company also came under fire for seeking huge tax incentives worth billions of dollars as part of its search for a second headquarters, or "HQ2," in 2018.
In 2018, Amazon posted income of more than $11 billion, but the company paid in federal taxes. In fact, thanks to tax credits and deductions, Amazon actually received a federal tax refund of $129 million. That was a year after Amazon received a $137 million refund from the federal government for 2017.
President Donald Trump is a frequent critic of Amazon for paying "little or no taxes to state and local governments," though the Trump Administration's 2017 Tax Cuts and Jobs Act helped to lower the statutory corporate tax rate.
In February 2019, Senator Bernie Sanders pointed out in a tweet that any one of the company's roughly 150 million Amazon Prime members would have paid more for that program's annual fee ($119) than Amazon paid in federal taxes for 2018 or 2017.
In a blog post on Thursday, Amazon touted the fact that the company had "over $1 billion in federal income tax expense" in 2019. However, that total includes the $162 million federal tax bill, as well as another $914 million federal tax bill that the company says has been deferred until a later date. (Federal tax laws companies to delay tax payments on certain income, including some foreign earnings and long-term investments in items such as equipment or machinery.)
Amazon also reported $276 million in state tax payments in 2019, as well as an international tax bill of more than $1.1 billion, according to Thursday's SEC filing. And, the company notes in its blog post that Amazon also paid roughly $2.4 billion "in payroll taxes and customs duties" in 2019.
However, paying something like payroll tax is hardly something to boast about, according to Matthew Gardner, a senior fellow at the Institute on Taxation and Economic Policy, or ITEP, a nonpartisan and nonprofit tax policy think tank. In a blog post responding to Amazon's release of its 2019 tax bill, Gardner notes that "economists agree that payroll taxes are ultimately paid by employees in the form of reduced compensation."
Calculating the Conversion Tax
With the above $10,000 example that had $2,000 in after-tax contributions, the $2,000 conversion would play out as follows:
- Total account value = $10,000
- After-tax contributions = $2,000
- Pre-tax contributions = $8,000
- $2,000 / $10,000 = 20%
- $2,000 converted x 20% = $400 converted tax-free
- $1,600 subject to income tax
The same would apply to earnings in the account. Let’s say your account had increased to $15,000, and you want to convert $2,000.
- After-tax contributions = $2,000
- Pre-tax contributions = $8,000
- Earnings = $5,000
- $2,000 / $15,000 = 13%
- $2,000 x 13% = $260 converted tax-free
- $1,740 subject to income tax
Seven ways Americans pay taxes
As Americans across the country rang in the new year, many were unaware that, at midnight, more than 50 different tax breaks expired. According to the Tax Foundation, among them were credits for everything from building motorsports facilities, producing biofuels, conducting business research and development, and even training a mine rescue team.
Clearly, the U.S. tax system can be very complex. Understanding the basics, especially the different types of taxes you may face, can be a valuable tool in financial planning.
Not all taxes are paid at the same time. Some, for example, are deducted from your paycheck. "Generally, three types of taxes will show up on a worker's pay stub: federal income taxes, payroll taxes (Social Security and Medicare), and state income taxes," Andrew Lundeen, manager of federal projects at the Tax Foundation, told 24/7 Wall St.
Other taxes, however, are levied at the register. State and local governments collect sales taxes on individual goods and services. Similarly, governments charge excise taxes on specific items, including gasoline and cigarettes.
Not all authorities levy the same types of taxes. Income taxes serve as the largest source of revenue for the federal government, accounting for over 40% of yearly tax revenue. And according to projections from the Congressional Budget Office, income taxes, as well as social insurance taxes, should continue to account for the bulk of the U.S. government's tax revenue going forward.
At the state level, the picture is a bit more mixed. Different states use different tax structures to raise money for the various services they provide. While some states rely heavily on income taxes, others depend primarily on sales or property taxes. A few states, including Florida and Texas, have no personal income tax. Others "follow a structure similar to the federal [tax] code, but with different brackets and much lower rates," explained Lundeen.
Counties, cities, and other local areas often levy taxes to raise money as well. Property taxes, Lundeen noted, "are generally charged at the local level in order to pay for services such as schools, police and fire departments, and parks." Similarly, localities often charge an additional sales tax.
Not all taxes apply to everyone. The federal estate tax, often the subject of controversy, applies only after death and only if the estate is worth $5.34 million or more. Also, you may be able to avoid paying a number of excise taxes if you do not smoke, drink, or gamble. However, some excise taxes may be harder to avoid, including those levied on cell phone services, hotel stays, and gasoline purchases, according to Lundeen.
Here are seven ways Americans pay taxes.
Income taxes can be charged at the federal, state and local levels. At the federal level, the amount paid depends on a number of factors, including income and marital status. Lundeen noted the U.S. has a progressive tax system, consisting of seven tax brackets. He added, "for each additional dollar in a new bracket, you pay that bracket's tax rate." There are also a number of credits. For one, the Earned Income Tax Credit (EITC) gives a tax credit to low and moderate earners.
State income tax structures vary considerably. Some states, such as Florida, do not levy an income tax at all. A few states use a single income tax rate, while many states apply different tax rates depending on income.
Sales taxes are taxes on goods and services purchased. These are usually calculated as a percentage of the price paid. Sales taxes vary by state, and even by municipality. In some states, there are no sales taxes at either the state or local level. Other states and local authorities can charge a hefty amount. In Tennessee, for example, consumers can pay as much as 9.44% in sales taxes when combining state and local taxes, according to the Tax Foundation. In 12 states, sales taxes are higher than 8%. Sales taxes are often considered to be regressive, meaning lower-income individuals and households spend a greater proportion of their earnings to pay the tax, compared to higher income residents.
Excise taxes are similar to broad sales taxes, except they are charged on specific goods. States typically tax certain purchases, including gas, cigarettes, beer and liquor. Excise taxes are frequently levied on so-called "sin products," and often are intended not only to help raise money, but also to deter unhealthy behaviors. The federal government also collects such taxes, including 18.4 cents per gallon on gasoline and 24.4 cents per gallon on diesel fuel, as well as a 10% charge for tanning services. Excise taxes are often combined with sales taxes on a single purchase. According to Lundeen, in many cases a sales tax is paid on top of an excise tax.
Both employees and employers have to pay the Social Security tax, one of two payroll taxes. For the Social Security tax, employees pay 6.2% of their wages, and employers match that for a total contribution of 12.4%. In 2013, the maximum earnings subject to the tax were $117,000. In 2011 and 2012, the amount employees had to contribute briefly declined to 4.2% of wages, as part of a payroll tax holiday designed to encourage people to spend more and boost the U.S. economy.
A similar tax also exists for Medicare. Both employees and employers are required to contribute 1.45% of wages, or 2.9% in total, to fund the program. Unlike Social Security, there is no maximum taxable wage. In fact, since last year, workers who earned more than $200,000 had to contribute an extra 0.9% of their wages to the program.
Property taxes are usually imposed to fund local services. According to the Tax Foundation's Lundeen, these taxes are based on the property's market value, and are most often levied on real estate, but can also apply to other property, such as cars. In many instances, these taxes are deductible. However, according to the IRS, property taxes on real estate are only deductible if they are used to promote the "general public welfare," but not if they are used "for local benefits and improvements that increase the value of the property." Many homeowners also qualify for a mortgage interest deduction.
The IRS defines an estate tax as "a tax on your right to transfer property at your death." The estate tax is controversial, as it is seen by some as a penalty for dying. Cash, securities, insurance, real estate, and business interests are among the items considered part of an estate. However, for individuals, only estates exceeding $5.34 million are taxed by the federal government. Most Americans, therefore, are exempt from paying the federal estate tax. The highest estate tax rate charged at the federal level is 40%.
Estate taxes are also often levied at the state level. While states frequently use lower rates, they also often have lower exemptions than the federal government's $5.34 million cutoff. Some states have an inheritance tax, where the rate you pay depends on your relation to the deceased.
The gift tax is similar to the estate tax, in that it is a tax on transferring wealth. One important difference is that gift taxes involve two living people, Lundeen added. The federal government also has a far lower exemption level for the gift tax than it does for the estate tax. All gifts over $14,000 are taxable, with the tax to be paid by the recipient. The highest gift tax rate is 40% of the taxable gift amount. This tax applies not only to cash, but also to gifts like company shares or cars. Last year, Minnesota became the second state to implement its own gift tax, following Connecticut.
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How Income Taxes Work
There's nothing quite like the excitement and pride of receiving your very first paycheck. You worked hard for a solid month, and here's your much-deserved compensation. But wait a second . what's the story with this line that says "net pay?" That can't be your actual salary, could it? What happened to all of your money? By the time you get your paycheck, it's been cut up like a pizza, with several government agencies taking a piece of the pie. Exactly how much money is withheld from each check varies from person to person, company to company and state to state. However, almost every income earner has to pay federal income tax.
We generally don't think much about taxes except during the annual tax season. It's probably the most dreaded time of the year for millions of Americans, yet we circle it on our calendars, along with holidays and birthdays. But little joy is connected to April 15, the deadline for filing tax forms. (This deadline doesn't always fall on the 15th. In 2012, Tax Day was Tuesday, April 17 because the 15th was a Sunday and the 16th was a holiday in Washington, D.C. [source: Kaufman].)
The American tax system is a huge machine with a tax code that seems more complex than rocket science. In this article, we will examine how individual income taxes work, take a look at the history of income taxes in the United States and consider two alternative tax plans.
Taxes have always left a sour taste in the mouths of American citizens. This national hatred for taxes dates back to the tax burden placed on the American colonies by Great Britain. Colonists were taxed for every consumer good, from tea and tobacco to legal documents. This "taxation without representation" led to many revolts, such as the Boston Tea Party, in which colonists dumped tea into the Boston Harbor rather than pay the tax on it.
Although the American colonists fought for independence from British rule and British taxes, once the United States government formed, its main source of revenue was derived from placing customs and excise taxes on the same items that had been taxed by Great Britain. In 1812, in an effort to support an expensive war effort, the U.S. government imposed the first sales tax, which was placed on gold, silverware, jewelry and watches. In 1817, internal taxes (taxes on goods and land) were terminated, and the government relied on tariffs (taxes on imports or exports) to support itself. It wasn't until 1862 that the United States imposed the first national income tax [source: Tax Foundation].
To support the Union Army during the American Civil War, Congress passed tax laws in both 1861 and 1862. The office of Commissioner of Internal Revenue was established by the Tax Act of 1862, which stated that the commissioner would have the power to levy and collect taxes. The office also was given the authority to seize property and income in order to enforce the tax laws. These powers remain pretty much the same today, although the Internal Revenue Service (as it's been known since the 1950s) will tell you that enforcement tactics have been toned down a bit [source: IRS].
In 1863, the federal government collected the first income tax. This graduated tax was similar to the income tax we pay today. Those who earned $600 to $10,000 per year paid at a rate of 3 percent. Those who earned in excess of $10,000 paid 5 percent. A flat-rate tax was imposed in 1867. Five years later, in 1872, the national income tax was repealed altogether since the Civil War was long over and revenue needs had declined. The federal government went back to relying mainly on tariffs and excise taxes, such as liquor taxes [source: U.S. Dept. of Treasury].
Spurred on by the Populist Party's 1892 campaign to reduce high tariffs, Congress passed the Income Tax Act of 1894 to make up the difference. This act taxed 2 percent of personal income that was more than $4,000, which only affected the top 10 percent. The income tax was short-lived, as the U.S. Supreme Court struck it down only a year after it was enacted. The justices wrote that the income tax was unconstitutional because it failed to abide by a constitutional guideline. This guideline required that any tax levied directly on people must be levied in proportion to a state's population [source: Our Documents].
In 1913, the income tax became a permanent part of the U.S. government. Congress avoided the constitutional roadblock mentioned above by passing a constitutional amendment. The 16th Amendment reads, "The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." The 16th Amendment gave the government the power to levy taxes on people regardless of state population. The Underwood Tariff Act of 1913 included an income-tax section that initiated the progressive system we use today: Those who earned more than $3,000 ($4,000 for married couples) were subject to a 1 percent tax, which increased depending on income and topped out at 7 percent [source: IRS].
During World War II, the federal government began withholding taxes, also known as the pay-as-you-earn taxation system. This gave the government the steady flow of money needed to finance the war effort.
In 2014, the tax brackets range from 10 percent to 39.6 percent [source: Bankrate].
While most Americans only think about taxes when April approaches, the tax collection process actually runs all year long.
The process begins when you start a new job. You and your employer agree on your compensation — an hourly wage or an annual salary — which adds up to your gross or "before tax" income. The next thing you do is fill out a W-4 form. The W-4 form is like a miniature income tax survey. It determines if you are single or married, if you have children or other dependents, if your spouse works and if you have childcare expenses. These are called your personal allowances. The number of allowances listed on the W-4 form determines how much income tax your employer will withhold from each paycheck.
Why does your company do this? Because employers are required by law to withhold income tax from all employee paychecks and deposit the money in a Federal Reserve Bank. This is how the federal government maintains a steady stream of income while also drawing interest on your tax dollars. Instead of paying taxes once a year in April, you really pay them all year long.
The W-4 form is important because it ensures that you aren't paying either too much or too little in federal income tax during the year. Some people love to get a big refund check when they file their tax return in April. But what that really means is that they paid too much income tax during the year. They could have put that money in the bank, invested it, or bought something useful with it rather than letting the IRS borrow it. By adjusting the number of allowances on the W-4 form, you can decrease or increase the amount withheld from each check. That way, there are no big checks or big bills in April. Check your W-4 annually to make sure the information is up to date.
Filing income taxes in April is akin to "settling up" with the IRS. In reality, you've been paying taxes all year long. In April, all you are doing is determining if you paid the right amount. If you paid too much, you get a refund too little and you're writing another check. Income tax forms like the 1040 are notoriously confusing, but that's because they're based on a U.S. tax code that's more than 5,000 pages long [source: Shinske]. Here are the basic steps to completing a tax return:
- Start by adding up your gross income, which includes salary or wages from a job, investment interest income, pensions and annuities. If you have job, your employer will send you a W-2 form in the mail which shows how much you earned and how much income tax was already withheld.
- Subtract any adjustments (examples: alimony that you paid, deposits in retirement plans, self-employment estimated taxes paid, moving expenses, interest that you paid on a student loan, etc.). The difference is called adjusted gross income (AGI).
- Once you know your AGI, you have two choices: Either subtract a standard deduction, or subtract itemized deductions, whichever is greater. Itemized deductions might include medical and dental expenses, charitable contributions, interest on home mortgages, and state and local taxes from the previous year.
- Next, subtract personal exemptions. For 2013, the IRS allows you to subtract $3,900 each for you, your spouse and each dependent if your AGI is under a certain amount [source: IRS]. Everything left over is called your taxable income.
- This is where it gets a little complicated, because the United States uses a marginal or progressive tax rate system. The more you earn, the higher your tax rate. To determine exactly how much you owe, look up your taxable income on the IRS tax table. Find the number that matches your filing status: single, married filing jointly, married filing separately, head of household, or qualifying widow(er) with dependent child, which is the same as "married filing jointly." That number is your gross tax liability. Don't worry, you have one more chance to lower your tax bill.
- From your gross tax liability, subtract any credits. The Child Tax Credit is a big one: $1,000 for each qualifying child. Other credits include the Earned Income Tax Credit (or Earned Income Credit) for low-income working families, which can be as much as $6,000, and the Child and Dependent Care Credit for childcare expenses.
- The final number is your net tax. If it's a positive number, you owe money to the IRS. If it's negative, you're getting a refund.
You must file your federal income tax return and pay any taxes owed by April 15. Filing or paying late results in penalties and interest that accrues over time. If you are due a refund, the IRS mails most of them out within two weeks of receiving a return. You could also have the money electronically deposited directly into a bank account.
If you are a freelancer, independent contractor or otherwise self-employed, no one is going to withhold income taxes each time you get paid by a client or customer. Instead, it's your responsibility to pay estimated taxes quarterly based on your taxable income the year before. Not only is it the law (you'll pay a small penalty if you don't), but it allows you to avoid a big tax bill in April.
Humorist and travel writer Stanton Delaplane once offered this lighthearted suggestion for a simplified tax form: "How much money did you make last year? Mail it in." While that may be a drastic way to change the tax system, there has been no shortage of people proposing new tax systems since the 16th Amendment was passed in 1913. If you follow presidential campaigns, there is usually talk from some of the candidates on revising the tax system. Here's a quick look at two of these alternative tax plans.
We currently use a marginal tax system, also called a graduated tax, in which the percentage you pay in taxes varies based on your income. Under a flat tax system, everyone pays the same tax rate no matter how much they earn. Former presidential candidate Steve Forbes proposed a 17 percent flat tax in 1996 and 2000, and Rick Perry floated a 20 percent flat tax in his 2012 presidential campaign [source: Tax Policy Center].
Proponents of a flat-tax system say that it would do away with the complicated tax code and tax forms. The flat tax would need only one form, about the size of a postcard and consisting of only 10 lines. You would merely add up wage, salary and pension income, subtract any personal allowances and pay 17 percent of your taxable income. Deductions and credits would be eliminated under this type of plan. (Perry's proposal did allow a few deductions such as mortgage interest).
Critics of the flat tax say that it would favor the wealthy. Under Rick Perry's plan, a married couple with two children earning $31,000 would lose $5,000 in credits, while the same earning $424,900 would owe nearly $45,000 less in taxes [source: Rampell].
Alternative: National Sales Tax
Even more controversial than the flat tax is the idea of abolishing the federal income tax entirely by repealing the 16th Amendment. In place of an income tax, some propose the use of a national sales tax. Many countries around the world levy a national sales tax, also called a value-added tax or VAT. The difference is that most of those countries also collect income taxes. The U.S. backers of a national sales tax want to get rid of the IRS and charge a flat 10 to 25 percent on all retail purchases of new goods and services [source: Montgomery].
What are the benefits of a national sales tax? Like the flat tax, a national sales tax makes tax collection vastly simpler. Workers could keep their entire paycheck and use that money to buy the things that they need.
Proponents of the so-called Fair Tax — a version of the national sales tax — include a provision called a pre-bate. This is a monthly check mailed by the government to lower-income families to subsidize their purchases. Advocates of a national sales tax also argue that a consumption tax collects revenue from everyone, even illegal immigrants, tax dodgers and tourists from other countries [source: FairTax.org].
Opponents of a national sales tax say it would put an unfair burden on the middle and lower classes, who buy a lot of the products that would be taxed. It might reduce consumer spending, thereby slowing the economy. They add that in order for a national sales tax to be fair, it should be applied to the purchase of stocks and bonds in addition to consumer goods. Under the Fair Tax proposal, investments are not taxed, although brokers' fees would be [source: FairTax.org].
Taxes are a bitter subject in almost every country, and the United States has had a decidedly tumultuous relationship with the issue. America has one of the most complicated tax systems in the world, and it grows more complex every year. In the end, whether you agree with paying taxes or not, you probably have April 15 circled on your calendar, embedded in your brain and on your list of dreaded days.
For more information on taxes and related topics, check out the links on the next page.
The definition of a direct tax is a tax that is paid straight from the individual or business to the government body that imposes the tax. Examples of direct taxes include individual income taxes (paid to the federal and state governments), corporate taxes (paid on an organization’s profits), and property taxes (paid on the value of real estate).
The federal income tax almost didn’t make it into law because the Supreme Court initially objected to the fact that it was a direct tax, rather than being apportioned among the states based on population. The 16th amendment to the constitution overrode the Supreme Court’s ruling in 1913 and the direct income tax was born.
Direct taxes are based on a percentage of the value of what is being taxed, and they are set by state and federal law.