Macroeconomic Analysis of Federal Tax Proposals Affecting State

Gregory Bird [email protected]

Brian Kessler [email protected]

Mark Hopkins Senior [email protected]

ECONOMIC & CONSUMER CREDIT ANALYTICS

Economic Analysis of Federal Tax Proposals Affecting State and Local BudgetsPREPARED FOR THE NATIONAL GOVERNORS ASSOCIATION AND THE COUNCIL OF STATE GOVERNMENTS

Prepared ByDan White Senior [email protected]

March 2014

MOODY'S ANALYTICS 2

Table of Contents

Table of Contents

Executive Summary

Economic Analysis of Federal Tax Proposals Affecting State and Local Budgets

Appendix A: Annual Data Tables

Appendix B: Methodology

3

26

15

5

MOODY'S ANALYTICS 3

Executive Summary

As part of the ongoing federal fiscal debate, policymakers are considering a number of proposals that would have a significant impact on state and local government finances. Among the proposals are changes to long-standing IRS provisions regarding the tax treatment of municipal bond interest and state and local

government taxes paid. The purpose of this study is to determine the national and regional economic impacts over the next decade of several selected parts of the president’s fiscal 2014 budget proposal, and the proposal being discussed in Congress to eliminate these tax preferences. These proposals were selected for the study given their outsize impact on state governments and were grouped into two different scenarios:

» Capped scenario: The capped scenario is based on various pieces of President Obama’s fiscal 2014 budget proposal, including a 28% cap on the value of both the state and local tax deduction and the earned interest exemption on municipal bonds, as well as establishment of the direct-subsidy America Fast Forward Bond (AFFB) program at a subsidy rate of 28%.

» Repeal scenario: In addition to the president’s proposal, the approach taken by the respective chairmen of the House and Senate tax-writing committees could result in the elimination of both forms of state and local government tax subsidy. Thus, the repeal scenario includes a total elimination of the state and local tax deduction and the earned interest exemption on municipal bonds.

The two scenarios vary significantly in magnitude, but their overall narrative is similar. Higher tax burdens decrease consumption and saving rates, while lower levels of infrastructure spending decrease construction activity and the economic spillover associated with it. These negative economic consequences would be offset in part by more federal tax revenue and thus lower budget deficits and a lighter debt load.

Fiscal impacts. The fiscal impacts of the two scenarios largely occur through changes in effective federal tax rates and in the costs of borrowing for states and local governments. Broken out by tax subsidy, the impacts from each scenario are as follows:

» State and local tax deduction: The capped scenario results in a tax revenue gain to the federal government of $112 billion over the 10-year period beginning in 2014, corresponding to an increase of about 0.07% in the average effective federal tax rate. The repeal scenario would generate a federal tax revenue gain of $743 billion over the next 10 years, pushing the average effective federal tax rate up 0.5%.

» Municipal bond interest exemption: The capped scenario increases cumulative state and local government borrowing costs by more than $32.9 billion over the 10-year period beginning in 2014, corresponding to an increase of about $77 billion in federal government tax revenues. The repeal scenario increases cumulative municipal borrowing costs $175.6 billion over the next decade, accompanied by a $385 billion increase in federal tax revenues.

» America Fast Forward Bond program: Under the capped scenario, Moody’s Analytics assumes that states and local governments issue just over $1 trillion in AFFBs over the next decade. Based on the savings estimates tailored from Treasury’s analysis of the Build America

Bond program, this equates to cumulative savings for states and local governments of about $16 billion over that period.

» Net fiscal impacts: The capped scenario is estimated to result in a net increase of $188.9 billion in federal tax revenues, and a $16.6 billion cumulative increase in state and local government borrowing costs over the next 10 years. The repeal scenario is estimated to increase federal tax revenues by $1.1 trillion in the next decade, accompanied by a cumulative increase in municipal borrowing costs of $175.6 billion.

Economic impacts. Once the budgetary and financial impacts of the two scenarios were established, the economic impacts were estimated using the Moody’s Analytics macroeconomic forecast model.

» Relative to the baseline, which assumes no change in tax policy, the capped scenario would result in a net loss of approximately 78,000 jobs and $15 billion in real GDP over the 10-year period beginning in 2014. This equates to a decrease of about 0.05% in employment and 0.07% in output.

Table X1: Summary of Alternative Scenario Fiscal Impacts, 10-yr Total (bil)

Capped Repeal

State and local tax deduction

Taxes $ 111.9 $ 743.0

Borrowing costs $ - $ -

Muni interest exemption

Taxes $ 77.0 $ 385.4

Borrowing costs $ 32.9 $ 175.6

America Fast Forward bonds

Taxes $ - $ -

Borrowing costs $ (16.3) $ -

NetTaxes $ 188.8 $ 1,128.4

Borrowing costs $ 16.6 $ 175.6

Executive Summary

MOODY'S ANALYTICS 4

» The effects of the repeal scenario would be far more material in the context of the overall economy. Such a scenario would bring a net loss of approximately 417,000 jobs and $71 billion in real GDP relative to the 2023 baseline. This represents a decrease of about 0.28% in payrolls and 0.35% in output.

To gauge the differing regional economic effects of changes to the state and local tax deduction or municipal borrowing costs, the national economic impacts estimated under the capped scenario were used to simulate the Moody’s Analytics proprietary regional econometric models. To help differentiate the impact of the capped scenario from one state to another, the models were augmented by including the relative importance of municipal bond issuance to a state’s total gross state product and the proportional amount of a state’s respective state and local tax benefits annually claimed by high-income taxpayers. As a result, those states that issue a proportionately large amount of municipal bonds and those with high income-tax burdens and a large amount of high-income taxpayers would be affected the most.

Conclusions. Both of the scenarios examined in this study would result in less GDP and fewer jobs, but would lower federal budget deficits over the next 10 years. The repeal scenario, currently being discussed in Congress, would carry the largest economic cost, equating to an economy with 417,000 fewer jobs, representing 0.28% of total employment, and $71 billion less output, or 0.35% of total GDP than in the baseline. This scenario would also provide the most long-term deficit relief, totaling $1.1 trillion in additional federal tax revenue over the next decade. The capped scenario, which includes various pieces of President Obama’s fiscal 2014 budget proposal, would put less drag on the U.S. economy, reducing employment by 0.05% and output by 0.07%, but it would also result in less deficit reduction, generating an additional $188 billion in federal tax revenue over 10 years. The effects differ from state to state based on tax structure, income distribution and industrial composition. States with higher income-tax burdens and higher numbers of high-income taxpayers would be most affected by a cap on the state and local government tax deduction. Additionally, states more reliant on finance and professional and business services would be disproportionately affected by a decrease in tax benefits to high-income taxpayers due to a hit to saving rates.

These are conservative estimates of the economic impacts of the tax proposals. The precedent of arbitrarily reducing the value of municipal bonds by capping the exemption on tax-exempt bond interest would likely result in a permanent uncertainty premium on municipal interest rates. Additionally, recent reductions in BAB payments to issuers due to sequestration would likely make the AFFB program less beneficial to

issuers than the estimates included in this analysis.

Executive Summary

Table X3: Capped Scenario Change in GSP Relative to Baseline, 2023Q4, ppts

5 States Most Affected 5 States Least Affected

New York -0.136 Washington -0.029

Delaware -0.114 South Dakota -0.026

California -0.106 Tennessee -0.025

Connecticut -0.101 Texas -0.022

New Jersey -0.099 Alaska -0.009

Table X2: Summary of Alternative Economic Impacts2023Q4 Values Baseline Capped Repeal

Employment (ths) 150,393.2 150,315.2 149,976.6

Real GDP (bil) $ 20,082.3 $ 20,068.0 $ 20,011.0

Difference From Baseline

Employment (ths) n/a (78.0) (416.6)

Real GDP (bil) n/a $ (14.3) $ (71.3)

10 10

Chart X1: Capped Scenario Impacts by State Decline in GSP relative to baseline, 2023Q4, quartile

Sources: BEA, Moody’s Analytics

2nd quartile 3rd quartile 4th quartile

1st quartile

1st quartile= least affected

It is also important to consider that these tax proposals would come at a time when more investment in public infrastructure is badly needed. In its 2013 Report Card for America’s Infrastructure, the American Society of Civil Engineers estimated a funding gap of more than $1.6 trillion to bring the nation’s infrastructure from a grade of D+ to a B by 202011. Both scenarios would create an even wider gap. Though long-term deficit reduction is extremely important to long-term economic growth, reduced infrastructure spending is a significant economic price to pay.

1 2013 Report Card for America’s Infrastructure, American Society of Civil Engineers. http://www.infrastructurereportcard.org/a/#p/grade-sheet/americas-infrastructure-investment-needs

MOODY'S ANALYTICS 5

As part of the ongoing federal fiscal debate, policymakers are considering a number of proposals that would have a significant impact on state and local government finances. Among the proposals are changes to long-standing IRS provisions regarding the tax treatment of municipal bond interest and state and local

government taxes paid. The president’s 2014 budget proposal, for example, would limit the value of these and oth-er tax expenditures to free up additional revenues for deficit reduction. Additionally, congressional tax writers have proposed rewriting the tax code from the ground up, creating the possibility that these provisions could be elimi-nated entirely. The purpose of this study is to gauge the 10-year national and regional economic impacts of several selected pieces of the president’s fiscal 2014 budget proposal, and the total elimination proposal being discussed in Congress. The individual proposals were selected for their outsize impact on state governments, specifically:

» Capping at 28% or eliminating the state and local personal income tax deduction; » Capping at 28% or eliminating municipal bond interest income exemptions; » Making direct-subsidy America Fast Forward bonds available for use by tax-exempt entities.

Subsidizing states and localsThe current tax code subsidizes state and

local governments in two major ways. First, it allows individual filers who itemize to deduct the amount of state and local taxes they pay when calculating their adjusted gross income. The effect is to reduce individual tax burdens, with the greatest federal tax benefit accruing to residents of high-tax states and municipalities. But deductions have their limitations. The deduction is not available to those who take the standard deduction, or to the millions of filers subject to the alternative minimum tax. Furthermore, starting in 2013, itemized deductions are once again subject to so-called Pease1 limitations, which restrict the amount by which total itemized deductions can be used to reduce AGI.

The second major subsidy is the tax exemption granted to interest earned on tax-exempt municipal bonds. Unlike a deduction, exempted income can be used to reduce the tax burden of those who take the standard deduction as well as those who itemize, and

1 More details on Pease limitations and how they were in-corporated into our calculations are included in the detailed methodology found in Appendix B.

therefore is not subject to Pease limitations. Furthermore, most municipal bond interest is exempt from the AMT. All of these attributes generally make benefits from the exemption broader-based than those from the state and local tax deduction. Additionally, they also allow states and local governments to issue debt at a lower cost than taxable debt with comparable attributes, significantly reducing the overall cost of important

public infrastructure projects. States and local governments fund the overwhelming majority of total U.S. public infrastructure spending. The National Association of Counties found in a recent report that in the

last 10 years states and local governments spent 2½ times more on public infrastructure projects than the federal government.2

Capped scenario. The president’s budget proposal would cap the value of both itemized deductions and currently tax-exempt municipal bond interest at 28%, reducing the benefit to filers in the 33%, 35% and 39.6% tax brackets. In 2013, the 33% tax bracket applies to income above $223,050 for couples

and $183,250 for individuals. The top rate of 39.6% begins at $450,000 for couples and $400,000 for individuals.

To help offset the additional costs to states and local governments resulting from these changes, the president’s fiscal 2014 budget proposal also includes the creation of a direct-subsidy bond program called America Fast Forward. It is based on the Build America Bond program, temporarily authorized under the 2009 American Recovery and

2 Municipal Bonds Build America: A County Perspective on Changing the Tax-Exempt Status of Municipal Bond Interest, Istrate, Emilia, National Association of Counties Policy Re-search Paper Series, Issue 1, 2013. The report estimates that a 28% cap or full repeal of the municipal bond interest exemp-tion would have cost subnational governments $173.4 billion and nearly $500 billion, respectively, over the past 10 years.

Table 1: 2013 Federal Marginal Personal Income Tax Rates

Married Filing Jointly

10%-25% $0 - $145,599

28% $145,600 - $223,049

33% $223,050 - $398,349

35% $398,350 - $449,999

39.6% $450,000+

Macroeconomic Analysis of Federal Tax Proposals Affecting State and Local Budgets


MOODY'S ANALYTICS 6

Reinvestment Act. Interest income earned from AFFBs would not be exempt from federal income taxes, and would thus require more competitive yields than traditional tax-exempt municipal bonds. The federal government would instead reduce the costs of capital for state and local governments by issuing subsidies equal to 28% of the coupon interest directly to bond issuers. To further enhance the new program’s appeal to issuers and investors, the president’s proposal eliminates some of the previous restrictions levied on BABs, including allowing AFFBs to be used for refundings, short-term operating notes, and qualified private activity.

The capped scenario thus includes a 28% cap on the value of both the state and local tax deduction and the earned interest exemption on municipal bonds, as well as establishment of the AFFB program at a subsidy rate of 28%. The

president’s budget proposal includes a number of other individual tax and infrastructure measures that could significantly augment or offset the impacts ultimately established as part of this analysis. However, to best isolate the economic impacts of those proposals having to do explicitly with state and local government finances, they will be excluded from the capped scenario for the purposes of this study.

Repeal scenario. In addition to the president’s proposal, a proposal from the respective chairmen of the House and Senate tax-writing committees could result in the elimination of both forms of state and local government

tax subsidy. This blank-slate approach to reworking the tax code first removes all exemptions and deductions, and then allows members of Congress to argue for the inclusion of each individual tax expenditure based on its own merits. Thus, for the purposes of

this study, the repeal scenario will include a total elimination of the state and local tax deduction and the earned interest exemption on municipal bonds. However, it will not include establishment of the AFFB program, as it has not been publicly included in the current congressional tax discussions.

Fiscal impactsTo properly gauge the economic impacts

of the respective proposals, it is first necessary to evaluate their fiscal impacts, both on various levels of government and on individual taxpayers. These impacts generally boil down to changes in effective federal tax rates and in the costs of borrowing for states and local governments. After those impacts have been established, the resulting economic fallout can be determined using Moody’s Analytics proprietary economic models.

State and local government tax deduction. In an effort to raise more federal revenue, the

president’s fiscal 2014 budget proposal includes capping tax deductions, including the state and local government taxes paid deduction, at 28% of a taxpayer’s income. For the purposes of this analysis, all increased federal revenue above the baseline forecast is assumed to go toward deficit reduction. This assumption was made in an effort to avoid forecasting policymaker behavior and remain in line with the stated intentions of the president’s tax proposal. The cap leads to a smaller deduction for taxpayers whose marginal rate is higher than 28%, resulting in more federal tax revenue and a higher effective tax rate for high-income taxpayers. The repeal scenario eliminates the deduction for all taxpayers, resulting in significantly more tax revenue for the federal government and a higher effective tax rate for taxpayers across all income levels.

To forecast these changes, state and

Table 2: Summary of Alternative ScenariosCapped Scenario Repeal Scenario

28% cap on state and local tax deduction Eliminates state and local tax deduction

28% cap on muni interest exemption Eliminates muni interest exemption

America Fast Forward bonds

1 1

0100200300400500600700800900

91 94 97 00 03 06 09 12F 15F 18F 21F

>$500k$200k-$500k<$200k

Chart 1: Higher Incomes, Higher Local Taxes State and local taxes paid, $ bil, by AGI

Sources: IRS, Moody’s Analytics

Table 3: Difference in State and Local Government Taxes Paid Deduction

28% CapChange in federal tax revenues ($ mil, 10-yr total) 111,894

Change in avg effective tax rate (%, 2023) 0.07

Full RepealChange in federal tax revenues ($ mil, 10-yr total) 743,043



The president’s budget proposal includes a number of other individual tax and infrastructure measures that could significantly augment or offset the impacts ultimately established as part of this analysis. However, to best isolate the economic impacts of those proposals having to do explicitly with state and local government finances, they will be excluded from the capped scenario for the purposes of this study.

MOODY'S ANALYTICS 7

local government taxes claimed were forecast by income group using the Moody’s Analytics proprietary tax forecast models based on historical Statement of Income data from the IRS. Marginal tax rates3 were then applied to estimate the decrease in the amount of tax deductions claimed by taxpayers whose marginal tax rate exceeds 28%. Further reductions in the amounts claimed were made, based on historical IRS data for deductions and AMT from the IRS and Joint Committee on Taxation, to account for individuals paying the AMT and for reinstatement of Pease limitations on high-income deductions.

Capping the state and local tax deduction at 28% results in a tax revenue gain to the federal government of $112 billion over the 10-year period beginning in 2014,

3 For the purposes of this study, taxpayers reporting adjusted gross income of $200,000 to $500,000 were analyzed at the second highest marginal tax rate, and those reporting more than $500,000 were analyzed at the highest marginal rate. This is because of limitations on time-series data reported by the IRS and is discussed in more detail in Appendix B.

corresponding to an increase of about 0.07% in the average effective federal tax rate. A full repeal of the deduction would generate a federal tax revenue gain of $743 billion over the next 10 years, pushing the average effective federal tax rate up by 0.5%.

Municipal bond interest exemption. In addition to limiting tax deductions, the president’s proposal aims to increase federal revenues by capping at 28% the amount of municipal bond interest taxpayers may exempt from their incomes. What this proposal ultimately does, in addition to raising federal revenue and increasing the tax burden on high-income taxpayers, is lower the market value of tax-exempt bonds. This drop in market value necessitates a higher yield for investors to purchase state and local government securities, in turn increasing municipal borrowing costs. For the purposes of this analysis, any increase in the amount of money paid by issuers on interest is assumed

Table 4: Muni Interest Exemption: Key Input Forecasts

BaselineMuni market ($ bil, 10-yr total) 5,363

20-yr AAA muni yield (%, 2023) 4.97

28% CapMuni market ($ bil, 10-yr total) 5,252

20-yr AAA muni yield (%, 2023) 5.18

Table 5: Change in Tax-Exempt Borrowing Costs and Federal Revenues

28% Cap

New tax-exempt issues ($ mil, 10-yr total) 3,394,649

Change in yield (%, 2023) 0.21

Change in borrowing costs ($ mil, 10-yr total) 32,905

Change in federal tax revenues ($ mil, 10-yr total) 76,954


Full Repeal

New tax-exempt issues ($ mil, 10-yr total) 3,361,892

Change in yield (%, 2023) 0.86

Change in borrowing costs ($ mil, 10-yr total) 175,645

Change in federal tax revenues ($ mil, 10-yr total) 385,429


2 2

<$200k

$200k-$500k

>$500k

Chart 2: $200k Plus Enjoys Biggest Break


Share of total 2013 tax-exempt interest claimed by AGI

35%

18%

47%


to reduce the amount of principal issued to fund infrastructure projects. This assumption was made because of the generally zero-sum nature of public bonding programs, stemming from statutory debt-service constraints and other limitations.

To forecast the change in borrowing costs resulting from a cap on the municipal bond interest exemption, several underlying baseline forecasts had to be prepared in conjunction with existing series in the Moody’s Analytics macroeconomic forecast model. More detailed information on these inputs can be found in Appendix B. The necessary forecasts included:

» The market value of tax-exempt securities outstanding, based on historical data from the New York Federal Reserve;

» The current yield on 20-year municipal securities, based on historical data from Moody’s Investors Service;

» The amount of tax-exempt interest claimed by different income levels, based on historical data from the IRS;

» The annual dollar amount of tax-exempt bond issuances from states and local governments, based on historical data from Bond Buyer.

The Moody’s Analytics yield calculations estimate that a 28% cap on the municipal bond interest exemption would increase cumulative state and local government borrowing costs by more than $32.9 billion over the 10-year period beginning in 2014. The cap would also result in a 10-year increase of about $77 billion in federal government tax revenues, amounting to an equal rise in the tax burden on high-income

MOODY'S ANALYTICS 8

taxpayers. If the exemption were to be repealed in its entirety, the effect would be a nearly $175.6 billion cumulative increase in state and local borrowing costs over the next 10 years, accompanied by a $385 billion increase in federal tax revenues.

To avoid making an arbitrary blanket assumption guessing investor behavior as a result of the policy change, the high-income taxpayers in question are assumed to maintain their positions in the municipal bond market, though at higher yield rates. If the affected investors were to pull their money from the municipal bond market in lieu of other tax-deferring investments, the federal tax revenue increase could prove to be less than what is estimated.

America Fast Forward bonds. Offsetting the increases in state and local borrowing costs, however, the president has also proposed the implementation of AFFBs, as a successor to the BAB program in place following the Great Recession. The brief life span of the BAB program makes modeling

Table 6: America Fast Forward BondsAmerica Fast Forward bond issuance ($ mil, 10-yr total) 1,070,233

Yield savings relative to tax-exempt bonds (%, 2023) 0.29

Change in borrowing costs ($ mil, 10-yr total) -16,305

3 3

Tax-exempt 64%

Taxable, BAB 27%

Taxable, other ARRA

4%

AMT 1%

Chart 3: BABs Were Significant Piece of Market

Sources: The Bond Buyer, Moody’s Analytics

Share of municipal bond issuances, 2010, %

Taxable, traditional

4%

Table 7: Net Changes in State and Local Government Costs of Borrowing

28% Cap

AFFB issuance ($ mil, 10-yr total) 1,070,233

Change in borrowing costs on AFFBs ($ mil, 10-yr total) -16,305

Tax-exempt bond issuance ($ mil, 10-yr total) 3,394,649

Change in borrowing costs on TEBs ($ mil, 10-yr total) 32,909

Net change in new money borrowing costs ($ mil, 10-yr total) 16,604

Full RepealTax-exempt issuance ($ mil, 10-yr total) 3,361,892

Change in borrowing costs on TEBs ($ mil, 10-yr total) 175,645

the impacts of the AFFB program problematic. However, the U.S. Treasury Department, based on its access to more complete datasets, has released estimates regarding observed changes in borrowing costs to tax-exempt issuers over the life of the BAB program.4 The Treasury Department analysis observed that for 20-year maturities, the term of the Moody’s Analytics yield benchmark, issuing BABs with a 35% federal subsidy netted approximately 45 basis points worth of yield savings to issuers. The analysis also found that issuers had to pay an additional 7 basis points in underwriting costs on the bonds because of their unique structure.

4 Treasury Analysis of Build America Bonds Issuance and Savings, U.S. Treasury Department, May 16, 2011.

The Moody’s Analytics analysis assumes that the 28% subsidy included in the AFFB program will result in approximately 80% of the savings realized during the BAB program. In other words, by issuing an AFFB in place of a normal tax-exempt bond, issuers will be able to save, on average, 36 basis points less 7 basis points in additional underwriting fees. The short life span of the BAB program and a lack of detailed historical data also prevent us from forecasting the amount of AFFBs to be issued by states and local governments into the future using traditional least squares modeling techniques. Therefore, we are forced to make the simplified assumption that states and local governments will issue AFFBs in about the same proportion to traditional bonds as they did during the BAB program. In 2010, the only full calendar year for which the BAB program was in place, 27%5 of long-term state and local bond issuances came in the form of BABs.

By assuming that proportional AFFB issuance will approximately mirror proportional BAB issuance, Moody’s Analytics projects that states and local governments will issue just over $1 trillion in AFFBs in the 10-year period beginning in 2014. Based on the savings estimates tailored from Treasury’s analysis of the BAB program, we find that the AFFB program will save issuers approximately $16.6 billion over that same period.

5 “A Decade of Municipal Bond Finance”, The Bond Buyer. http://www.bondbuyer.com/marketstatistics/decade_1/#dataTable Accessed September 24, 2013.

Table 8: Net Changes in Federal Tax Revenues and Average Effective Tax Rates

28% CapNet change in federal tax revenues ($ mil, 10-yr total) 188,847

Net change in avg effective tax rates (%, 2023) 0.11

Full RepealNet change in federal tax revenues ($ mil, 10-yr total) 1,134,147

Net change in avg effective tax rates (%, 2023) 0.67


MOODY'S ANALYTICS 9

Net effects. Combining the offsetting effects in each of the two scenarios, we come up with net effects that can be inputted into the Moody’s Analytics macroeconomic forecast model. Based on the capped scenario, we estimate that cumulative state and local government borrowing costs will increase by approximately $16.6 billion over the next 10 years. This equates to around 0.1% of the total dollar value of bonds expected to be issued over that period. The overall tax impacts would be much larger. In addition to the $111 billion in increased revenues from capping the state and local taxes paid deduction, $77 billion will come from the 28% cap on exempt interest. This results in a net increase of $188 billion in federal tax revenue over the 10-year period beginning in 2014, equating to a 0.11% rise in the average effective federal tax rate.

The impacts of the repeal scenario proved much more material. In the event of a total repeal of both the state and local tax deduction and the municipal bond interest exemption, federal tax revenues would increase $1.1 trillion over the next decade, pushing the average effective tax rate 0.7% higher. Eliminating the exemption for municipal bond interest would also increase cumulative borrowing costs for states and local governments by $175.6 billion over the same period.

Macroeconomic impacts

Once the budgetary and financial impacts of the two scenarios were established, their economic impacts were estimated using the Moody’s Analytics macroeconomic forecast model. Relative to the baseline, the capped scenario would result in a net loss of approximately 78,000 jobs and $15 billion in real GDP by 2023. This equates to declines of about 0.05% in employment and about 0.07% in output.

The effects of the repeal scenario would be far more material in the context of the overall economy. Such a scenario would bring a net loss of approximately 417,000 jobs and $71 billion in real GDP relative to the baseline in 2023. This represents declines of about 0.3% in payrolls and about 0.4% in output.

The two scenarios vary significantly in magnitude, but the overall narrative is similar. Higher tax burdens decrease consumption and saving rates, while lower levels of infrastructure spending decrease construction activity and the economic spillover associated with it.

When looking at the scenario impacts more granularly, it becomes evident that the tax consequences of the proposals prove much more damaging to economic growth than do the infrastructure implications. This is undoubtedly because of the mismatch in sheer size of the two parallel impacts. The tax

proposals in the capped and repeal scenarios result in a 10-year net tax increase of $188 billion and $1.1 trillion, respectively, while the declines in state and local government infrastructure spending amount to less than a tenth of those amounts. Even when accounting for multiplier effects, it is clear that the increased tax burden resulting from the two proposals would do the most damage to the economy.

However, because of how the increased tax burden is distributed among different income levels, we observe that the full hit to economic output in each scenario is far less than the actual amount of tax increases being pushed through the economy. Annualized, the capped scenario tax increases amount to about $19 billion a year, but the annual decline in real GDP is distilled down to only $14 billion by 2023. This is thanks to the fact that the tax increases, even in the repeal scenario, are largely concentrated among high-income taxpayers. Therefore, the marginal increase in tax burden flows through less to consumption and more to saving, which holds a much lower economic multiplier. These effects are borne out by the industry breakdowns as well.

Of the more than $71 billion in lost output under the repeal scenario by 2023, nearly half is lost from financial, and business and professional services—industries most dependent on private savings. Meanwhile, only a little more than 18% of the loss was attributable to wholesale and retail trade, and leisure and hospitality—industries most dependent on consumer spending. The contrast clearly highlights the way that these funds would have otherwise trickled

Table 9: Summary of Alternative Economic Impacts2023Q4 Values Baseline Capped Repeal

Employment (ths) 150,393.2 150,315.2 149,976.6

Real GDP (bil) $ 20,082.3 $ 20,068.0 $ 20,011.0

Difference From Baseline

Employment (ths) n/a (78.0) (416.6)

Real GDP (bil) n/a $ (14.3) $ (71.3)

4 4

0

10

20

30

40

50

60

70

80

14 15 16 17 18 19 20 21 22 23

CappedRepeal

Chart 4: Repeal Scenario Carries Biggest Hit Real GDP, loss relative to baseline scenario, $ bil

Source: Moody’s Analytics


The two scenarios vary significantly in magnitude, but the overall narrative is similar. Higher tax burdens decrease consumption and saving rates, while lower levels of infrastructure spending decrease construction activity and the economic spillover associated with it.

MOODY'S ANALYTICS 10

through the economy, but for the proposed tax increases.

The consumption effects prove much more significant when discussing potential changes to employment. Though the consumption-dependent industries contributed only 18% to the loss of output under the repeal scenario, they represented more than 21% of the total number of jobs lost. Savings-dependent industries, which made up nearly half of the lost output under the repeal scenario, represented only about a third of the total jobs lost. This is indicative of the role that wage rates play in employment multipliers.

Less investment and infrastructure

spending also weigh heavily on construction and manufacturing. Under the repeal scenario, these two industries account for almost a third of total job losses relative to the baseline. The construction impacts from reduced state and local government

infrastructure spending carry the highest multipliers. In addition to the economic multipliers inherent in the macroeconomic forecast model, a leverage multiplier of 1.5 was applied to the initially calculated increased borrowing costs of states and local governments. This factor was used to account for federal and/or private matching funds, which generally accompany any state and local government infrastructure projects.6,7 The biggest spillover from

6 Public Spending on Transportation and Water Infrastructure, Congressional Budget Office, November 2010.

7 Highway Grants: Roads to Prosperity?, Sylvain and Wilson, Federal Reserve Bank of San Francisco, November 26, 2012.

infrastructure construction flows into manufacturing, thanks to the need for large durable goods. For that reason, construction and manufacturing would experience a significant decrease in demand under the repeal scenario, resulting in 125,000 fewer jobs by 2023.

When looking at each scenario relative to the baseline, it becomes clear that the capped scenario is much less harmful to the overall economy than the repeal scenario. This is a result of both the immense mismatch in size of the tax impacts between the two, but also because the capped scenario includes at least some offset to higher state and local government borrowing costs through implementation of the AFFB program. However, the capped scenario also carries with it several practical issues that could amplify the estimated economic effects described by our models.

Regional economic impactsTo gauge the differing regional economic

effects of changes to the state and local tax deduction and municipal borrowing costs, the macroeconomic impacts estimated under the capped scenario were then flowed through the Moody’s Analytics regional forecast models. To help differentiate the impact

5 5

Chart 5: Non-PIT States Less Affected Personal income taxes as a % of total taxes, 2012

Sources: Census Bureau, Moody’s Analytics

<30 30-40 >40

No PIT

U.S.=35.6

Table 11: Summary of Alternative Scenario Employment Changes (% of total)

Industry Capped Repeal

Natural Resources/Mining 1.4% 2.3%

Construction 10.7% 16.2%

Manufacturing 15.2% 13.8%

Transportation/Utilities 0.2% 0.7%

Wholesale Trade 6.7% 6.8%

Retail Trade 8.1% 7.2%

Information 3.8% 4.1%

Financial Activities 25.5% 24.4%

Prof. and Bus. Services 12.7% 11.8%

Educ. and Health Services 2.5% 1.7%

Leisure and Hosp. Services 8.1% 7.0%

Other Services 2.3% 2.3%

Government 2.9% 1.8%


Table 10: Summary of Alternative Scenario Output Changes (% of total)

Industry Capped Repeal

Natural Resources/Mining 1.2% 2.0%

Construction 8.8% 8.3%

Manufacturing 16.5% 16.1%

Transportation/Utilities 0.1% 0.6%

Wholesale Trade 5.5% 5.9%

Retail Trade 6.6% 6.3%

Information 3.1% 3.6%

Financial Activities 34.7% 35.6%

Prof. and Bus. Services 10.7% 10.3%

Educ. and Health Services 2.0% 1.5%

Leisure and Hosp. Services 6.6% 6.1%

Other Services 1.9% 2.0%

Government 2.3% 1.6%


of the capped scenario from one state to another, the models were augmented by including the relative importance of municipal bond issuance to a state’s total gross state product and the proportional amount of a state’s respective state and local tax benefits annually claimed by high-income taxpayers. As a result, those states that issue a proportionately large amount of municipal bonds and those with high income-tax burdens and a large amount of high-income taxpayers would be affected the most. Table 12 shows the respective impacts to gross state product and employment under the capped scenario for all 50 states and the District of Columbia. The State of New York suffers the greatest economic loss by 2023, with GSP and employment projected to be 0.14% and 0.11% lower than the baseline forecast, respectively. 8

Upon reviewing the results of the alternative scenarios, it becomes clear that the state-by-state results hinge on three key differentiating factors:

» Tax structure » Income distribution » Industrial composition

Tax structure. The amount of state and local taxes claimed as deductions by taxpayers is disproportionately weighted toward personal income taxes, making state tax structures a key differentiating factor in the state-by-state effects under either scenario. In 2011, nearly three-quarters of state and local taxes deducted by taxpayers were personal income taxes. This attribute of the deduction focuses the economic impacts of any proposed cap or repeal on states with higher personal income tax burdens. This is best demonstrated when looking at the states least affected under the capped scenario. Nine of the 11 states least affected have limited or no personal income tax.9

The fact that the capped scenario effectively limits the deduction to those making less than $250,000 per year also

8 Regional economic analysis was performed for all 50 states and the District of Columbia. U.S. territories and possessions were not included because insufficient data was available to construct applicable fiscal impacts.

9 New Hampshire and Tennessee tax only interest and divi-dends, while Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming have no personal income tax.


Table 12: Capped Scenario Change in GSP and Employment Relative to Baseline, 2023Q4, percentage points

Gross State Product Employment

New York -0.136 New York -0.111Delaware -0.114 California -0.092California -0.106 Delaware -0.089Connecticut -0.101 Connecticut -0.085New Jersey -0.099 New Jersey -0.075Maine -0.096 District of Columbia -0.067Wisconsin -0.089 Maryland -0.061Ohio -0.087 Minnesota -0.056Minnesota -0.085 Massachusetts -0.056Maryland -0.084 North Carolina -0.055Rhode Island -0.083 Hawaii -0.054Iowa -0.082 Rhode Island -0.053North Carolina -0.082 Oregon -0.052Vermont -0.079 U.S. -0.052South Carolina -0.078 Ohio -0.050Hawaii -0.077 Wisconsin -0.049Indiana -0.077 Maine -0.049Kentucky -0.077 Illinois -0.048Kansas -0.076 Iowa -0.047Nebraska -0.075 Indiana -0.046Missouri -0.075 Vermont -0.045U.S. -0.074 Kansas -0.045District of Columbia -0.074 Montana -0.044Montana -0.073 Virginia -0.044Massachusetts -0.072 Nebraska -0.044Illinois -0.070 South Carolina -0.043Michigan -0.070 Kentucky -0.042West Virginia -0.068 Missouri -0.042Utah -0.066 Arizona -0.042Pennsylvania -0.066 Louisiana -0.040Oregon -0.065 Pennsylvania -0.040Idaho -0.064 Michigan -0.040Arkansas -0.063 Colorado -0.039Arizona -0.063 Utah -0.039Virginia -0.062 Georgia -0.039Georgia -0.061 Arkansas -0.036Mississippi -0.057 Idaho -0.036Oklahoma -0.056 Nevada -0.035Colorado -0.055 West Virginia -0.034Alabama -0.054 Wyoming -0.034Louisiana -0.054 Oklahoma -0.032Florida -0.052 Alabama -0.032Nevada -0.052 Florida -0.031New Mexico -0.049 Mississippi -0.031Wyoming -0.046 New Mexico -0.029New Hampshire -0.040 New Hampshire -0.025North Dakota -0.033 North Dakota -0.022Washington -0.029 Washington -0.022South Dakota -0.026 Texas -0.018Tennessee -0.025 Tennessee -0.015Texas -0.022 South Dakota -0.014Alaska -0.009 Alaska -0.009



brings a state’s relative progressivity into account. This differentiates the capped scenario from the repeal scenario in that state-by-state impacts not only hinge on the amount of personal income taxes paid, but also how much are paid by high-income taxpayers. States with relatively more progressivity in their personal income tax codes compound this impact further, depending more on high-income taxpayers for tax revenues than for total income.

Income distribution. Beyond tax progressivity, some states simply have a higher income tax base than others. As a result, those states with higher per capita incomes will be more affected than those with lower incomes.

The only potential exception to this convention is in states without an income tax. Alaska, for example, has significantly higher per capita income than that of the rest of the U.S., but is the least affected state under the capped scenario. This reflects the fact that taxpayers in

Alaska and similar states see significantly less tax benefit from the affected tax incentives under current law, and thus have less to lose by capping or repealing them.

Industrial composition. The final piece to the puzzle in determining state-by-state performance is industrial composition. The macroeconomic analysis done on both the capped and repeal scenarios showed that several industries would be hurt worse than others, specifically financial services, professional and business services, manufacturing, and construction. Consequently, under either scenario those states most dependent on these four industries, particularly finance, would be disproportionately affected.

Oregon, for example, relies more heavily on personal income tax collections than any other state, largely because it has no sales tax. In 2012, nearly 70% of Oregon’s tax revenues were derived from personal income tax collections, nearly twice the national average. However, Oregon has a lower than average per capita income, and is also 10% less reliant on finance and professional service jobs than the U.S. Consequently, the state is slightly less affected under the capped scenario than the U.S. as a whole.

Significant issuesThe implementation of a 28% cap on

the earned interest exemption for municipal bonds on paper represents a relatively marginal hit to the overall economy. However, the proposal also presents some significant practical and market-based issues that cannot be sufficiently quantified in this study. By setting a precedent of lowering the expected value of a municipal bond at its own discretion, the federal government would undermine the credibility of the tax-exempt market and likely introduce a large uncertainty premium into market yields, in excess of the actual value of the tax expenditures lost. In other words, such a proposal would open a door than cannot be closed, and will result in higher borrowing costs for states and local governments in perpetuity, regardless of any offset from a direct-subsidy bond program.

What is more, direct-subsidy bond programs have already been undermined by the sequester. The reduction in subsidy rates to BAB issuers under sequestration

7 7

Chart 7: Higher Incomes, Higher Impacts Per capita income, $ ths, 2011

Sources: BEA, Moody’s Analytics

40-<45 35-<40 <35

>45

U.S.=41.6

8 8

Chart 8: Financial and Prof. Services Hardest Hit Financial/prof. business services % of total employment, 2012

Sources: BLS, Moody’s Analytics

15-<17.5 17.5-20 >20

<15

U.S.=19.2

By setting a precedent of lowering the expected value of a municipal bond at its own discretion, the federal government would undermine the credibility of the tax-exempt market and likely introduce a large uncertainty premium into market yields, in excess of the actual value of the tax expenditures lost.

6 6

Chart 6: States Benefiting Most From Current Law State/local tax deduction AGI>$200k, % of personal income, 2011


0.7-<1 1-1.4 >1.4

<0.7

U.S.=1.4


showed states and local governments as well as investors that the value of direct-subsidy payments is in no way permanent and can be reduced at any time based on the functionality of Congress and the president to set an adequate level of appropriations. This will slightly limit the use of any direct-subsidy bonds in the future by issuers, and likely introduce an additional uncertainty premium on their yields. This undermines an important assumption used to construct the financial impacts of the capped scenario, in that issuers are unlikely to use AFFBs as frequently as they used BABs following the Great Recession. The reason for the more simplistic assumption in this analysis was to avoid arbitrarily handicapping the borrowing cost savings to states and local governments. Without sufficient precedent of such a change in the nature of a federal bonding program, it would have been nearly impossible to do so objectively.

Because of the unquantifiable nature of these factors, the financial impacts on borrowing costs listed in this study, particularly in the capped scenario, should be considered a lower-bound estimate. The actual increase in borrowing costs could be much higher, depending on the uncertainty premiums demanded by investors as a result of this historic precedent of policy changes. However, the economic impacts estimated in this study were overwhelmingly weighted toward the influence of the tax proposals included in each scenario, and not necessarily the impacts from higher borrowing costs.

Therefore, the overall magnitude of the impacts outlined in the economic analysis relative to the baseline are unlikely to change based solely on these unquantifiable factors.

The results of changes to the state

and local tax deduction included in each of the alternative scenarios could also differ materially from our estimates based on the actions of state and local policymakers. By eliminating the zero-sum interaction between subnational and federal income taxes, increases to state and local tax rates could prove more harmful to the economy, and less practical for elected officials. To avoid forecasting state and local fiscal policy decisions, this analysis assumes that no changes are made to subnational tax codes over the next decade. Similarly, no action is assumed by national policymakers, either in Congress or the Federal Reserve, to offset the fiscal drag in each of these scenarios. The Fed has proven, both during and after the Great Recession, that it sees its mandate as a responsibility not only to control inflation but also to promote full employment.

ConclusionsBoth of the scenarios examined in this

study would result in lower federal budget deficits over the next 10 years, at the expense of individual taxpayers and states and local governments. The repeal scenario, currently being discussed in Congress, would provide the most long-term deficit relief, totaling $1.1 trillion in additional federal tax revenue over the next decade. Not coincidentally, it also would carry the largest economic cost, equating to 417,000 fewer jobs, representing 0.28% of total employment, and $71 billion less output, or 0.35% of total GDP, than in the baseline.

The capped scenario, which includes various pieces of President Obama’s fiscal

2014 budget proposal, would result in less deficit reduction, generating an additional $188 billion in federal tax revenue over 10 years, but would also put less drag on the U.S. economy, reducing employment by 0.05% and output by 0.07%. The effects differ from state to state based on tax structure, income distribution and industrial composition. States with higher income-tax burdens and higher numbers of high-income taxpayers would be most affected by a cap on the state and local government tax deduction. Additionally, states more reliant on finance and professional and business services would be disproportionately affected by a decrease in tax benefits to high-income taxpayers due to a hit to saving rates.

However, each scenario is filled with a number of unquantifiable factors, which would likely result in a higher economic cost than what is estimated. Particularly, the precedent of arbitrarily reducing the value of the municipal bond market by capping the exemption on tax-exempt bond interest would result in a permanent uncertainty premium on municipal interest rates. Additionally, recent reductions in BAB payments to issuers due to sequestration will likely make the AFFB program less beneficial to issuers than the estimates included in this analysis.

It is also important to consider that these tax proposals would come at a time when more investment in public infrastructure is badly needed. In its 2013 Report Card for America’s Infrastructure, the American Society of Civil Engineers estimated a funding gap of more than $1.6 trillion to bring the nation’s infrastructure from a grade of D+ to a B by 2020101. Both scenarios would create an even wider gap. Though long-term deficit reduction is extremely important to long-term economic growth, reduced infrastructure spending is a significant economic price to pay.

10 2013 Report Card for America’s Infrastructure, American Soci-ety of Civil Engineers. http://www.infrastructurereportcard.org/a/#p/grade-sheet/americas-infrastructure-investment-needs

Table 13: Summary of Alternative Fiscal and Economic Impacts Relative to Baseline

Capped Repeal

Fiscal Impacts

Federal tax revenues (bil)Municipal borrowing costs (bil)

$ 186.9 $ 1,128.4

$ 16.6 $ 175.6

Economic Impacts

Real GDP (bil)Employment (ths)

$ (14.3) $ (71.3)

(78.0) (416.6)



Appendix A

Appendix A: Annual Data Tables


Table A1: Alternative Fiscal Impacts From State and Local Government Tax-es Paid Deduction Relative to Baseline

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 10-yr Total

CappedChange in federal tax revenues ($ mil) 7,279 8,033 8,830 9,696 10,616 11,548 12,443 13,408 14,461 15,580 111,894

Change in avg effective tax rate (%) 0.05 0.05 0.05 0.05 0.06 0.06 0.06 0.06 0.07 0.07 n/a

RepealChange in federal tax revenues ($ mil) 51,800 54,900 58,600 62,000 68,837 75,567 81,982 88,896 96,313 104,147 743,042.8

Change in avg effective tax rate (%) 0.34 0.34 0.34 0.35 0.37 0.39 0.40 0.42 0.44 0.46 n/a

Appendix A

Table A2: Alternative Financial Market Impacts2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Muni Market ($ bil)

Baseline 3,511.91 3,565.17 3,748.49 3,961.19 4,124.21 4,242.79 4,505.69 4,823.39 5,127.03 5,363.44

28% cap 3,458.80 3,507.28 3,680.11 3,880.77 4,038.11 4,155.85 4,413.54 4,724.51 5,021.35 5,251.88

Full repeal 3,176.25 3,222.24 3,383.49 3,562.38 3,711.47 3,828.34 4,085.30 4,396.61 4,692.37 4,919.10

20-yr AAA Muni Yield (%)

Baseline 3.97 4.65 5.16 4.96 4.90 4.92 4.89 4.93 4.96 4.97

28% cap 4.10 4.81 5.34 5.16 5.11 5.12 5.09 5.14 5.16 5.18

Full repeal 4.86 5.62 6.20 6.02 5.95 5.94 5.86 5.85 5.84 5.84

Table A3: Alternative Fiscal and Financial Market Impacts Relative to Baseline2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 10-yr Total

Capped

New tax-exempt issues ($ mil) 293,848 304,998 315,288 324,304 333,254 343,081 353,241 364,092 375,502 387,040 3,394,649

Chg in yield (%) 0.14 0.16 0.19 0.20 0.21 0.21 0.20 0.21 0.21 0.21 n/a

Chg in borrowing costs ($ mil) 401 482 590 663 696 704 722 749 779 811 6,597

Cumulative chg in borrowing 401 883 1,473 2,135 2,831 3,536 4,258 5,007 5,785 6,597 32,905

Chg in federal tax revenues ($ 4,295 5,147 6,486 7,462 7,935 8,006 8,468 9,117 9,753 10,285 76,954

Repeal

Chg in avg effective tax rate (%) 0.03 0.03 0.04 0.04 0.04 0.04 0.04 0.04 0.04 0.04 n/a

New tax-exempt issues ($ mil) 291,211 302,022 311,999 320,871 329,769 339,579 349,816 360,739 372,186 383,699 3,361,892

Chg in yield (%) 0.9 0.98 1.04 1.06 1.05 1.02 0.97 0.92 0.88 0.86 n/a

Chg in borrowing costs ($ mil) 2,636 2,976 3,289 3,434 3,485 3,502 3,425 3,353 3,316 3,342 32,757

Cumulative chg in borrowing 2,636 5,612 8,901 12,335 15,820 19,321 22,747 26,100 29,416 32,757 175,645

Chg in federal tax revenues ($ 31,800 33,300 34,100 34,900 37,083 37,513 39,740 42,802 45,814 48,377 385,429

Chg in avg effective tax rate (%) 0.21 0.21 0.20 0.19 0.20 0.19 0.20 0.20 0.21 0.21 n/a


Appendix A

Table A6: Alternative Impacts on Federal Tax Revenues and Average Effective Tax Rates Relative to Baseline

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 10-yr Total

CappedNet change in federal tax revenues ($ mil) 11,574 13,180 15,315 17,158 18,552 19,553 20,910 22,525 24,215 25,865 188,847

Net change in avg effective tax rates (%) 0.08 0.08 0.09 0.10 0.10 0.10 0.10 0.11 0.11 0.11 n/a

RepealNet change in federal tax revenues ($ mil) 83,677 88,417 93,087 97,400 106,483 113,688 122,392 132,462 143,005 153,535 1,134,147

Net change in avg effective tax rates (%) 0.56 0.55 0.54 0.54 0.56 0.58 0.60 0.62 0.64 0.67 n/a

Table A5: Net Alternative Impacts on State and Local Government Borrowing Relative to Baseline

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 10-yr Total

Capped

AFFB issuance ($ mil) 92,642 96,157 99,401 102,244 105,065 108,163 111,366 114,788 118,385 122,022 1,070,233

Chg in borrowing costs on AFFBs ($ mil) -269 -279 -288 -297 -305 -314 -323 -333 -343 -354 -3,104

Cumulative chg in borrowing costs on AFFBs -269 -548 -836 -1,132 -1,437 -1,751 -2,074 -2,406 -2,750 -3,104 -16,305

Tax-exempt issuance ($ mil) 293,848 304,998 315,288 324,304 333,254 343,081 353,241 364,092 375,502 387,040 3,394,649

Chg in borrowing costs on TEBs ($ mil) 401 482 590 663 696 704 722 749 779 811 6,597

Cumulative chg in borrowing costs on TEBs 401 883 1,473 2,135 2,831 3,536 4,258 5,007 5,785 6,597 32,905

Net chg in new money borrowing costs ($ mil) 133 203 301 366 392 391 399 416 435 457 3,493

Cumulative net chg in borrowing costs ($mil) 133 335 637 1,003 1,394 1,785 2,184 2,600 3,035 3,493 16,600

Repeal

Tax-exempt issuance ($ mil) 291,211 302,022 311,999 320,871 329,769 339,579 349,816 360,739 372,186 383,699 3,361,892

Chg in borrowing costs on TEBs ($ mil) 2,636 2,976 3,289 3,434 3,485 3,502 3,425 3,353 3,316 3,342 32,757

Cumulative chg in borrowing costs ($mil) 2,636 5,612 8,901 12,335 15,820 19,321 22,747 26,100 29,416 32,757 175,645

Table A4: Alternative Impacts From Implementation of the America Fast Forward Bond Program Relative to Baseline

2014 2015 2016 2017 2018 2019 2020 2021 2022 202310-yr Total

America Fast Forward Bond Issuance ($ mil) 92,642 96,157 99,401 102,244 105,065 108,163 111,366 114,788 118,385 122,022 1,070,233

Yield Savings Relative to Tax-Exempt Bonds (%) 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29 0.29 n/a

Change in Borrowing Costs ($ mil) -269 -279 -288 -297 -305 -314 -323 -333 -343 -354 -3,104

Cumulative chg in borrowing costs -269 -548 -836 -1,132 -1,437 -1,751 -2,074 -2,406 -2,750 -3,104 -16,305


Appendix A

Table A8: Alternative Scenario Employment Forecasts (ths)2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Baseline 139,613 142,956 145,477 146,796 147,396 147,976 148,658 149,335 149,869 150,393

Capped 139,604 142,931 145,442 146,755 147,350 147,926 148,603 149,275 149,800 150,315

Repeal 139,547 142,771 145,235 146,536 147,118 147,677 148,337 148,987 149,489 149,977

Difference From Baseline (ths)

Capped (8.59) (25.53) (35.51) (41.08) (45.95) (50.13) (54.31) (60.11) (68.00) (77.98)

% -0.01% -0.02% -0.02% -0.03% -0.03% -0.03% -0.04% -0.04% -0.05% -0.05%

Repeal (65.26) (185.79) (242.22) (260.10) (277.98) (298.89) (320.95) (347.65) (379.70) (416.63)

% -0.05% -0.13% -0.17% -0.18% -0.19% -0.20% -0.22% -0.23% -0.25% -0.28%

Table A7: Alternative Scenario Real GDP Forecasts (2009$ bil)2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Baseline 16,468.38 17,053.63 17,518.78 17,894.93 18,260.79 18,616.25 18,984.80 19,354.57 19,724.72 20,082.26

Capped 16,460.55 17,045.85 17,512.05 17,887.78 18,253.31 18,608.33 18,975.84 19,344.06 19,712.31 20,067.99

Repeal 16,410.66 17,001.08 17,479.51 17,855.65 18,217.46 18,569.70 18,933.83 19,297.57 19,661.18 20,010.98

Difference From Baseline (2009$ bil)

Capped (7.83) (7.78) (6.73) (7.15) (7.48) (7.92) (8.96) (10.51) (12.41) (14.27)

% -0.05% -0.05% -0.04% -0.04% -0.04% -0.04% -0.05% -0.05% -0.06% -0.07%

Repeal (57.72) (52.55) (39.27) (39.28) (43.33) (46.55) (50.97) (57.00) (63.54) (71.28)

% -0.35% -0.31% -0.22% -0.22% -0.24% -0.25% -0.27% -0.29% -0.32% -0.35%


Appendix A

Table A9.1: Capped Scenario Real GDP Forecasts, Difference From Baseline (2005$ mil)*State 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023Alaska -2.840 -2.830 -2.440 -2.570 -2.700 -2.880 -3.240 -3.760 -4.400 -5.170% -0.006 -0.006 -0.005 -0.005 -0.005 -0.006 -0.006 -0.007 -0.008 -0.009Alabama -54.490 -56.640 -50.520 -54.310 -57.480 -61.260 -69.370 -81.240 -95.830 -114.120% -0.033 -0.033 -0.028 -0.030 -0.031 -0.032 -0.035 -0.041 -0.047 -0.054Arkansas -39.120 -40.080 -35.700 -38.340 -40.380 -42.900 -48.480 -56.460 -66.180 -78.300% -0.039 -0.038 -0.033 -0.035 -0.036 -0.038 -0.042 -0.047 -0.054 -0.063Arizona -98.450 -99.490 -91.160 -100.980 -108.430 -117.070 -133.910 -157.750 -186.710 -223.510% -0.038 -0.037 -0.032 -0.035 -0.036 -0.038 -0.042 -0.048 -0.054 -0.063California -1,231.200 -1,215.580 -1,100.460 -1,206.060 -1,276.860 -1,361.330 -1,537.110 -1,783.690 -2,079.590 -2,448.000% -0.065 -0.062 -0.054 -0.058 -0.061 -0.063 -0.070 -0.080 -0.091 -0.106Colorado -86.520 -86.640 -77.820 -84.470 -89.360 -95.340 -107.940 -125.950 -147.830 -175.020% -0.033 -0.032 -0.028 -0.030 -0.031 -0.032 -0.036 -0.041 -0.047 -0.055Connecticut -126.050 -133.680 -124.740 -134.950 -142.260 -150.120 -166.920 -192.000 -223.080 -262.180% -0.060 -0.061 -0.055 -0.059 -0.061 -0.063 -0.069 -0.077 -0.088 -0.101District of Columbia -47.810 -45.870 -38.190 -40.570 -42.300 -44.820 -50.760 -59.580 -70.020 -82.620% -0.050 -0.047 -0.038 -0.040 -0.041 -0.043 -0.047 -0.055 -0.063 -0.074Delaware -38.860 -41.890 -41.040 -44.370 -46.530 -48.650 -53.360 -60.380 -69.260 -80.460% -0.066 -0.068 -0.065 -0.069 -0.072 -0.074 -0.079 -0.088 -0.099 -0.114Florida -228.030 -233.950 -213.260 -230.530 -243.160 -257.630 -289.250 -334.960 -390.260 -459.230% -0.032 -0.031 -0.028 -0.029 -0.030 -0.031 -0.035 -0.039 -0.045 -0.052Georgia -149.350 -152.680 -137.210 -147.610 -155.820 -165.680 -186.920 -217.380 -254.390 -300.660% -0.037 -0.037 -0.033 -0.034 -0.035 -0.037 -0.041 -0.046 -0.053 -0.061Hawaii -32.450 -32.930 -28.880 -30.480 -31.650 -33.200 -37.110 -42.980 -50.190 -59.200% -0.049 -0.048 -0.041 -0.043 -0.044 -0.046 -0.051 -0.058 -0.067 -0.077Iowa -66.180 -68.510 -62.410 -66.770 -69.960 -73.750 -82.140 -94.440 -109.560 -128.160% -0.048 -0.049 -0.044 -0.046 -0.048 -0.050 -0.055 -0.062 -0.071 -0.082Idaho -24.000 -20.990 -17.830 -20.020 -21.100 -22.610 -25.880 -30.240 -35.200 -41.280% -0.044 -0.037 -0.031 -0.034 -0.036 -0.038 -0.042 -0.049 -0.056 -0.064Illinois -254.820 -265.500 -242.190 -259.580 -272.830 -288.090 -320.980 -368.410 -425.290 -495.910% -0.041 -0.041 -0.037 -0.039 -0.041 -0.042 -0.047 -0.053 -0.060 -0.070Indiana -123.840 -130.490 -115.020 -121.860 -127.620 -134.340 -150.300 -174.650 -204.470 -242.160% -0.046 -0.047 -0.041 -0.043 -0.044 -0.046 -0.051 -0.058 -0.066 -0.077Kansas -56.280 -57.360 -50.050 -53.220 -55.680 -58.850 -66.180 -76.980 -90.120 -106.490% -0.045 -0.045 -0.039 -0.041 -0.042 -0.044 -0.049 -0.056 -0.065 -0.076Kentucky -73.680 -74.050 -63.960 -68.340 -71.700 -75.910 -85.620 -99.660 -116.700 -138.060% -0.048 -0.047 -0.040 -0.042 -0.043 -0.045 -0.050 -0.057 -0.066 -0.077Louisiana -68.220 -70.620 -62.640 -66.420 -69.720 -73.810 -82.920 -96.360 -113.220 -134.400% -0.033 -0.033 -0.029 -0.030 -0.031 -0.032 -0.035 -0.040 -0.046 -0.054Massachusetts -171.910 -166.140 -149.870 -164.950 -173.980 -185.060 -208.560 -241.180 -280.030 -328.370% -0.045 -0.042 -0.037 -0.040 -0.042 -0.043 -0.048 -0.055 -0.062 -0.072Maryland -158.170 -157.380 -140.110 -149.750 -156.070 -164.090 -183.080 -210.720 -244.230 -285.770% -0.054 -0.052 -0.045 -0.048 -0.049 -0.051 -0.056 -0.064 -0.073 -0.084Maine -28.180 -28.650 -25.680 -27.340 -28.520 -29.910 -33.270 -38.190 -44.200 -51.670% -0.058 -0.058 -0.051 -0.054 -0.056 -0.058 -0.064 -0.072 -0.083 -0.096Michigan -154.420 -159.000 -138.730 -146.580 -152.770 -159.640 -177.370 -204.010 -237.000 -278.990% -0.042 -0.043 -0.037 -0.039 -0.040 -0.041 -0.046 -0.052 -0.060 -0.070Minnesota -143.100 -143.520 -130.550 -142.300 -150.300 -159.790 -179.690 -208.160 -242.580 -285.430% -0.053 -0.051 -0.045 -0.048 -0.050 -0.052 -0.057 -0.065 -0.074 -0.085Missouri -104.220 -106.020 -93.840 -99.840 -104.400 -110.110 -123.350 -142.940 -166.960 -197.110% -0.045 -0.044 -0.039 -0.041 -0.042 -0.044 -0.049 -0.056 -0.064 -0.075*Note: Sum of state changes do not total U.S. changes, because after the most recent NIPA revision, the BEA reports national GDP in 2009$ and state GSP in 2005$.Sources: BEA, Moody's Analytics


Appendix A

Table A9.2: Capped Scenario Real GDP Forecasts, Difference From Baseline (2005$ mil)*State 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023Mississippi -31.750 -32.270 -28.100 -29.910 -31.380 -33.240 -37.570 -43.800 -51.350 -60.840% -0.035 -0.034 -0.029 -0.031 -0.032 -0.033 -0.037 -0.042 -0.049 -0.057Montana -15.960 -16.560 -14.950 -16.090 -17.080 -18.250 -20.730 -24.300 -28.730 -34.340% -0.044 -0.044 -0.038 -0.040 -0.042 -0.043 -0.048 -0.054 -0.063 -0.073North Carolina -214.450 -214.630 -194.400 -212.220 -225.310 -241.150 -273.830 -320.860 -378.170 -450.260% -0.050 -0.049 -0.043 -0.046 -0.047 -0.049 -0.055 -0.062 -0.071 -0.082North Dakota -8.630 -8.970 -8.090 -8.660 -9.180 -9.770 -11.010 -12.850 -15.110 -17.960% -0.020 -0.020 -0.017 -0.018 -0.019 -0.020 -0.022 -0.025 -0.028 -0.033Nebraska -39.120 -40.370 -36.260 -38.640 -40.690 -43.250 -48.650 -56.400 -65.940 -77.640% -0.044 -0.044 -0.039 -0.041 -0.043 -0.045 -0.049 -0.056 -0.065 -0.075New Hampshire -15.210 -14.780 -13.320 -14.660 -15.500 -16.480 -18.640 -21.610 -25.180 -29.590% -0.025 -0.023 -0.021 -0.022 -0.023 -0.024 -0.027 -0.030 -0.035 -0.040New Jersey -278.810 -288.420 -265.990 -284.420 -296.810 -311.280 -344.670 -393.980 -454.410 -529.600% -0.059 -0.059 -0.054 -0.057 -0.059 -0.061 -0.067 -0.075 -0.086 -0.099New Mexico -24.480 -21.970 -18.670 -20.740 -21.820 -23.380 -26.760 -31.340 -36.600 -43.110% -0.033 -0.028 -0.024 -0.026 -0.027 -0.028 -0.032 -0.037 -0.042 -0.049Nevada -37.560 -39.660 -36.420 -39.250 -41.520 -44.100 -49.560 -57.540 -67.500 -79.990% -0.031 -0.031 -0.028 -0.029 -0.030 -0.031 -0.034 -0.039 -0.045 -0.052New York -893.430 -936.040 -879.030 -946.170 -994.750 -1,048.710 -1,166.380 -1,338.620 -1,549.810 -1,815.060% -0.080 -0.081 -0.074 -0.079 -0.081 -0.084 -0.092 -0.104 -0.118 -0.136Ohio -239.230 -247.190 -219.480 -233.890 -244.780 -257.630 -288.120 -333.130 -388.610 -458.440% -0.052 -0.052 -0.046 -0.048 -0.050 -0.052 -0.057 -0.065 -0.074 -0.087Oklahoma -48.420 -49.270 -43.560 -46.430 -48.900 -51.900 -58.500 -68.160 -79.990 -94.680% -0.033 -0.033 -0.029 -0.030 -0.031 -0.033 -0.036 -0.042 -0.048 -0.056Oregon -109.020 -59.810 -41.520 -61.140 -68.040 -78.660 -98.040 -119.090 -139.620 -164.340% -0.054 -0.029 -0.019 -0.028 -0.030 -0.034 -0.041 -0.049 -0.056 -0.065Pennsylvania -216.370 -220.400 -198.430 -212.890 -223.210 -235.350 -262.820 -302.730 -351.260 -411.740% -0.040 -0.040 -0.035 -0.037 -0.038 -0.040 -0.044 -0.050 -0.057 -0.066Rhode Island -22.690 -23.750 -22.080 -23.830 -25.040 -26.230 -29.090 -33.360 -38.570 -45.100% -0.049 -0.049 -0.045 -0.047 -0.049 -0.051 -0.055 -0.063 -0.072 -0.083South Carolina -77.160 -79.210 -69.780 -74.630 -78.410 -82.980 -93.550 -109.020 -127.910 -151.630% -0.048 -0.048 -0.041 -0.043 -0.044 -0.046 -0.051 -0.058 -0.067 -0.078South Dakota -5.590 -5.810 -5.350 -5.730 -6.020 -6.380 -7.140 -8.230 -9.590 -11.280% -0.015 -0.015 -0.014 -0.015 -0.015 -0.016 -0.017 -0.020 -0.022 -0.026Tennessee -38.570 -38.940 -34.390 -36.830 -38.570 -40.740 -45.650 -52.950 -61.610 -72.540% -0.015 -0.015 -0.013 -0.014 -0.014 -0.015 -0.016 -0.019 -0.021 -0.025Texas -182.980 -186.650 -169.190 -184.810 -196.170 -210.570 -238.770 -280.150 -329.470 -391.240% -0.014 -0.013 -0.012 -0.012 -0.013 -0.013 -0.015 -0.017 -0.019 -0.022Utah -47.640 -48.600 -44.220 -47.760 -50.460 -53.710 -60.530 -70.370 -82.440 -97.630% -0.039 -0.039 -0.035 -0.037 -0.038 -0.040 -0.044 -0.050 -0.057 -0.066Virginia -156.860 -159.420 -142.430 -152.890 -160.860 -170.590 -191.960 -222.900 -260.410 -307.190% -0.038 -0.037 -0.033 -0.034 -0.036 -0.037 -0.041 -0.046 -0.053 -0.062Vermont -12.700 -12.010 -10.520 -11.550 -12.160 -12.950 -14.690 -17.100 -19.970 -23.600% -0.050 -0.046 -0.040 -0.043 -0.044 -0.047 -0.052 -0.060 -0.068 -0.079Washington -60.940 -63.660 -56.460 -60.730 -64.150 -67.990 -76.570 -88.990 -104.130 -123.080% -0.017 -0.018 -0.015 -0.016 -0.017 -0.017 -0.019 -0.022 -0.025 -0.029Wisconsin -125.890 -128.750 -115.680 -124.570 -130.980 -138.430 -155.030 -178.920 -207.610 -243.410% -0.053 -0.052 -0.046 -0.049 -0.051 -0.053 -0.058 -0.067 -0.076 -0.089West Virginia -24.810 -25.050 -21.630 -22.740 -23.650 -24.810 -27.760 -32.110 -37.400 -43.950% -0.042 -0.041 -0.035 -0.037 -0.038 -0.039 -0.044 -0.050 -0.058 -0.068Wyoming -8.870 -9.010 -7.920 -8.340 -8.660 -9.060 -10.090 -11.630 -13.490 -15.820% -0.028 -0.028 -0.024 -0.025 -0.026 -0.027 -0.030 -0.034 -0.039 -0.046*Note: Sum of state changes do not total U.S. changes, because after the most recent NIPA revision, the BEA reports national GDP in 2009$ and state GSP in 2005$.Sources: BEA, Moody's Analytics


Appendix A

Table A10.1: Capped Scenario Employment Forecasts, Difference From Baseline (ths)State 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023Alaska -19 -18 -15 -16 -17 -18 -21 -24 -28 -33% -0.005 -0.005 -0.004 -0.004 -0.005 -0.005 -0.005 -0.006 -0.007 -0.009Alabama -337 -345 -300 -322 -340 -364 -414 -489 -579 -692% -0.017 -0.017 -0.015 -0.016 -0.016 -0.017 -0.020 -0.023 -0.027 -0.032Arkansas -246 -248 -216 -231 -243 -259 -295 -346 -407 -484% -0.020 -0.020 -0.017 -0.018 -0.019 -0.020 -0.023 -0.026 -0.031 -0.036Arizona -606 -604 -537 -591 -634 -686 -790 -937 -1,116 -1,342% -0.023 -0.022 -0.019 -0.021 -0.022 -0.023 -0.026 -0.030 -0.035 -0.042California -7,615 -7,433 -6,543 -7,135 -7,549 -8,072 -9,184 -10,736 -12,586 -14,893% -0.051 -0.048 -0.042 -0.045 -0.048 -0.051 -0.057 -0.067 -0.078 -0.092Colorado -549 -543 -475 -514 -544 -582 -664 -780 -921 -1,095% -0.022 -0.021 -0.018 -0.020 -0.020 -0.022 -0.024 -0.028 -0.033 -0.039Connecticut -737 -767 -696 -750 -791 -837 -939 -1,089 -1,274 -1,507% -0.044 -0.044 -0.040 -0.043 -0.045 -0.048 -0.053 -0.062 -0.072 -0.085District of Columbia -313 -291 -231 -244 -254 -269 -308 -365 -432 -513% -0.042 -0.039 -0.030 -0.032 -0.033 -0.035 -0.040 -0.048 -0.056 -0.067Delaware -212 -224 -212 -229 -240 -252 -279 -318 -367 -429% -0.048 -0.050 -0.046 -0.049 -0.051 -0.054 -0.059 -0.067 -0.077 -0.089Florida -1,426 -1,441 -1,275 -1,374 -1,450 -1,543 -1,749 -2,043 -2,399 -2,841% -0.018 -0.018 -0.015 -0.016 -0.017 -0.018 -0.020 -0.023 -0.026 -0.031Georgia -936 -943 -825 -886 -937 -1,001 -1,140 -1,338 -1,577 -1,875% -0.023 -0.022 -0.019 -0.020 -0.021 -0.022 -0.025 -0.028 -0.033 -0.039Hawaii -205 -203 -171 -179 -186 -196 -221 -259 -305 -363% -0.033 -0.032 -0.026 -0.027 -0.028 -0.030 -0.033 -0.039 -0.046 -0.054Iowa -396 -403 -358 -382 -400 -423 -475 -550 -642 -754% -0.025 -0.025 -0.022 -0.024 -0.025 -0.026 -0.029 -0.034 -0.040 -0.047Idaho -151 -132 -110 -122 -128 -138 -159 -186 -218 -257% -0.023 -0.020 -0.016 -0.018 -0.018 -0.020 -0.022 -0.026 -0.030 -0.036Illinois -1,544 -1,584 -1,406 -1,501 -1,576 -1,668 -1,872 -2,161 -2,506 -2,934% -0.026 -0.026 -0.023 -0.025 -0.026 -0.027 -0.031 -0.036 -0.041 -0.048Indiana -748 -779 -675 -713 -747 -788 -887 -1,037 -1,219 -1,450% -0.025 -0.025 -0.022 -0.023 -0.024 -0.025 -0.028 -0.033 -0.039 -0.046Kansas -350 -351 -299 -317 -332 -351 -398 -466 -548 -650% -0.025 -0.025 -0.021 -0.022 -0.023 -0.024 -0.027 -0.032 -0.038 -0.045Kentucky -458 -454 -383 -408 -428 -455 -516 -605 -713 -847% -0.024 -0.024 -0.020 -0.021 -0.022 -0.023 -0.026 -0.030 -0.036 -0.042Louisiana -431 -440 -382 -404 -424 -450 -509 -595 -702 -837% -0.022 -0.022 -0.019 -0.020 -0.021 -0.022 -0.025 -0.029 -0.034 -0.040Massachusetts -1,049 -1,001 -876 -959 -1,011 -1,079 -1,226 -1,429 -1,670 -1,969% -0.031 -0.029 -0.025 -0.027 -0.029 -0.031 -0.035 -0.041 -0.047 -0.056Maryland -981 -956 -820 -871 -906 -954 -1,074 -1,247 -1,456 -1,713% -0.037 -0.035 -0.029 -0.031 -0.032 -0.034 -0.038 -0.045 -0.052 -0.061Maine -174 -173 -150 -159 -166 -174 -196 -226 -263 -309% -0.029 -0.028 -0.024 -0.025 -0.026 -0.028 -0.031 -0.036 -0.042 -0.049Michigan -945 -961 -820 -865 -901 -943 -1,054 -1,220 -1,425 -1,683% -0.023 -0.023 -0.019 -0.020 -0.021 -0.022 -0.025 -0.029 -0.034 -0.040Minnesota -878 -869 -771 -838 -885 -945 -1,071 -1,251 -1,467 -1,736% -0.031 -0.030 -0.026 -0.028 -0.029 -0.031 -0.035 -0.041 -0.048 -0.056Missouri -652 -653 -563 -597 -625 -662 -747 -872 -1,024 -1,214% -0.024 -0.023 -0.020 -0.021 -0.022 -0.023 -0.026 -0.030 -0.036 -0.042Sources: BEA, Moody's Analytics


Table A10.2: Capped Scenario Employment Forecasts, Difference From Baseline (ths)State 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023Mississippi -201 -201 -171 -181 -190 -202 -230 -270 -318 -378% -0.017 -0.017 -0.014 -0.015 -0.016 -0.017 -0.019 -0.022 -0.026 -0.031Montana -102 -103 -91 -97 -103 -111 -127 -150 -178 -214% -0.022 -0.022 -0.019 -0.020 -0.022 -0.023 -0.026 -0.031 -0.037 -0.044North Carolina -1,290 -1,270 -1,116 -1,213 -1,287 -1,380 -1,579 -1,864 -2,209 -2,643% -0.031 -0.030 -0.026 -0.027 -0.029 -0.030 -0.034 -0.040 -0.047 -0.055North Dakota -55 -56 -49 -53 -56 -59 -67 -79 -94 -112% -0.012 -0.012 -0.010 -0.011 -0.011 -0.012 -0.014 -0.016 -0.019 -0.022Nebraska -242 -245 -214 -227 -239 -255 -288 -337 -396 -467% -0.024 -0.024 -0.021 -0.022 -0.023 -0.024 -0.027 -0.032 -0.037 -0.044New Hampshire -93 -89 -78 -86 -91 -97 -110 -129 -151 -178% -0.014 -0.013 -0.011 -0.012 -0.013 -0.014 -0.016 -0.018 -0.021 -0.025New Jersey -1,706 -1,733 -1,551 -1,653 -1,726 -1,816 -2,027 -2,335 -2,709 -3,173% -0.042 -0.042 -0.037 -0.039 -0.041 -0.043 -0.048 -0.055 -0.064 -0.075New Mexico -156 -140 -115 -127 -134 -143 -165 -195 -229 -271% -0.019 -0.016 -0.013 -0.015 -0.015 -0.016 -0.018 -0.022 -0.025 -0.029Nevada -236 -245 -218 -234 -247 -263 -298 -349 -412 -492% -0.020 -0.020 -0.017 -0.018 -0.019 -0.020 -0.022 -0.026 -0.030 -0.035New York -5,340 -5,479 -4,980 -5,347 -5,623 -5,958 -6,689 -7,747 -9,041 -10,657% -0.059 -0.059 -0.053 -0.056 -0.059 -0.063 -0.070 -0.081 -0.094 -0.111Ohio -1,473 -1,502 -1,304 -1,385 -1,449 -1,528 -1,720 -2,001 -2,346 -2,779% -0.028 -0.027 -0.023 -0.025 -0.026 -0.027 -0.031 -0.036 -0.042 -0.050Oklahoma -305 -305 -263 -279 -293 -312 -354 -415 -489 -582% -0.018 -0.018 -0.015 -0.016 -0.017 -0.018 -0.020 -0.023 -0.027 -0.032Oregon -661 -382 -262 -370 -410 -472 -588 -717 -845 -1,001% -0.038 -0.022 -0.015 -0.020 -0.022 -0.025 -0.031 -0.038 -0.044 -0.052Pennsylvania -1,339 -1,341 -1,173 -1,253 -1,312 -1,386 -1,558 -1,807 -2,108 -2,482% -0.023 -0.022 -0.019 -0.020 -0.021 -0.023 -0.025 -0.029 -0.034 -0.040Rhode Island -136 -140 -126 -135 -142 -149 -166 -192 -224 -263% -0.029 -0.029 -0.025 -0.027 -0.028 -0.030 -0.033 -0.038 -0.045 -0.053South Carolina -480 -486 -418 -446 -468 -497 -564 -662 -781 -930% -0.025 -0.024 -0.020 -0.022 -0.022 -0.024 -0.027 -0.031 -0.036 -0.043South Dakota -33 -34 -30 -33 -34 -36 -41 -48 -56 -66% -0.008 -0.008 -0.007 -0.007 -0.008 -0.008 -0.009 -0.010 -0.012 -0.014Tennessee -241 -239 -206 -220 -231 -244 -276 -322 -377 -445% -0.009 -0.008 -0.007 -0.007 -0.008 -0.008 -0.009 -0.011 -0.013 -0.015Texas -1,158 -1,173 -1,038 -1,129 -1,200 -1,288 -1,472 -1,734 -2,047 -2,441% -0.010 -0.010 -0.008 -0.009 -0.009 -0.010 -0.011 -0.013 -0.015 -0.018Utah -290 -292 -258 -278 -293 -313 -354 -415 -489 -581% -0.022 -0.021 -0.019 -0.020 -0.021 -0.022 -0.025 -0.029 -0.033 -0.039Virginia -976 -972 -841 -898 -944 -1,004 -1,138 -1,331 -1,562 -1,851% -0.025 -0.025 -0.021 -0.022 -0.023 -0.024 -0.028 -0.032 -0.037 -0.044Vermont -79 -75 -63 -69 -73 -78 -89 -104 -123 -146% -0.026 -0.024 -0.020 -0.022 -0.023 -0.024 -0.028 -0.032 -0.038 -0.045Washington -376 -386 -335 -359 -380 -404 -458 -536 -631 -749% -0.013 -0.013 -0.011 -0.011 -0.012 -0.012 -0.014 -0.016 -0.019 -0.022Wisconsin -762 -769 -674 -723 -761 -806 -908 -1,055 -1,230 -1,448% -0.027 -0.026 -0.023 -0.024 -0.026 -0.027 -0.031 -0.036 -0.042 -0.049West Virginia -161 -160 -135 -141 -147 -154 -174 -203 -237 -280% -0.020 -0.020 -0.016 -0.017 -0.018 -0.019 -0.021 -0.025 -0.029 -0.034Wyoming -58 -58 -50 -53 -55 -57 -64 -74 -87 -102% -0.020 -0.019 -0.016 -0.017 -0.018 -0.019 -0.021 -0.024 -0.029 -0.034Sources: BEA, Moody's Analytics

Appendix A


Appendix A

Table A11.1: Summary of Capped Scenario Employment Changes by State,(% of total)State Agriculture

Natural Res./Mining

Utilities Construction ManufacturingWholesale

Trade Retail Trade

Transp./Warehouse

Alaska 0.7 21.1 2.6 15.6 3.3 3.0 6.5 5.3Alabama 0.4 0.6 3.2 10.9 23.9 5.9 8.6 1.1Arkansas 1.1 1.1 3.4 8.9 18.2 8.3 10.2 1.6Arizona 0.3 0.6 2.4 14.4 7.2 5.8 8.9 1.1California 0.6 0.8 1.9 8.7 8.4 6.2 7.4 0.9Colorado 0.3 2.2 1.4 11.1 7.1 5.8 7.8 1.0Connecticut 0.0 0.0 1.7 8.2 13.0 5.6 6.6 0.6District of Columbia 0.0 0.0 2.3 6.7 0.3 1.3 2.0 0.2Delaware 0.2 0.0 1.8 6.2 4.9 3.4 4.5 0.4Florida 0.2 0.1 2.5 11.5 4.2 6.4 8.9 1.3Georgia 0.3 0.1 2.3 11.5 11.4 8.7 8.1 1.7Hawaii 0.3 0.0 4.1 17.9 1.8 3.5 8.9 1.6Iowa 2.0 0.1 2.0 8.7 21.9 7.2 8.3 1.5Idaho 2.4 0.2 2.3 12.1 7.7 8.9 11.3 1.1Illinois 0.3 0.1 2.0 5.4 17.8 7.4 7.2 1.2Indiana 0.4 0.1 2.0 10.8 37.2 5.0 7.0 1.0Kansas 1.5 0.9 2.0 9.8 21.6 7.0 8.7 1.1Kentucky 0.4 0.8 2.2 10.9 22.6 8.9 8.8 1.8Louisiana 0.3 7.3 2.3 12.8 24.3 5.5 8.0 1.8Massachusetts 0.1 0.0 1.5 9.0 8.4 6.0 5.1 0.5Maryland 0.1 0.0 3.0 10.6 5.4 5.4 7.1 0.8Maine 0.7 0.0 2.6 9.4 12.0 6.1 10.6 0.8Michigan 0.4 0.1 2.4 7.2 24.3 6.6 7.9 0.8Minnesota 1.0 0.1 1.7 10.0 13.0 9.6 8.8 1.3Missouri 0.5 0.1 2.1 9.1 17.7 7.9 8.1 1.3Mississippi 0.9 0.9 3.5 13.5 20.1 4.8 11.4 1.3Montana 1.7 2.8 2.9 14.9 8.7 6.0 9.5 1.7North Carolina 0.4 0.0 1.9 8.3 19.4 5.6 7.4 0.8North Dakota 3.3 6.8 2.6 15.1 9.9 10.2 8.0 3.0Nebraska 2.4 0.1 1.7 9.3 20.0 5.9 8.2 2.2New Hampshire 0.1 0.0 2.6 7.6 10.1 7.1 10.3 0.6New Jersey 0.1 0.0 2.0 10.8 7.7 7.5 6.8 0.9New Mexico 0.8 7.8 2.4 14.0 1.8 4.7 9.9 1.2Nevada 0.1 1.7 1.8 12.2 5.2 3.6 7.8 1.6New York 0.1 0.0 1.7 7.7 5.2 6.3 6.7 0.5Ohio 0.3 0.2 2.0 9.6 22.4 7.2 8.2 1.0Oklahoma 0.5 6.1 2.7 10.2 16.2 5.9 10.2 1.2Oregon 0.9 0.1 1.9 11.0 6.1 8.2 7.5 1.2Pennsylvania 0.2 0.9 2.2 8.4 14.0 6.9 8.0 1.3Rhode Island 0.1 0.0 1.6 10.9 9.9 5.7 6.7 0.6South Carolina 0.2 0.0 3.2 11.0 21.0 5.8 10.5 0.9South Dakota 3.4 0.2 1.7 9.1 16.1 6.9 9.1 0.7Tennessee 0.2 0.1 0.8 10.0 18.5 7.1 8.6 1.6Texas 0.2 6.2 2.1 13.0 15.2 7.9 8.3 1.4Utah 0.1 0.8 1.2 12.3 19.2 4.9 8.0 1.2Virginia 0.2 0.3 1.8 9.0 10.5 3.7 7.5 1.0Vermont 0.6 0.1 3.7 11.8 9.0 6.3 12.4 0.8Washington 0.7 0.1 1.0 9.5 19.5 5.4 8.0 1.0Wisconsin 0.6 0.1 2.1 10.0 23.2 6.7 7.3 1.0West Virginia 0.1 6.7 3.4 13.5 14.6 6.0 11.5 0.9Wyoming 0.6 20.3 3.5 14.9 7.1 4.8 7.7 2.1Source: Moody's Analytics


Appendix A

Table A11.2: Summary of Capped Scenario Employment Changes by State (% of total)State Information

Financial Activities

Prof./Bus. Services

Educ./Health Services

Leisure & Hospitality

Other Services

Government

Alaska 2.4 19.2 7.5 2.1 7.7 2.0 1.1Alabama 2.9 19.4 9.9 2.0 5.7 2.8 2.6Arkansas 2.9 18.8 10.3 2.6 6.4 2.4 3.7Arizona 3.6 29.5 10.5 2.5 8.3 2.1 3.0California 9.7 26.6 13.9 2.1 7.7 2.4 2.8Colorado 10.1 22.2 15.8 1.8 8.8 2.4 2.1Connecticut 5.3 34.9 11.6 2.5 4.7 2.0 2.9District of Columbia 9.7 27.0 37.3 2.9 11.1 10.3 -11.1Delaware 2.6 53.9 10.9 2.0 5.0 1.6 2.4Florida 4.8 25.7 12.6 3.0 13.6 2.8 2.6Georgia 8.4 20.7 13.4 2.3 7.1 2.3 1.8Hawaii 2.7 28.6 8.4 2.1 18.8 2.5 -1.1Iowa 3.5 25.8 6.1 1.9 5.4 2.1 3.4Idaho 3.0 22.6 11.9 2.8 7.3 2.6 3.9Illinois 4.0 27.0 13.6 2.2 6.6 2.4 2.7Indiana 2.3 15.2 6.7 2.1 5.7 2.1 2.4Kansas 5.1 19.3 9.6 2.2 5.8 2.5 2.8Kentucky 3.5 18.1 8.2 2.7 6.5 2.3 2.4Louisiana 2.5 14.5 6.8 1.9 7.1 2.5 2.4Massachusetts 7.1 29.3 17.4 3.8 7.1 2.0 2.7Maryland 6.0 30.8 17.8 3.0 7.4 2.8 -0.2Maine 2.7 27.8 9.5 3.7 9.0 2.4 2.6Michigan 2.8 20.2 12.8 2.4 6.5 2.5 3.3Minnesota 4.5 24.3 12.2 2.5 5.7 2.1 3.0Missouri 6.1 19.7 11.8 2.6 7.9 2.6 2.6Mississippi 3.0 16.9 6.2 2.2 8.8 2.4 4.0Montana 3.3 22.5 8.1 2.9 9.3 2.8 3.0North Carolina 3.9 27.7 10.8 2.2 6.4 2.2 3.0North Dakota 3.3 21.4 5.5 2.1 5.0 1.7 2.2Nebraska 4.3 22.7 10.5 2.3 4.8 2.3 3.3New Hampshire 5.4 27.6 12.5 3.0 7.3 2.5 3.1New Jersey 5.2 29.7 15.9 2.4 5.5 2.1 3.5New Mexico 3.7 23.9 12.2 2.8 8.2 3.0 3.5Nevada 1.5 26.4 7.7 1.3 25.5 1.6 2.0New York 9.1 34.7 12.8 2.4 7.6 2.0 3.1Ohio 3.0 20.3 12.4 2.5 6.0 2.2 2.9Oklahoma 3.6 20.9 8.5 2.0 6.5 2.3 3.0Oregon 4.4 27.6 12.3 3.1 8.1 2.9 4.6Pennsylvania 5.0 25.5 13.4 3.5 6.2 2.3 2.4Rhode Island 5.6 33.5 10.2 3.2 7.3 2.0 2.7South Carolina 2.5 18.9 9.5 2.1 8.1 2.5 3.8South Dakota 3.0 30.3 5.3 2.7 6.7 2.1 2.5Tennessee 3.9 19.9 11.7 3.2 8.5 2.9 3.0Texas 4.0 18.7 10.6 1.8 5.8 2.3 2.5Utah 5.0 25.1 9.3 1.6 6.1 2.9 2.3Virginia 5.9 27.4 21.5 2.0 6.1 2.9 0.1Vermont 2.8 23.4 9.6 3.2 11.1 2.5 2.9Washington 11.5 21.0 10.0 1.8 6.1 2.0 2.4Wisconsin 3.8 23.3 8.3 2.6 5.5 2.2 3.1West Virginia 3.0 15.2 7.6 3.2 7.6 2.5 4.0Wyoming 1.9 17.1 4.7 1.5 7.8 2.2 4.0Source: Moody's Analytics


Appendix A

Table A12.1: Summary of Capped Scenario Output Changes by State,(% of total)State Agriculture

Natural Res./Mining

Utilities Construction ManufacturingWholesale

Trade Retail Trade

Transp./Warehouse

Alaska 0.6 18.6 2.3 13.7 3.8 2.7 5.7 4.6Alabama 0.3 0.5 2.7 9.0 26.4 4.9 7.1 0.9Arkansas 0.9 1.0 2.8 7.5 20.5 7.0 8.6 1.4Arizona 0.2 0.5 1.9 11.8 7.9 4.8 7.3 0.9California 0.5 0.7 1.6 7.2 9.3 5.1 6.1 0.8Colorado 0.2 1.9 1.2 9.5 8.1 5.0 6.7 0.8Connecticut 0.0 0.0 1.4 6.5 13.6 4.4 5.2 0.5District of Columbia 0.0 0.0 1.9 5.7 0.3 1.1 1.7 0.1Delaware 0.2 0.0 1.3 4.5 4.7 2.5 3.3 0.3Florida 0.2 0.1 2.1 9.7 4.8 5.4 7.5 1.1Georgia 0.3 0.0 2.0 9.8 12.9 7.4 6.9 1.4Hawaii 0.2 0.0 3.4 15.0 2.0 2.9 7.5 1.3Iowa 1.6 0.0 1.6 7.0 23.5 5.8 6.7 1.2Idaho 2.0 0.2 2.0 10.3 8.7 7.6 9.6 0.9Illinois 0.2 0.1 1.6 4.4 19.1 6.0 5.8 0.9Indiana 0.3 0.1 1.6 8.8 40.4 4.1 5.7 0.8Kansas 1.3 0.7 1.7 8.1 24.0 5.9 7.3 0.9Kentucky 0.3 0.7 1.9 9.1 25.2 7.5 7.3 1.5Louisiana 0.3 6.2 2.0 10.9 27.5 4.7 6.8 1.5Massachusetts 0.1 0.0 1.2 7.4 9.1 4.9 4.2 0.4Maryland 0.1 0.0 2.5 8.6 5.9 4.4 5.8 0.6Maine 0.6 0.0 2.1 7.6 13.0 5.0 8.7 0.7Michigan 0.3 0.1 2.0 5.9 26.7 5.4 6.5 0.6Minnesota 0.9 0.1 1.4 8.3 14.4 7.9 7.3 1.1Missouri 0.4 0.1 1.8 7.6 19.8 6.7 6.8 1.1Mississippi 0.8 0.8 3.0 11.5 22.7 4.0 9.6 1.1Montana 1.4 2.3 2.4 12.7 9.9 5.1 8.0 1.4North Carolina 0.3 0.0 1.5 6.6 20.7 4.5 6.0 0.7North Dakota 2.8 5.8 2.2 12.8 11.2 8.7 6.8 2.5Nebraska 2.0 0.1 1.4 7.6 21.9 4.8 6.7 1.8New Hampshire 0.1 0.0 2.1 6.3 11.1 5.9 8.4 0.5New Jersey 0.1 0.0 1.7 8.8 8.3 6.1 5.5 0.7New Mexico 0.7 6.7 2.1 12.1 2.1 4.0 8.5 1.1Nevada 0.1 1.4 1.5 10.2 5.8 3.0 6.5 1.3New York 0.1 0.0 1.4 6.2 5.6 5.0 5.3 0.4Ohio 0.3 0.1 1.6 7.9 24.7 5.9 6.8 0.8Oklahoma 0.5 5.2 2.3 8.6 18.1 4.9 8.6 1.0Oregon 0.8 0.1 1.6 9.2 6.8 6.8 6.2 1.0Pennsylvania 0.2 0.7 1.8 6.9 15.3 5.6 6.6 1.0Rhode Island 0.1 0.0 1.3 8.7 10.5 4.5 5.4 0.4South Carolina 0.2 0.0 2.6 9.2 23.4 4.9 8.8 0.7South Dakota 2.7 0.2 1.4 7.3 17.1 5.5 7.2 0.5Tennessee 0.2 0.1 0.7 8.4 20.6 5.9 7.2 1.4Texas 0.2 5.3 1.8 11.1 17.2 6.8 7.1 1.2Utah 0.1 0.7 1.0 10.0 20.8 4.0 6.5 1.0Virginia 0.1 0.2 1.5 7.4 11.5 3.1 6.2 0.8Vermont 0.5 0.1 3.1 9.9 10.1 5.3 10.5 0.7Washington 0.6 0.1 0.9 7.9 21.6 4.5 6.6 0.8Wisconsin 0.5 0.1 1.7 8.1 25.0 5.4 5.9 0.8West Virginia 0.1 5.8 3.0 11.7 17.0 5.2 10.0 0.8Wyoming 0.5 17.8 3.0 13.1 8.4 4.2 6.8 1.8Source: Moody's Analytics


Appendix A

Table A12.2: Summary of Capped Scenario Output Changes by State,(% of total)State Information

Financial Activities

Prof./Bus. Services

Educ./Health Services

Leisure & Hospitality

Other Services

Government

Alaska 2.1 28.1 6.6 1.9 6.7 1.7 0.9Alabama 2.4 26.7 8.2 1.7 4.7 2.4 2.2Arkansas 2.4 26.5 8.7 2.2 5.4 2.0 3.1Arizona 2.9 40.3 8.6 2.0 6.8 1.7 2.4California 8.0 36.8 11.5 1.7 6.4 2.0 2.3Colorado 8.6 31.6 13.5 1.6 7.5 2.1 1.8Connecticut 4.2 45.6 9.1 2.0 3.7 1.6 2.3District of Columbia 8.2 38.1 31.6 2.5 9.4 8.7 -9.4Delaware 1.9 65.3 7.9 1.4 3.7 1.2 1.8Florida 4.0 36.2 10.6 2.5 11.4 2.3 2.2Georgia 7.2 29.3 11.4 1.9 6.0 2.0 1.5Hawaii 2.3 39.8 7.0 1.8 15.7 2.1 -0.9Iowa 2.8 34.6 4.9 1.6 4.3 1.7 2.7Idaho 2.5 32.0 10.1 2.3 6.2 2.2 3.3Illinois 3.2 36.4 11.0 1.8 5.3 1.9 2.2Indiana 1.9 20.7 5.4 1.7 4.7 1.7 2.0Kansas 4.3 26.9 8.0 1.8 4.8 2.1 2.3Kentucky 2.9 25.2 6.8 2.2 5.4 1.9 2.0Louisiana 2.1 20.6 5.8 1.6 6.1 2.1 2.0Massachusetts 5.8 39.9 14.2 3.1 5.8 1.7 2.2Maryland 4.9 41.9 14.6 2.4 6.0 2.3 -0.1Maine 2.2 37.9 7.8 3.0 7.4 2.0 2.1Michigan 2.3 27.7 10.6 2.0 5.3 2.0 2.7Minnesota 3.7 33.7 10.1 2.1 4.7 1.7 2.5Missouri 5.1 27.5 10.0 2.2 6.6 2.2 2.2Mississippi 2.5 23.9 5.3 1.9 7.5 2.1 3.4Montana 2.8 31.8 6.9 2.5 7.9 2.3 2.6North Carolina 3.2 36.9 8.6 1.7 5.1 1.8 2.4North Dakota 2.8 30.4 4.6 1.8 4.2 1.5 1.9Nebraska 3.5 31.1 8.6 1.9 4.0 1.9 2.7New Hampshire 4.4 37.8 10.3 2.5 6.0 2.1 2.6New Jersey 4.2 40.5 13.0 1.9 4.5 1.7 2.9New Mexico 3.2 34.1 10.5 2.4 7.1 2.6 3.0Nevada 1.3 36.8 6.5 1.1 21.4 1.3 1.7New York 7.3 46.3 10.2 2.0 6.1 1.6 2.5Ohio 2.5 27.9 10.3 2.1 4.9 1.8 2.4Oklahoma 3.0 29.2 7.2 1.7 5.4 2.0 2.5Oregon 3.6 38.2 10.2 2.6 6.7 2.4 3.8Pennsylvania 4.1 34.9 11.0 2.9 5.1 1.9 1.9Rhode Island 4.5 44.4 8.1 2.6 5.8 1.6 2.1South Carolina 2.1 26.3 7.9 1.8 6.8 2.1 3.2South Dakota 2.4 40.3 4.3 2.1 5.3 1.7 2.0Tennessee 3.3 27.7 9.8 2.7 7.1 2.4 2.5Texas 3.4 26.5 9.0 1.5 4.9 1.9 2.1Utah 4.1 34.0 7.5 1.3 5.0 2.3 1.9Virginia 4.9 37.5 17.7 1.7 5.0 2.4 0.1Vermont 2.4 32.9 8.1 2.7 9.4 2.1 2.4Washington 9.5 29.0 8.3 1.5 5.1 1.6 2.0Wisconsin 3.1 31.6 6.8 2.1 4.5 1.8 2.6West Virginia 2.6 22.1 6.6 2.8 6.6 2.2 3.5Wyoming 1.7 25.0 4.2 1.3 6.8 1.9 3.5Source: Moody's Analytics


Appendix B

Appendix B: Methodology


Appendix B

Municipal bond interest exemptionTax-exempt interest. To estimate the

impacts of a cap or elimination of the municipal bond interest exemption, it was first necessary to establish a baseline forecast for tax-exempt interest income based on detailed annual tax filing data in the Internal Revenue Service’s Statistics of Income. SOI Table 1.4 includes the amount of tax exempt interest income claimed by taxpayers broken down into 15 income groups from 1993 to 2011. Of interest in analyzing the 28% cap proposal, it breaks out higher income filers into those with between $200,000 and $500,000 of adjusted gross income, and those with $500,000 or more in AGI. These categories roughly correspond to the 33%, 35%, and 39.6% tax brackets, in tax year 2013.

Market value of municipal securities. Tax exempt interest income is a function of the market value of outstanding tax-exempt securities and their yield. As such, we can derive alternative forecasts of tax exempt interest income by developing alternative forecasts for both the amount of municipal securities outstanding and average yield. This necessitated the creation of a custom baseline forecast series for total tax exempt securities outstanding using common least squares regression techniques, based on historical data from the New York Federal Reserve’s flow of funds database.

Municipal bond yields. The baseline economic forecast already includes the

average 20 year AAA-rated municipal bond yield from Moody’s Investor Service. In an effort to keep the new calculations as in line as possible with the baseline economic scenario, the MIS yield was used as a benchmark instead of a more widely encompassing AA yield. Sensitivity analysis showed no significant differences to the overall economic results of this analysis using either the AAA or AA yield benchmarks. Alternative yields were then calculated based on the forecast change in the market value of outstanding municipal securities.

Using forecasts for average yield and market value, it was then possible to project alternative totals of tax-exempt interest income, first as a national aggregate, and then broken out into respective income classifications.

Tax revenues. From the perspective of virtually all filers regardless of income level or filing status, the amount by which the exemption reduces their tax burden is equal to the amount of interest income times the marginal tax rate. Thus individuals in the 28% tax bracket and below would not

see their after tax income affected by the proposed cap.

For individuals in the top three tax brackets, the impact of the proposed cap is calculated as the difference between the marginal tax rate and 28%. It is important to note, however, that as an exemption and not a deduction, tax-exempt bond interest directly impacts AGI levels used to calibrate more than personal income tax rates. Therefore, we also assume that municipal bond interest that is no longer exempt will be subject to the 3.8% surcharge on unearned income for filers with AGI over $250,000 included in the Affordable Care Act. Unfortunately the SOI income classifications do not correspond to the annually changing tax bracket definitions, forcing some tax brackets to be consolidated for the purposes of this analysis. Therefore, everyone with

1 1

0

2

4

6

8

10

12

14

No AGI <$50k $50k to<$100k

$100kto

<$200k

$200kto

<$500k

$500kto

<$1 mil

$1 milto

<$2 mil

$2 milto

<$5 mil

$5 mil+

Chart B1: High Earners Hold Most Muni Bonds


Tax-exempt interest claimed by AGI, $ bil, 2011

2 2

1.01.52.02.53.03.54.04.55.05.5

94 96 98 00 02 04 06 08 10 12 14F 16F 18F 20F 22F

Baseline 28% cap Full repeal

Chart B2: Alternative Muni Market Values Total outstanding tax-exempt municipal securities, $ bil

Sources: Federal Reserve Bank, Moody’s Analytics

3 3

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.5

7.0

94 96 98 00 02 04 06 08 10 12 14F 16F 18F 20F 22F

Full repeal

28% cap

Baseline

Chart B3: Alternative Muni Yields Avg Aaa-rated 20-yr municipal bond yield, %

Sources: Moody’s Investors Service, Moody’s Analytics


4 4

0

20

40

60

80

100

120

97 99 01 03 05 07 09 11 13 15F 17F 19F 21F 23F

>$500k$200k-$500k<$200k

Chart B4: High Income Share Will Grow Faster Tax-exempt interest income claimed, $ mil, by AGI


5 5

<$200k

$200k-$500k

>$500k

Chart B5: $200k Plus Enjoys Biggest Break


Share of total 2013 tax exempt interest claimed, by AGI

35%

18%

47%

Appendix B

AGI between $200,000 and $500,000 was treated as falling into the 35% tax bracket, while those with more than $500,000 in AGI were taxed at 39.6%. Therefore, in calculating future tax benefits derived from the municipal bond interest exemption, individuals were taxed at a marginal rate of 38.8% and 43.4% respectively1.

State and local tax deductionState and local taxes paid. Like tax-exempt

interest, state and local taxes paid data in the SOI is broken out into 15 different income classifications. In analyzing the historical composition of total state and local taxes

1 $200,000 to $500,000 were grouped into the 35% tax bracket, plus an additional 3.8%from the Affordable Care Act. $500,000 and above were grouped into the 39.6% tax bracket, plus an additional 3.8% from the Affordable Care Act.

deducted by high-income households, nearly three-fourths originate from income taxes. To model income taxes we chose wage and salary income as a proxy for compensation income and the S&P 500 Index as a proxy for investment income. The remaining one-fourth of the total comes almost entirely from real estate taxes. Since the fair market value of the property is a large determinant of real estate taxes paid, we included house prices, as measured by CoreLogic’s Case-Shiller® Home Price Indexes.

Calculating the value of this tax provision, and the impact of the 28% cap, follows much the same logic as the municipal bond interest exemption. The amount by which a filer’s tax burden is decreased by the provision is equal to the total amount claimed times the filer’s marginal tax rate. The impact of the proposed cap is the difference between that rate and

Table 1: SOI Categories vs. Federal Tax Brackets, by AGISOI historical reporting categories 2013 tax brackets, married filing jointly

>$200,000 10%-25% $0-145,599

28% $145,600-223,049

$200,000-500,00033% $223,050-398,349

35% $398,350-449,999

39.6% $450,000+<$500,000

Sources: IRS, Moody's Analytics

28%. Because the ACA surcharge does not apply, a marginal tax rate of 35% was used for the $200,000-$500,000 category and a rate of 39.6% was used for those in the $500,000 and above category.

Taxes paid versus claimed. However, unlike the municipal bond interest exemption, the amount of state and local government taxes paid is not equal to the amount claimed as deductions. Itemized deductions must be detailed, and are then subtracted from adjusted gross income subject to a number of rules governing who qualifies and how much they are allowed to deduct.

First, taxpayers who take the standard deduction receive no benefit from itemized deductions. Historically, only about one-third of filers itemize2, with higher income filers much more likely to itemize than those in lower income brackets. Also, roughly one-third of taxpayers in the $200,000-$500,000 income group cannot claim the state and local tax deduction because they file under the Alternative Minimum Tax3. This significantly limits the impact of the proposed policy change on this income group.

Second, for taxpayers that do itemize, there are other restrictions on deductions

2 IRS Statistics of Income, Table 2 http://www.irs.gov/uac/SOI-Tax-Stats---Historic-Table-2. Accessed September 25, 2013

3 Distribution of AMT and Regular Income Tax by Cash Income, Current Law, 2012-2014, Urban-Brookings Tax Policy Center, http://www.taxpolicycenter.org/numbers/displayatab.cfm?DocID=3972&topic2ID=60&topic3ID=61&DocTypeID=1. Accessed September 25, 2013


6 6

0100200300400500600700800900

91 94 97 00 03 06 09 12F 15F 18F 21F

>$500k$200k-$500k<$200k

Chart B6: Higher Incomes, Higher Local Taxes State and local taxes paid, $ mil, by AGI


7 7

Income taxes

Real estate taxes

Other

Chart B7: Income Taxes Are Largest Deduction


State and local taxes for AGI >$200k, 2011, %

23%

3%

74%

8 8

0

20

40

60

80

100

<$50k $50k to<$100k

$100k to<$200k

$200k to<$500k

$500k to<$1 mil

$1 mil+ All

Chart B8: High Incomes Itemize More…


% of 2011 tax units claiming itemized deductions, by AGI

9 9

0

10

20

30

40

50

60

70

<$50k $50k to<$100k

$100k to<$200k

$200k to<$500k

$500k to<$1 mil

$1 mil+ All

Chart B9: …And Pay More AMT

Sources: Tax Policy Center, Moody’s Analytics

% of 2013 tax units with AMT liability, by AGI

Appendix B

that can reduce the value of the state and local tax provision. The 2013 American Taxpayer Relief Act reinstated so-called Pease limitations on itemized deductions that were phased out as part of the Bush-era tax cuts. In contrast to the 28% proposal, which would

be applied to each individual deduction, Pease limits affect the amount by which the sum of all deductions can be used to reduce one’s tax liability. Pease limits phase in slowly starting at $300,000 for married couples in 2013, and max out at 80% of the deductions’

value. This means that at very high income levels, the most any filer can use itemized deductions to reduce their total tax burden by is 20%. This further limits the impact of the 28% cap for those filers who already claim large amounts of itemized deductions.


This page intentionally left blank


© 2013, Moody’s Analytics, Inc. and/or its licensors and affi liates (together, “Moody’s”). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT. All information contained herein is obtained by Moody’s from sources believed by it to be accurate and reliable. Because of the possibility of human and mechanical error as well as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. Under no circumstances shall Moody’s have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of Moody’s or any of its directors, offi cers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profi ts), even if Moody’s is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The fi nancial reporting, analysis, projections, observations, and other information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell, or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER. Each opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation prior to investing.

About Moody’s AnalyticsEconomic & Consumer Credit AnalyticsMoody’s Analytics helps capital markets and credit risk management professionals worldwide respond to an evolving marketplace with confi dence. Through its team of economists, Moody’s Analytics is a leading independent provider of data, analysis, modeling and forecasts on national and regional economies, fi nancial markets, and credit risk.

Moody’s Analytics tracks and analyzes trends in consumer credit and spending, output and income, mortgage activity, popu-lation, central bank behavior, and prices. Our customized models, concise and timely reports, and one of the largest assembled fi nancial, economic and demographic databases support fi rms and policymakers in strategic planning, product and sales fore-casting, credit risk and sensitivity management, and investment research. Our customers include multinational corporations, governments at all levels, central banks and fi nancial regulators, retailers, mutual funds, fi nancial institutions, utilities, residen-tial and commercial real estate fi rms, insurance companies, and professional investors.

Our web and print periodicals and special publications cover every U.S. state and metropolitan area; countries throughout Europe, Asia and the Americas; and the world’s major cities, plus the U.S. housing market and other industries. From our offi ces in the U.S., the United Kingdom, the Czech Republic and Australia, we provide up-to-the-minute reporting and analysis on the world’s major economies.

Moody’s Analytics added Economy.com to its portfolio in 2005. Its economics and consumer credit analytics arm is based in West Chester PA, a suburb of Philadelphia, with offi ces in London and Sydney. More information is available at www.economy.com.

About Moody's Analytics

Copyright © 2012, Moody’s Analytics, Inc. All Rights Reserved.

Email us: [email protected] Or visit us: www.economy.com

U.S./CANADA +1 866.275.3266

EMEA+44 (0) 20.7772.1646

ASIA/PACIFIC +61 2 9270 8111

OTHER LOCATIONS+1 610.235.5299

CONTACT US

Documents

Macroeconomic Analysis of Federal Tax Proposals Affecting State