Calculator Methodology

Income tax changes. The calculator calculates income tax liability for four years – 2013 (current law), 2014, 2015, and 2016. It’s a basic calculation so, aside from the child tax credit, ignores tax credits after the tax calculation itself.

In an effort to keep things simple, we want to avoid bombarding the user with too many questions. Therefore we choose not to ask about tax deductions immediately – the goal here is to provide a rough estimate, not make a North Carolina TurboTax. Once the user enters in his household income, number of dependents, and filing status, the calculator estimates their North Carolina tax deductions automatically (based on IRS data for North Carolina).

The 2013 tax calculation is just current law; for simplicity we start with AGI = household income and go from there. If the user has entered a nonzero number of dependents they are switched from single to head of household in the calculation. Then, the calculator subtracts out the personal exemption and the tax deductions estimated above (which is always at least the standard deduction), arrives at taxable income, and does the tax calculation based on the 2013 tax brackets:

Rates and Brackets, 2013
(Taxable Income = AGI – personal exemptions – deductions)

Rate Single Married HOH
6% >$0 >$0 >$0
7% >$12750 >$21250 >$17000
7.75% >$60000 >$100000 >$80000

For 2014 on, the income tax is restructured. For 2015 and 2016 there is a special “transitional adjustment” deduction for middle class taxpayers, but other than that there are no more personal exemptions or deductions – tax is calculated on the starting AGI, except that a portion is subject to a 0% rate.

Rates and Brackets, 2014-2016
(Taxable income = AGI – "transitional adjustment" for 2015 and 2016)

Rate Single Married HOH
2014
0% >$0 >$0 >$0
5.5% >$5000 >$10000 >$8000
2015
0% >$0 >$0 >$0
4.85% >$6250 >$12500 >$10000
2016
0% >$0 >$0 >$0
4.5% >$6250 >$12500 >$10000
2017
0% >$0 >$0 >$0
4.5% >$7500 >$15000 >$12000

Sales Tax Changes. This is significantly less precise, but there are ways to estimate it. The first step is to estimate the household’s spending in a variety of categories – we do this using consumer expenditure survey data available here: http://www.bls.gov/cex/ - starting with the income tabulation, and then adjusting based on the family size tabulation. A further adjustment needs to be made based on the fact that the low-income BLS data is problematic – it tends to show that such households spend well more than they earn, because they tend to under-report their income on the survey. We adjust for this by smoothly bending the spending function so that it can never exceed income.

The larger problem is that the categories here don’t line up particularly well with the changes to the tax base under the reform, and it's challenging to do a precise crosswalk. This problem can be simplified somewhat by focusing on the differential between current law and reform only, and not try to assign a tax base percentage to every category in the survey.

We start out with John Mikesell’s estimate that approximately 31% of North Carolina expenditures are subject to sales tax. Then, for each category of spending for the family, we estimate the percentage of that category that is currently untaxed but would be under the reform, for both state and local sales tax, based on the survey category definitions. After applying these percentages to the family’s spending, we come up with an additional number to add onto the 31% of their spending, and then it’s a simple matter of calculating the state and local sales tax burden.

One other important limitation to note here is that within the framework of an individual tax calculator that takes inputs for income and spending and spits out a number, is that the analysis is necessarily static – we don’t account for possible changes to income and spending that might result from the reform.  The biggest change where this might be a problem is the new sales tax exemption for all business-to-business transactions – this is something that will likely lower prices for consumers but not something that benefits them in a direct, legal sense, so it’s hard to account for here. Likewise, income tax changes might cause economic benefits which lead to higher salaries and wages, but these cannot be accounted for within the confines of a static tax calculator.