fdr/yet-another-state-universal-transfer-tweak

## yet-another-state-universal-transfer-tweak


I write today to request a tweak in the federal tax code to make it possible to implement state-level universal and conditional benefits. In particular, to allow some more state tax credits to skip federal income tax. The reason to prefer universality is to avoid the high effective marginal taxation rates that correspond with phase-outs in the tax code: in the federal code, effective marginal rates can exceed 80% for people with children with about $20,000 annual household income. The chart of effective marginal taxation looks like a city skyline, with very high but also chaotic marginal rates for low earners.

Currently, the main way to do something like that is through TANF, which has a number of restrictions and wording around "need" based credits, i.e. means-testing within the program rather than in the tax system. This makes it unsuitable as a vehicle for conditional benefits. By opting to use flat-rate universal/conditional benefits, a state will emit extra tax to the federal government as compared to a more awkward policy of aggressive means testing that exacerbates the chaos of effective marginal rates for low earners. The policy environment is not neutral.

While I would like to see the federal codes improved as well (i.e. eliminating phase-outs, and regaining progressivity via tax), the smaller job of letting states avoid increasing these problems may come more easily.

If you want to see a chart showing the problem,  consult this tweet: https://twitter.com/jdcmedlock/status/1353914540044349441. Or the CBO, with the key words "effective marginal taxation" (including transfers).


	I write today to request a tweak in the federal tax code to make it possible to implement state-level universal and conditional benefits. In particular, to allow some more state tax credits to skip federal income tax. The reason to prefer universality is to avoid the high effective marginal taxation rates that correspond with phase-outs in the tax code: in the federal code, effective marginal rates can exceed 80% for people with children with about $20,000 annual household income. The chart of effective marginal taxation looks like a city skyline, with very high but also chaotic marginal rates for low earners.

	Currently, the main way to do something like that is through TANF, which has a number of restrictions and wording around "need" based credits, i.e. means-testing within the program rather than in the tax system. This makes it unsuitable as a vehicle for conditional benefits. By opting to use flat-rate universal/conditional benefits, a state will emit extra tax to the federal government as compared to a more awkward policy of aggressive means testing that exacerbates the chaos of effective marginal rates for low earners. The policy environment is not neutral.

	While I would like to see the federal codes improved as well (i.e. eliminating phase-outs, and regaining progressivity via tax), the smaller job of letting states avoid increasing these problems may come more easily.

	If you want to see a chart showing the problem, consult this tweet: https://twitter.com/jdcmedlock/status/1353914540044349441. Or the CBO, with the key words "effective marginal taxation" (including transfers).