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Executive Summary

Americans pay a mind-boggling array of taxes--income taxes, payroll taxes, sales taxes, utility taxes--and one result is that most people have no idea how high their tax burden actually is. This paper identifies $638.8 billion in hidden taxes, or $2,413 in hidden taxes for every American.

These hidden taxes undermine our democratic decision-making process. If people don't accurately perceive how much government policies cost them, how can they make informed decisions in our democratic process? When taxes are not visible, Americans are unable to evaluate whether they're getting their money's worth for their tax dollars. As a result, hidden taxes help boost the size of government.

This paper estimates that the total U.S. tax burden is equal to 40 percent of annual personal consumption spending. If Americans recognized this high level of taxation, there might well be a second American Revolution.

To maintain support for so many programs, it's often in the interest of governments to keep their costs hidden. Commenting on hidden telecommunications taxes, American Enterprise Institute fellow James Glassman put his finger on the problem: The idea here is an old one: People can't rebel if they're kept in the dark.

In addition to increasing the size of government, hidden taxes are an especially harmful way to raise money. Hidden taxes distort the prices that Americans face, causing them to over-consume some products and under-consume others. As a result, hidden taxes inflict more economic damage than broad-based, visible taxes.

There is some good news. While hidden taxes are significant in the United States, they could be even higher. For example, America is one of the few countries without a value-added tax (VAT), a type of hidden sales tax. In addition, the move to deregulate the telecommunication and utility industries will help make taxes for those services much clearer to consumers.

Communities are much stronger when they consist of a well-informed citizenry. Working to bring more hidden taxes into the open world would give Americans the information they need to make thoughtful choices about the role of government in the United States.

Americans pay a mind-boggling array of taxes--income taxes, payroll taxes, sales taxes, utility taxes--and one result is that most people have no idea how high their tax burden actually is.

While some taxes are fairly obvious, many others are hidden from plain view. This violates a basic principle of taxation--that taxes should be visible to the people who pay them. If people don't accurately perceive how much government policies cost them, then how can they make informed decisions in our democratic process? This paper identifies $638.8 billion in hidden taxes, or $2,413 in hidden taxes per person.⁽²⁾

Some of these taxes are inadvertently hidden, but others are consciously designed that way to disguise the cost of government. It's easy to see why: the total U.S. tax burden is equal to 40 percent of annual personal consumption spending.⁽³⁾ If Americans recognized this high level of taxation, there might well be a second American Revolution. To maintain support for so many programs, it's often in the interest of governments to keep their costs hidden.

Table 1. Taxes and Spending (1996)

Personal Consumption Spending	Federal, State, and Local Taxes	Taxes as a Percent of Personal Spending
$5.21 trillion	$2.09 trillion	40%

Americans are subject to a host of different forms of taxes. The many types and levels of taxation help explain why taxes are so steep: giving governments more options for taxation usually encourages higher tax burdens.⁽⁴⁾ Figure 1 shows the relative magnitude of different U.S. taxes.

Figure 1. U.S. Tax Revenue⁽⁵⁾

How Many Taxes Are Hidden?

For the purposes of this paper, a hidden tax is one that is not explicitly clear to the taxpayer. For example, sales taxes generally are not considered to be hidden taxes, because the costs are clearly indicated on cash register receipts. This methodology can be compared to the definition used by the U.S. Census Bureau:

One important feature of tax revenue is the need to pass a "visibility test." That is, the tax levy must be visible to the taxpayer as being a tax and not buried under the guise of another revenue. Take, for instance, a tax on utility services provided by the government levying the tax. If the utility bill does not itemize the tax but incorporates it into its user charge rate (therefore being invisible to the customer as a tax), then that so-called "tax" is reported as a utility revenue for Census Bureau purposes.⁽⁶⁾

Therefore the Census Bureau counts the revenue when the utility company pays it, even though the tax may have been financed by the company's customers.

Many regulations, mandates, and other government policies have been described as hidden taxes because of the costs they impose on Americans. However, this paper focuses primarily on tax policy, not a broader definition of hidden taxes.⁽⁷⁾ Table 2 graphically demonstrates the impact of several hidden taxes.

Table 2. Hidden Taxes in the United States(8)

Hidden Tax	Cost (Billions)	Cost/ Person
Corporate Income Tax	$201.2	$760
Fuel Taxes	$32.1	$121
Other Excise Taxes and State "Sin" Taxes	$30.5	$115
Hidden Portion of Payroll Taxes	$216.4	$817
Workers' Compensation Taxes (1993)	$57.3	$216
Unemployment Taxes	$28.6	$108
Import Taxes	$18.7	$71
Hotel Room Taxes	$6.7	$25
Taxes on Flying	$2.4	$9
State Utility Taxes	$8.6	$32
Implicit Telecommunications and Electricity Taxes	$11.0	$42
Severance Taxes	$4.4	$17
Insurance Premium Taxes	$9.1	$34
Licenses (occupation, corporate, utility, alcohol, and amusement)	$11.7	$44
Total	$638.8	$2,413

 

Corporate Income Taxes

In 1996, federal, state, and local governments collected over $201 billion in corporate income taxes, or the equivalent of $760 a person.⁽⁹⁾ Many individuals believe that figure represents $201 billion that the rest of us don't have to pay. Some critics claim that corporations should pay even more in taxes.

On the surface, taxing corporations instead of people may sound appealing. However, it's not that simple, since corporations are people working as a legal entity. In addition, when the government imposes corporate income taxes, the potential responses include:

1. Raising prices
2. Lowering payments to stockholders
3. Reducing employee compensation and capital investment

Under any of the three options, Americans end up paying the tax either through lower wages if they work for a corporation, poorer performance if they own a mutual fund, or higher prices when they buy a product.⁽¹⁰⁾ But this tax burden doesn't show up on any pay slip or price tag.

Hidden corporate taxes impose an even greater burden because they represent double-taxation. When a company earns a profit, it pays taxes on that money. When it pays its stockholders a dividend, that same money is taxed again. This double-taxation discourages much-needed investment. Harvard economist Dale Jorgensen calculates that double-taxation reduces our national wealth by about a trillion dollars.⁽¹¹⁾

Everyone who owns a mutual fund or IRA, or who participates in a 401(k) or typical pension plan, is penalized by this double-taxation. Even relatively low-income Americans increasingly rely on stocks for a portion of their savings. According to the Federal Reserve Bank, from 1989 to 1995 the share of stocks as a percent of total assets doubled for families with incomes under $25,000.⁽¹²⁾

Gas and Other Transportation Taxes

How much does a gallon of gasoline cost? Many Americans might be surprised by the answer, because the price to actually produce and deliver the product is much lower than the amount posted at the pump.

According to the U.S. Department of Transportation, the average price for a gallon of gasoline as of May 1996 was $1.38. However, this statistic is highly misleading: 40.8 cents of the price consisted of gasoline taxes.⁽¹³⁾ In other words, as of 1996, gas taxes inflated the price of gasoline by 42 percent. (With the current price of gasoline at about $1.10 per gallon, gas taxes increase the price of gasoline by nearly 59 percent.)

Unlike sales taxes, gas taxes don't appear anywhere on the receipt after you fill up. Lucky motorists may find the state and federal tax rate in small print somewhere on the gasoline pump. But since the total amount they pay is hidden, most Americans don't recognize the tax burden when they buy their gas, and they certainly have no idea of the annual cost of gas taxes.

As Table 3 shows, gas taxes haven't always been so high. While the pre-tax price of gas fell by 31 cents between 1980 and 1995, this decline coincided with an increase in gas taxes of 26.6 cents, so that the retail price remained virtually unchanged.

Table 3. Retail Price of Regular Grade Gasoline(14)

Year	Service Station Price Excluding Taxes	State & Federal Taxes	Service Station Price Including Taxes
1980	$1.05	13.8¢	$1.19
1985	89.5¢	22.0¢	$1.11
1990	88.0¢	26.9¢	$1.15
1991	81.2¢	32.8¢	$1.14
1992	79.1¢	33.6¢	$1.13
1993	75.4¢	35.4¢	$1.11
1994	72.0¢	39.2¢	$1.11
1995	74.3¢	40.4¢	$1.15
Change	-29.4%	+192.8%	-3.7%

When you buy a gallon of gasoline, the government receives the largest chunk of your money. According to one report, for a dollar's worth of gasoline, 34 cents are accounted for by exploration and production, refining takes up 6 cents, wholesalers get a nickel, and the service station owner gets 12 cents. As Figure 2 shows, taxes take up the rest.

Figure 2. Where Your Gasoline Dollar Goes⁽¹⁵⁾

Stephen Moore of the Cato Institute concludes that over the past 20 years gas taxes have been the fastest-growing federal taxes imposed on middle-income Americans. Moore observes:

Earlier this year [1997] Republicans adopted a sensible policy that required all gas tax dollars to be spent on roads, not other government programs. That well-intentioned policy inadvertently created a whole new set of problems. It turns out that the care and maintenance of the highway system don't require anything like an 18.4 cent gas tax. After all, in the 1950s and 1960s we built the interstate highway system with a maximum federal gasoline tax of just 4 cents a gallon. Maintenance of those roads shouldn't cost 18 cents a gallon.⁽¹⁶⁾

Fuel taxes cost Americans $32.1 billion, or $121 a person. But as Table 4 shows, additional transportation taxes and related revenues totaled $86 billion as of 1994.

Table 4. Transportation Revenues by Mode and Revenue Raising Instrument: FY 1994(17) (Billions)

Highway, total	$60.1	Air, total	$13.1
Federal:		Federal Airport & Airway Trust Fund	$6.0
Highway Trust Fund	$15.4	State airport charges	$.7
State:		Local airport charges	$6.4
Motor fuel taxes	$24.5	Transit, total	$8.9
Motor vehicle license taxes	$11.8	HTF Transit Account	$2.7
Motor vehicle operator license taxes	$1.1	State transit charges	$1.2
Reg & toll highway charges	$3.2	Local transit charges	$5.0
Local:		Water, total	$3.2
Motor fuel taxes	$.7	Federal water receipts	$1.4
Motor vehicle license taxes	$.9	State water transit charges	$.4
Motor vehicle operator license taxes	N.A.	Local water transit charges	$1.4
Reg & toll highway charges	$2.0	Pipeline Safety Fund	N.A.
Parking charges	$1.1	Emergency Preparedness Fund	N.A.

GRAND TOTAL $86.0

"Sin" Taxes

The gas tax is just one example of an excise tax. Unlike retail sales taxes, which are clear to consumers, excise taxes are imposed on producers. As a result, the final cost of excise taxes is often hidden from consumers. These taxes lower consumption of the taxed product and increase consumption of other products. Because they distort people's spending decisions, excise taxes can be a particularly costly way for governments to raise money.

In general, most experts believe that tax policy should be neutral--it should neither favor nor discriminate against specific goods or services. While policymakers often follow this advice, a notable exception to this rule is provided by taxes on items that the government decides are unhealthy, like products containing alcohol and tobacco. These "sin" taxes provide a major source of excise tax revenue. Since consumers of these products often lack the political clout to counter the revenue stream available to taxing authorities, sin taxes have been an especially attractive tool to finance government spending. Some examples of sin taxes follow.

Beer Taxes

Many taxes are raised during wartime but never returned to their original level. For example, the federal government hiked beer taxes to help pay for the Korean War. The taxes were maintained after the war, and then doubled in 1991. According to the consulting firm of DRI/McGraw Hill, 43 percent of the cost of each six-pack comes from taxes, versus a 30 percent tax component for most other consumer goods. Therefore, if not for taxes, a $5.00 six-pack would cost just $2.85. Adam Thierer of the Heritage Foundation observes that beer taxes tend to be regressive, with about two-thirds of the beer sold in America bought by households earning less than $45,000.⁽¹⁸⁾

Figure 3. Total Taxes Hidden in a Bottle of Beer⁽¹⁹⁾

Liquor Taxes

Not surprisingly, taxes on so-called "hard" liquor tend to be even more punitive. Combined local, state, and federal taxes account for close to half (45 percent) of the cost of distilled spirits. Tax revenues from liquor are many times higher than the total profits of distillers. As with beer taxes and other sin taxes, distilled spirits taxes are regressive. According to one study, these taxes are five times higher as a percent of income for lower-income families as for their higher-income counterparts.⁽²⁰⁾

Tobacco Taxes

Tobacco products are portrayed even more negatively than alcoholic beverages, so taxing users of these products is correspondingly popular with government officials. However, like other sin taxes, tobacco taxes are also very regressive. The Joint Economic Committee concludes that at the federal level, two-thirds of cigarette taxes come from smokers who earn less than $40,000 per year. According to the Tax Foundation, the recent 15 cents per pack tax hike left smokers earning less than $15,000 a year with 34 percent of the tax burden.⁽²¹⁾

The current 24-cent federal tax on a pack of cigarettes is scheduled to increase to 34 cents per pack in the year 2000 and 39 cents per pack in 2002, with much higher taxes recently under consideration. State taxes vary from 2.5 cents to nearly a dollar per pack. Cigars are subject to a federal tax of up to 12.75 percent, chewing tobacco is taxed at 12 cents per pound, and pipe tobacco is taxed at 67.5 cents per pound. These taxes are scheduled to increase along with cigarette taxes in the years 2000 and 2002.⁽²²⁾

Appendix 1 shows each state's excise tax rate for gasoline, cigarettes, distilled spirits, wine, and beer.

Other Excise Taxes

The federal government levies several other excise taxes, including:

Vaccination Taxes

The government imposes a 75-cent per dose excise tax on vaccines for DPT (diphtheria, pertussis, tetanus), DT (diphtheria, tetanus), MMR (measles, mumps, or rubella), polio, HIB (haemophilus influenza type B), Hepatitis B, and varicella (chickenpox).⁽²³⁾

Firearms Taxes

The government imposes a 10 percent excise tax on pistols and revolvers, an 11 percent tax on other firearms, and an 11 percent tax on shells and cartridges.

Phone Taxes

A 3 percent excise tax on telephone services cost $4.2 billion and universal service subsidies an additional $944 million in 1996. On top of this $944 million, governments historically have subsidized universal service through regulations that boost phone bills for some users in order to subsidize others. One study put the cost of this hidden tax at $5 billion.⁽²⁴⁾

Table 5. Federal Excise Tax Revenue (Millions)(25)

"General" Revenue
Alcohol	$ 7,220
Tobacco	$ 5,795
Telephone	$ 4,234
Ozone Depleting Chemicals	$ 320
Transportation Fuels	$ 7,468
Other	$ 410
"Trust Fund" Revenue
Highway	$ 24,651
Airport and Airway	$ 2,369
Black Lung Disability	$ 614
Inland Waterway	$ 108
Superfund	$ 313
Oil Spill Liability	$ 34
Aquatic Resources	$ 315
Leaking Underground Storage Tank	$ 48
Vaccine Injury Compensation	$ 115
Total Excise Taxes	$ 54,014

Sen. John McCain (R-AZ) has introduced legislation to repeal the phone excise tax.⁽²⁶⁾ However, as discussed below, much steeper taxes are in the works to finance new telecommunications subsidies. On the positive side, deregulation is leading toward replacement of "implicit" hidden telecommunications regulatory subsidies with "explicit" tax-financed subsidies. Making the subsidy explicit to taxpayers will increase pressure to control taxes. Combined federal excise tax revenue comes to $54 billion, or more than $200 a person.

Examples of How Taxes Are Hidden in the Price of Goods

Americans for Tax Reform (ATR) has calculated several examples of how taxes affect the purchase price of several goods and services. The ATR figures include the impact of all taxes--not just certain hidden taxes--on prices. According to ATR:

• Taxes account for 35 cents of the cost of a $1.14 loaf of bread.
• 18 cents of a 50-cent can of soda go toward taxes.
• 72 percent of the cost of a 750 ml bottle of liquor goes toward taxes.
• Taxes for an $80 hotel room average 43 percent.
• Taxes account for $63.60 of a $159 airline ticket.
• A $153.09 monthly utility bill consists of $39.35 in taxes.
• Over half the cost of a $1.33 gallon of gasoline is due to taxes.⁽²⁷⁾

A 1992 Cato Institute study looked at taxes somewhat differently, calculating how much someone needed to earn to have enough after-tax dollars to purchase several products. The study concluded that a typical worker needed to earn $17,038 to buy a $10,000 car, and $2,556 to purchase a $1,500 computer.⁽²⁸⁾

Telecommunications Taxes

State and federal governments have indirectly taxed some telecommunications users and subsidized others for years. The government first imposed telecommunications taxes to help finance the Spanish-American War. Today, the impact of these taxes can be significant: according to the cellular industry, a combination of fees and mandates forces consumers to pay 20 to 30 percent more than the actual cost of providing cellular service.⁽²⁹⁾

For many years, the cost of telecommunications subsidies was hidden in Americans' phone bills. As part of the move to deregulate the industry, the 1996 Telecommunications Act was supposed to make these costs explicit. However, it also opened the door to a big increase in telecommunications taxes. The Act stated:

Consumers in all regions of the Nation, including low-income consumers and those in rural, insular, and high cost areas, should have access to telecommunications and information services . . . that are reasonably comparable to those services provided in urban areas and that are available at rates that are reasonably comparable to rates charged for similar services in urban areas. . . . Elementary and secondary schools and classrooms, health care providers, and libraries should have access to advanced telecommunications services.⁽³⁰⁾

In other words, the Act suggested that residents in low-cost areas should continue to pay more to subsidize service for Americans who choose to live in high-cost areas, and it authorized additional support for schools, libraries, and rural health care providers.

Subsidizing rural customers is not necessarily good policy. Kent Lassman of Citizens for a Sound Economy explains:

Ted Turner owns a 160,000-acre ranch in Montana. For $8.45 million, Turner recently purchased 44,000 acres in Nebraska to bring his holdings in the Cornhusker State to more than 96,500 acres. With more than 15,000 bison grazing on his land in Montana, Nebraska and New Mexico, Turner-the-Rancher can afford a few of life's luxuries--yet he does not pay the full cost of telephone service.⁽³¹⁾

Even if it makes sense to subsidize high-cost users, financing those subsidies by taxing telecommunications services does not. As Stephen Entin pointed out, "[T]he government provides universal access to food by giving needy people food stamps and welfare checks. This assistance is funded out of general federal revenues, not by an excise tax on groceries or a mandated 'contribution' by food stores to a 'Food Fund.'" ⁽³²⁾

Would Congress Have Imposed These Taxes?

FCC Commissioner Harold Furchgott-Roth estimated that the total cost of federal universal access policies could require a 10 percent tax on interstate services on top of the preexisting 3 percent tax.⁽³³⁾ Many rural states want an even bigger subsidy. For example, Utah Gov. Michael Leavitt complained that federal government efforts to fund 25 percent of universal service costs were inadequate, and provided the following analogy:

The integrated national telecommunications network is directly analogous to the interstate road system. . . . The economic benefits that have been derived from taking a national approach to transportation are obvious. One needs [sic] only look at a country like Russia, which has vast natural resources and productive farmland, to see the consequences of the failure to build a reliable and universally available road system. They simply cannot bring their resources and crops to market in an efficient manner. The decision to impose 75 percent of the cost of maintaining universal service on the individual states is a direct breach of the same principles that led to the development of the interstate road system.⁽³⁴⁾

It seems ironic that anyone could blame Russia's current economic problems on a lack of government spending. If anything, the collapse of the Soviet Union clearly shows the need to limit government interference in the economy, not to increase government intervention.

Bypassing Elected Officials

Commissioner Furchgott-Roth alluded to the implications of taxation imposed by agencies other than Congress: "The May 1997 universal service order promises the Schools and Libraries Corporation, an entity of questionable legal status, $2.25 billion annually. This . . . is an arbitrary target, one that the FCC could equally well, and with equal legal authority, have set at $22.5 million, or $225 million, or $22.5 billion, or $225 billion [emphasis added]." ⁽³⁵⁾

Not everyone was happy about the imposition of taxes by unelected federal officials. Former Budget Director Jim Miller observed:

The authority to tax has passed through so many hands that it is nearly impossible to seek redress within the political process. . . . . Common sense dictates that when government officials command economic resources from taxpayers, those officials should be those we elected to govern. Often this is the reason cited to explain why in our system of government, 'All Bills for raising Revenue shall originate in the House of Representatives.'

National Taxpayers Union President John Berthoud seconded this opinion: "[B]efore one dime is taken, at a minimum, taxpayers should have the ability to address elected officials on the topic, and then later hold them accountable. It violates any and all basic tenets of democratic representation to allow unelected officials to levy taxes on the American public." ⁽³⁶⁾

"Explicit" Costs?

While the 1996 Act was supposed to make taxes and subsidies more explicit, from the government's perspective, providing such clear information also would increase opposition to government subsidies. Therefore it was not particularly surprising when several companies complained that although the FCC wanted them to fund new universal service programs, they were not supposed to inform their customers of the cost.

Randall Coleman of the Cellular Telecommunications Industry Association argued, "They don't want us to call it a tax. But that's exactly what it is." ⁽³⁷⁾ Sprint Corporation commented: "[A]lthough the Commission did not prohibit carriers from passing through their USF (Universal Service Fund) costs to end users, the Commission did bar carriers from labeling any USF cost recovery charge on their bills a 'USF surcharge' [emphasis added]." ⁽³⁸⁾

Who Pays?

The FCC answered questions about the cost of new subsidies to connect schools and libraries to the Internet in the following way:

 Myth: Phone rates will go up for the residential user in order to connect schools and libraries to the Internet.

Fact: Under the Telecommunications Act of 1996, Congress mandated that universal service include for the first time support for schools, libraries, and rural health care providers. Although the discounted services that eligible schools, libraries, and health care providers receive will be paid for by telecommunications providers' contributions to universal service, we anticipate that this new assessment will be offset by other changes resulting from the Act, such as the reductions in access charges that long-distance companies will pay.⁽³⁹⁾

Many Americans might prefer to see the reduced cost of service reflected on their phone bills instead of used to offset new government spending. FCC Chairman Reed Hundt admitted that higher subsidies translate to higher prices: "It's a very small additional subsidy. . . . It will be contributed by communications companies. Will they pass it onto somebody? Yes, they'll pass it on to everyone in America in insignificant ways down to . . . pennies a day. It will be a collective action by all of America." ⁽⁴⁰⁾

Income Tax Withholding

When tax day comes around each year, many Americans are happy to get a check from the federal government, even though they're just getting back their own money--without interest.

Since income tax payments are withheld from their paychecks, the cost of paying taxes is much less visible to them. This principle of tax collection is similar to the advice offered by many financial planners to have money automatically deducted from your paycheck for investments, since you don't miss the money as much that way. As David Brinkley commented:

Congress and the president learned, to their pleasure, what automobile salesmen had learned long before: that installment buyers could be induced to pay more because they looked not at the total debt but only at the monthly payments. And in this case there was, for government, the added psychological advantage that people were paying their taxes with not much resistance because they were paying with money they had never even seen.⁽⁴¹⁾

A Brief History

When the federal government instituted the income tax, technology initially did not allow for withholding from workers' paychecks. Ironically, the Internal Revenue Service itself was a leading opponent of withholding because of its administrative complexity.

In addition, withholding carried political risks. In 1916, Treasury Secretary William G. McAdoo suggested that ". . . it would be very advantageous to . . . do away with the [authorization of] withholding of income tax at the source" in order to "eliminate a great deal of criticism which has been directed against the law." ⁽⁴²⁾ But the adoption of Social Security in the 1930s showed federal officials that automatic withholding was now a more feasible option.⁽⁴³⁾

Government officials saw withholding as a way to help meet the financial burdens imposed by World War II. In 1942, the government adopted a flat 5 percent "Victory Tax" on income above $624. The Victory Tax was collected when income was earned, unlike regular income tax payments, which taxpayers made in a lump sum from money they saved during the prior year.

The combination of Social Security and the Victory Tax set the stage for universal withholding. To sell withholding to the public, the government combined it with an alleged "forgiveness" of one year's income tax liability. Government officials were concerned that adoption of withholding in 1943 would force taxpayers to write a check for their 1942 liability while simultaneously having income withheld for their 1943 liability. Therefore, they forgave a portion of individuals' income tax liability to help sell adoption of withholding beginning in 1943.

Withholding increased the burden on taxpayers in two ways. First, money that previously could have been sitting in bank accounts gaining interest now was preemptively taken by the government. Second, making income tax costs less visible in turn made tax increases much more feasible.

Today, withholding is widely accepted. House Majority Leader Dick Armey (R-TX) initially proposed elimination of withholding in his flat tax plan, describing withholding as a "crucial, deceptive device" that permits the government to "raise taxes to their current level without igniting a rebellion." ⁽⁴⁴⁾ While Rep. Armey later removed this feature from his plan, Rep. Cliff Stearns (R-FL) has introduced stand-alone legislation proposing to eliminate withholding.⁽⁴⁵⁾

Employer Share of Payroll Taxes

According to the government, payroll taxes for Social Security and Medicare are "paid equally by both employees and employers," with each paying 7.65 percent.⁽⁴⁶⁾ While that may be true for accounting purposes, economist Walter Williams explains how it really works:

[Y]ou probably already believe . . . that your employer pays half your Social Security. This lie may be demonstrated by pretending that you're my boss. We agree to a wage of $7.00 an hour. You deduct 50 cents an hour as my Social Security contribution and add 50 cents as the "employer contribution," making your cost to hire me $7.50 an hour. My question is: If it costs you $7.50 to hire me, what is my minimum hourly output for you to keep me on the job and stay in business? If you said $7.50 an hour, go to the head of the class, because you also know who pays all of the Social Security tax. The worker does.⁽⁴⁷⁾

Williams observes that the government maintains the myth that employers pay half of Social Security and Medicare taxes because Americans would "go ape" if they knew the true tax burden these programs impose.

The government uses payroll taxes to help finance Social Security and Medicare spending, including Old Age and Survivors Insurance (OASI), Disability Insurance (DI), and Hospital Insurance (HI, or Medicare Part A). When the government first imposed these taxes during the 1930s, the rate was a combined 2 percent for earnings up to $3,000 per year. Today's combined rate is 15.3 percent: 12.4 percent for OASDI for the first $62,700 of wage income, and 2.9 percent for HI for all labor income.

Payroll taxes have increased dramatically since 1937. According to the Institute for Policy Innovation, over 90 percent of American workers pay more in payroll taxes (including the "employer's share") than they do in income taxes.⁽⁴⁸⁾ Table 6 illustrates the rise in payroll tax rates in recent years. Since 1977, the payroll tax rate has grown by nearly one-third, from 11.7 percent to 15.3 percent--and that doesn't include the big increase in the wage base subject to payroll taxes.

Table 6. Combined Payroll Tax Rates(49)

Year

OASDI Tax

HI Tax Rate

Combined

HI Tax Base

Maximum HI

1977	9.9	1.8	11.7	$16,500	$297
1978	10.1	2.2	12.1	$17,700	$389
1979	10.16	2.1	12.26	$22,900	$481
1980	10.16	2.1	12.26	$25,900	$544
1981	10.7	2.6	13.3	$29,700	$772
1982	10.8	2.6	13.4	$32,400	$842
1983	10.8	2.6	13.4	$35,700	$928
1984	11.4	2.6	14	$37,800	$983
1985	11.4	2.7	14.1	$39,600	$1,069
1986	11.4	2.9	14.3	$42,000	$1,218
1987	11.4	2.9	14.3	$43,800	$1,270
1988	12.12	2.9	15.02	$45,000	$1,305
1989	12.12	2.9	15.02	$48,000	$1,392
1990	12.4	2.9	15.3	$51,300	$1,488
1991	12.4	2.9	15.3	1 $125,000	$3,625
1992	12.4	2.9	15.3	$130,200	$3,776
1993	12.4	2.9	15.3	$135,000	$3,915
1994	12.4	2.9	15.3	2 none	no limit
1995	12.4	2.9	15.3	none	no limit
1996	12.4	2.9	15.3	none	no limit
1997	12.4	2.9	15.3	none	no limit

1 Prior to 1991, the upper limit on taxable earnings was the same as for Social Security. The Omnibus Budget Reconciliation Act of 1990 (OBRA 1990) raised the limit in 1991 to $125,000. Under automatic indexing provisions, the maximum was increased to $130,200 in 1992 and $135,000 in 1993. 2 The Omnibus Budget Reconciliation Act of 1993 eliminated the indexing provision entirely beginning in

The government collected some $472.4 billion in Social Security, Disability, and Medicare payroll taxes in 1996. Deducting the amount paid by self-employed workers, which is not hidden, leaves a rough estimate of just over $432.7 billion in combined employer and employee taxes. The hidden portion of this comes to $ 216.4 billion, or $817 per person.⁽⁵⁰⁾

Unemployment and Workers' Compensation Taxes

Around the same time the government instituted Social Security, it mandated that states set up unemployment insurance programs. Unemployment insurance, along with mandatory workers' compensation insurance for on-the-job injuries, is a hidden tax that lowers employees' wages.

Since unemployment insurance is mandatory, workers who stay employed help finance payments to frequent job-changers. As George Leef observed, "[T]hose workers who seek and hold steady jobs are being compelled to subsidize the unemployment of workers who choose employment which is apt to be sporadic." ⁽⁵¹⁾

Unemployment insurance can also extend the amount of time people stay out of work. According to Harvard University's Martin Feldstein, "For those who are already unemployed, it (unemployment insurance) greatly reduces and often almost eliminates the cost of increasing the period of unemployment." ⁽⁵²⁾

The Impact of Hidden Labor Taxes

A recent Cato Institute study documented the impact that hidden labor taxes have on America's workforce. The report found that while an average full-time manufacturing worker earns about $27,200, it costs employers $31,000 to hire the worker due to workers' compensation, unemployment insurance, and the employer's share of Social Security and Medicare taxes. As the study points out, this money otherwise would have gone to the employee.

Table 7. Cost Per Hour for Civilian Employees, March 1997 (53)

	Cost	Percent of Total
Total compensation	$19.22	100.0
Wages and salaries	13.85	72.0
Total benefits	5.37	28.0
Paid leave (including vacation, holiday, sick leave)	1.27	6.6
Supplemental pay	0.47	2.4
Insurance (including life, health, accident, long-term disability)	1.23	6.4
Retirement and savings	0.75	3.9
Legally required benefits	1.62	8.4
Social Security and Medicare	1.11	5.8
Unemployment insurance (state and federal)	0.14	0.7
Workers' compensation	0.38	2.0
Other benefits	0.03	0.1

After deducting income and payroll taxes from his paycheck, the worker keeps just $22,400. The total "tax wedge" from labor taxes is $8,600, or 28 percent of the amount the employer pays. The amount rises to 36 percent for employees earning $60,000, nearly half of which does not appear on the pay stub.⁽⁵⁴⁾

The average burden imposed by unemployment insurance and workers' compensation taxes is $1,618 per employee.⁽⁵⁵⁾ Appendix 2 shows the burden for each state. Table 7 gives a breakdown of employee compensation costs.

Since mandated benefits raise the cost of hiring workers, they destroy jobs and lower wages. An analysis of federal labor laws, Social Security, and unemployment compensation laws from 1934 to 1940 found that these policies boosted the median unemployment rate to 17.2 percent from 6.7 percent.⁽⁵⁶⁾

Import Taxes

Americans pay $18.7 billion in taxes on imported products, or $71 per person. As Table 8 shows, these taxes hit a broad range of products.

Import taxes also boost the price of U.S.-made products. When interest groups persuade Congress to protect their industry from competition at the expense of the rest of the country, they can charge higher prices than they would be able to maintain in a competitive marketplace.

Table 8. Examples of Import Taxes

Imported Product	Hidden Tax
Babies' dresses, not knitted or crocheted, of cotton	12%
Bicycles	11%
Brooms (other than whiskbrooms), wholly or in part broom corn, valued over 96 cents each	32%
Brussels sprouts, fresh or chilled	12%
Certain infant formulas	18%
Electric blankets	13%
Fishing rods and parts	7%
Flashlights	18%
Frozen blackberries	11%
Girdles and panty-girdles	24%
Hammocks, of cotton	15%
Nonwoven disposable hospital apparel	4%
Nursing nipples and pacifiers, of plastics	3%
Peanut butter	143%
Roses, fresh cut	7%
School supplies, of plastics	5%
Screwdrivers	6%
Table linen of man-made fibers, not knitted or crocheted	12%
Telephone sets	8%

Travel Taxes

Hotel and Car Rental Taxes

While the phrase "no taxation without representation" strikes a chord with many Americans, it's often politically attractive to impose a tax on those who are unable to vote. This process, called "exporting" taxes, helps explain the popularity of hotel and car-rental taxes in many communities. Politicians can tax out-of-town voters to finance local projects, often at a stiff price. The specter of room taxes ranging up to 17 percent and additional car rental taxes can be an unwelcome surprise for American travelers.

One bed-and-breakfast owner described the problem: "Here in Massachusetts we have a 5.7% room occupancy tax. In addition, towns are permitted to add their own local tax, so in the same area, the tax may be different depending on the specific town. Many people don't know this and are perturbed to find out how much more they are paying for a $125 room." ⁽⁵⁷⁾ Another owner observed: "Lodging establishments tend to despise the room tax, the main reason being that the local governments spend the funds on things other than promoting tourism and lodging." ⁽⁵⁸⁾

Nationwide, bed taxes average 11.7 percent, or $9.19 per night. Tax rates are as high as 17 percent in Houston, and average more than $24 per night in New York City. As of 1997, bed taxes cost $6.7 billion, or $25 a person.⁽⁵⁹⁾ Car rental taxes average 8.24 percent.⁽⁶⁰⁾

Hotel and car rental taxes are becoming an especially popular tool to finance new sports stadiums. According to one report, at least 18 cities already have used these taxes to fund stadiums, with as many as 20 more close behind.⁽⁶¹⁾ One analyst called travel taxes the "hottest trend" in stadium financing, adding that ". . . these types of financing are sailing through local city councils and municipalities." ⁽⁶²⁾

Most travelers who rent a car or stay at a hotel don't benefit from the stadiums their taxes help finance. According to the Travel Industry Association, only about 5 percent of travelers include attendance at a sporting event in their activities.⁽⁶³⁾

Airline Ticket Taxes

Airline ticket taxes are currently 9 percent of the fare plus $1 per domestic flight segment. The tax rate is scheduled to change as follows:

Table 9. Changes in Ticket Taxes

Current	9 percent of fare plus $1/domestic flight segment
October 1, 1998	8 percent plus $2/domestic segment
October 1, 1999	7.5 percent plus $2.25/domestic segment
January 1, 2000	7.5 percent plus $2.50/domestic segment
January 1, 2001	7.5 percent plus $2.75/domestic segment
January 1, 2002	7.5 percent plus $3.00/domestic segment (the $3.00 is indexed for inflation thereafter)

In addition, the tax for international departures recently was doubled to $12 per passenger and extended to apply to return flights.⁽⁶⁴⁾ The government imposes many other hidden costs on air transportation, including a 4.3 cents-per-gallon tax on airline fuel that costs $550 million, a $3.00 passenger facility charge that costs $1.2 billion, and a 6.25 percent air freight tax that costs $361 million.⁽⁶⁵⁾

The burden that ticket taxes impose on travelers was highlighted when they temporarily expired during budget fights between President Clinton and Congress. When the tax was reinstated in 1996, airlines passed the cost along to consumers. As one story reported at the time, "Major U.S. airlines have raised domestic fares 10 percent, anticipating a 10 percent excise tax that President Clinton is expected to sign into law today." ⁽⁶⁶⁾

Table 10 shows the impact of hidden vacation taxes for a family headed from Chicago to Orlando.

Table 10. The Hidden Cost of a Family Disney World Vacation(67)

Item	Cost (est.)	Tax Rate	Tax
4 roundtrip airline tickets, Chicago to Orlando, 2 flight segments each way	$840 ($210 each)	Ticket price includes $17.34 tax; add $1 per flight segment per person	$85.36
5 nights lodging	$403	12.5 percent	$50.38
5 days rental car	$163.59	6 percent	$9.82
Total Hidden Tax			$145.55

 Southwest Airlines Chairman Herbert D. Kelleher recently summed up the effects of hidden taxes on his industry when he wrote: "The Customer is only truly aware of the total fare. If that is perceived as being too high, the airline receives the blame and suffers the economic consequences if the Customer chooses not to travel or to travel by other means [emphasis in original]." ⁽⁶⁸⁾

Rep. Neil Abercrombie (D-HI) has introduced legislation to repeal recent airline ticket-tax increases.⁽⁶⁹⁾

Bracket Creep

One side effect of inflation is that in a progressive tax system, taxpayers will be bumped into higher tax brackets even if their real income is unchanged. In the late 1970s, high inflation rates caused middle-class taxpayers to face marginal tax rates far higher than Congress initially intended. To prevent further bracket creep, in 1981 Congress voted to index federal tax rates and exemptions for inflation.⁽⁷⁰⁾

Unfortunately for most taxpayers, few states have taken similar precautions to protect taxpayers from bracket creep. Only eight of the states that impose income taxes automatically adjust their brackets, exemptions, and deductions for inflation.⁽⁷¹⁾

This hidden "inflation tax" falls hardest on lower-income taxpayers, since inflation sends them into higher tax brackets. Those already paying the maximum rates are unaffected by bracket creep.

While the impact of bracket creep is different for each state, Ohio provides an example of how this hidden tax works. According to a Buckeye Institute study, the tax rate for a married couple each earning $6 an hour was ten times higher in 1997 than it would have been if Ohio's tax code had made allowances for inflation when it was adopted in 1972.⁽⁷²⁾

Severance Taxes

Most states impose a variety of severance taxes on natural resources when producers "sever" them from the Earth. These taxes apply to a wide array of products, ranging from oil and gas to turpentine and timber. While the taxes are visible to the initial producers, they are hidden from consumers who buy the finished goods that are made from natural resources. State severance taxes cost Americans $4.4 billion in 1996, or $17 a person.

Utility Taxes

Public utilities provided states with $8.6 billion in tax revenue in 1996, or $32 per person. These taxes often are hidden from consumers. According to the Edison Electric Institute (EEI), one state imposes taxes that add 25 percent to electricity bills, but then prohibits a separate line-item on bills that would inform customers of their tax burden.⁽⁷³⁾ EEI also calculates that utilities pay a total of $25.8 billion in taxes of all kinds.

Utility regulations also force some electricity users to pay higher prices to subsidize other users. The U.S. Department of Energy estimates that these subsidies cost about $6 billion.⁽⁷⁴⁾ As with telecommunications deregulation, energy deregulation should provide the opportunity to make these taxes more explicit and therefore possibly lower.

Insurance Premium Taxes

State taxes on insurance premiums cost Americans $9.1 billion in 1996. These taxes average $34 per person, a cost that often is hidden in the price of insurance.

Licensing

Most states impose a broad range of licensing requirements on different segments of the economy. One of the more prevalent examples is the use of occupational licensing. The rationale for these licenses is usually to protect consumers' health and safety, but in reality they are often just hidden taxes that restrict competition for the regulated profession.

As Nobel prize-winning economist Milton Friedman and his wife Rose commented: "The justification [for licensure] is always the same: to protect the consumer. However, the [real] reason is demonstrated by observing who lobbies at the state legislatures for imposition or strengthening of licensure. The lobbyists are invariably representatives of the occupation in question rather than its customers." ⁽⁷⁵⁾

An example of licensing in practice is provided by the case of Monique Landers, a high school student who opened a hair-braiding business and won an award from the National Foundation for Teaching Entrepreneurship. But since she didn't have a cosmetology license, the state shut her down. According to Landers, "The [state Cosmetology] Board won't let me earn my own money, and won't let kids like me learn how to take care of ourselves. I think owning your own business is a way of being free. If more kids knew they could grow up to be their own boss they would be more responsible and cause less trouble." ⁽⁷⁶⁾

In some states, Mary Kay representatives and their counterparts from other companies can't even help their customers apply makeup unless they first get a cosmetology license.

These hidden taxes drive up taxes for consumers, but they also limit opportunities to enter many professions. Several studies have concluded that licensing is especially detrimental to individuals from minority groups. According to Dan Hogan, "The reliance of licensing laws on academic credentials--which are less frequently possessed by the poor, minorities, women, and the elderly--has a deeply pernicious and discriminating effect, especially when evidence does not exist that these credentials are positively correlated with competence." ⁽⁷⁷⁾ Randall Collins reached a similar conclusion: "Since the evidence strongly shows that credentials do not provide work skills that cannot be acquired on the job, and that access to credentials is inherently biased toward particular groups, the case for discrimination is easy to make." ⁽⁷⁸⁾

Total state licensing, including occupational and corporate licensing, cost $11.7 billion in 1996, the equivalent of $44 a person.

Electronic Commerce

Use of the Internet is booming, and along with it online sales of goods and services. According to the U.S. Commerce Department:

• Fewer than 40 million people around the world were connected to the Internet during 1996. By the end of 1997, more than 100 million people were using the Internet.
• As of December 1996, about 627,000 Internet domain names had been registered. By the end of 1997, the number of domain names had more than doubled to reach 1.5 million.
• Traffic on the Internet has been doubling every 100 days.⁽⁷⁹⁾

This development has not escaped the eye of state taxing authorities. As the Chairman of California's Tax Board noted:

Instead of applying traditional legal concepts to the taxation of electronic commerce, state tax bureaucrats are becoming legal contortionists in an attempt to tax Internet sales. The resulting confusion among prospective Internet merchants and service providers could substantially impede the development of electronic commerce.⁽⁸⁰⁾

Some states tax access to Internet service providers like America Online, an especially questionable practice since the providers may be located in another state.

Table 11. Taxation of Internet Access(81)

	State Tax Rate	Local Tax Rate
Connecticut	6%	--
District of Columbia	City--5.75%	--
Iowa	5%	Up to 1%
New Mexico	5%	Up to 1.25%
North Dakota	5%	Up to 1%
Ohio	5%	Up to 2%
South Carolina	5%	Up to 1%
South Dakota	4%	Up to 2%
Tennessee	6%	Up to 2.75%
Texas	6.25%	Up to 2%
Wisconsin	5%	Up to 1%

A recent Commerce Department report gave several principles for Internet taxation: "The application of existing taxation on commerce conducted over the Internet should be consistent with the established principles of international taxation, should be neutral with respect to other forms of commerce, should avoid inconsistent national tax jurisdictions and double taxation, and should be simple to administer and easy to understand." ⁽⁸²⁾

"Internet Tax Freedom" legislation is moving through Congress to combat tax policies that could interrupt the growth of electronic commerce. Among other things, the proposals would guarantee tax-free Internet service and prohibit discrimination against commerce transacted over the Internet.⁽⁸³⁾

Phase-Outs of Deductions

While the above hidden taxes have been described in dollar terms, there are many policies buried in the Tax Code that serve as hidden taxes by forcing people to pay higher-than-normal marginal tax rates--the rate paid on an additional dollar of income. The U.S. Joint Committee on Taxation (JCT) recently reported on 22 provisions that can make a taxpayer's marginal tax rate differ from the statutory rates of 15, 28, 31, 36, and 39.6 percent.

The JCT concluded that two taxpayers with similar incomes can face very different marginal tax rates. For example, older Americans can face marginal tax rates of greater than 90 percent. All told, the JCT found that 33.2 million taxpayers face effective marginal tax rates that differ from the statutory rate.⁽⁸⁴⁾

The Social Security earnings test provides an example of how effective marginal tax rates can differ from statutory marginal tax rates. Up to half of Social Security retirement benefits are taxable for taxpayers with modified adjusted gross income between $25,000 and $34,000 ($32,000-$44,000 if married filing jointly). In other words, once reaching $25,000, an additional dollar of income adds 50 cents of Social Security benefits to taxable income. This provision makes the effective tax rate 50 percent higher than the statutory rate. Appendix 3 gives a complete list of the measures identified by the JCT that alter marginal tax rates.

William Gale of the Brookings Institution concluded that some of these provisions should be repealed:

The personal income tax contains several "take-back" provisions. These taxes are imposed even when a taxpayer is complying perfectly with the law but ends up with what the law has deemed "too many" deductions or "too little" taxable income. These items represent hidden taxes, they distort incentives, they raise little revenue, and, most crucially, they create unnecessary complexity. They should simply be repealed.⁽⁸⁵⁾

Gale identified four features in particular for possible repeal: phaseouts of personal exemptions, limitations on itemized deductions, taxes on excess pension accumulations and payouts, and the individual alternative minimum tax (AMT).

To simplify these numerous and complex phaseouts, the American Institute of Certified Public Accountants (AICPA) has proposed combining many of them into just three schedules.⁽⁸⁶⁾

Empowering Voters with Information

Hidden taxes cost the average American at least $638.8 billion--much more if the cost of income-tax withholding is included. When taxes are not visible, Americans are unable to evaluate whether they're getting their money's worth from the government. As a result, hidden taxes help to boost the size of government.

Commenting on hidden telecommunications taxes, American Enterprise Institute fellow James Glassman put his finger on the problem: "The idea here is an old one: People can't rebel if they're kept in the dark." ⁽⁸⁷⁾

 In addition to increasing the size of government, hidden taxes are an especially harmful way to raise money. Hidden taxes distort the prices that Americans face, causing them to over-consume some products and under-consume others. As a result, hidden taxes inflict more economic damage than broad-based, visible taxes.

There is some good news. While hidden taxes are significant in the United States, they could be even higher. For example, America is one of the few countries without a value-added tax (VAT), a type of hidden sales tax. In addition, the move to deregulate the telecommunication and utility industries will help make taxes for those services much clearer to consumers.

And even though governments have an incentive to hide the cost of taxes, there are opportunities to make taxes more visible even without government action. Many utility companies now include the cost of taxes as a line item on their monthly billing statements. More companies could take similar steps to itemize the cost of taxes--gas stations, for example, could more prominently display the cost of taxes or even tell consumers their tax bill every time they fill up.⁽⁸⁸⁾

On the payroll side, the Mackinac Center for Public Policy has developed a "Right to Know Payroll Form" that employers can distribute with their paychecks. The form shows the hidden cost of policies including the "employer's share" of payroll taxes and the cost of mandated workers' compensation and unemployment insurance.⁽⁸⁹⁾ As Joe Lehman from the Mackinac Center commented, "The Right to Know Payroll Form isn't anti-government or pro-government. It's just giving people information. Still, it's perfectly possible that a worker can look at these numbers, see what government costs him, and conclude that he's getting a good deal. This is all just information. It doesn't tell you what conclusions to draw." ⁽⁹⁰⁾

Communities are much stronger when they consist of a well-informed citizenry. Working to bring more hidden taxes into the open would give Americans the information they need to make wise choices about the role of government in the United States.

About the Author

Bryan Riley is a National Taxpayers Union Foundation adjunct scholar.

 

Appendix 1: 1997 State Excise Tax Rates

	Gas Tax (Cents per Gallon)	Cigarette Tax (Cents per Pack)	Spirits Tax (Dollars per Gallon)	Table Wine Tax (Dollars per Gallon)	Beer Tax (Dollars per Gallon)
Alabama	16	16.5	56% (b)	.05/1.7 (c)	0.53
Alaska	8	29	5.6	0.85	0.35
Arizona	18	58	3	0.84	0.16
Arkansas	18.5	31.5	2.5	0.75	0.2
California	18	37	3.3	0.2	0.2
Colorado	22	20	2.28	.35/.32 (c) (d)	0.08
Connecticut	36	50	4.5	0.6	0.194
Delaware	23	24	5.46	0.97	0.156
District of Columbia	20	65	1.5	0.3	0.09
Florida	5	33.9	6.5	2.25	0.48
Georgia	7.5	12	3.79	1.51	0.32
Hawaii	16	80	5.87	1.34	0.91
Idaho	25	28	N.A. (b)	0.45	0.15
Illinois	19	44	2	0.23	0.07
Indiana	15	31	2.68	0.47	0.115
Iowa	20	36	N.A. (b)	1.75	0.19
Kansas	18	24	2.5	0.3	0.18
Kentucky	15	3	1.92	0.5	0.08
Louisiana	20	20	2.5	0.11	0.32
Maine	19	74	N.A. (b)	0.6	0.35
Maryland	23.5	36	1.5	0.4	0.09
Massachusetts	21	76	4.05	0.55	0.106
Michigan	19	75	13.85% (b)	0.51	0.2
Minnesota	20	48	5.3	0.3	0.077
Mississippi	18	18	2.5 (b)	0.35	0.4268
Missouri	15	17	2	0.36	0.06
Montana	27	18	26% (b)	1.02	0.139
Nebraska	25.3 (a)	34	3	0.75	0.23
Nevada	24	35	2.05	0.4	0.09
New Hampshire	18	37	N.A. (b)	0.3	0.3
New Jersey	10.5	40	4.4	0.7	0.12
New Mexico	17	21	6.05	1.7	0.41
New York	8	56	6.43	0.1893	0.16
North Carolina	22.3 (a)	5	28% (b)	0.79	(f)
North Dakota	20	44	4.05	0.5	0.16
Ohio	22	24	2.25 (b)	0.32	0.18
Oklahoma	17	23	5.56	0.72	0.4
Oregon	24	68	N.A. (b)	0.67	0.084
Pennsylvania	12	31	18% (b)	(e)	0.08
Rhode Island	28	61	3.75	0.6	0.097
South Carolina	16	7	2.72 (g)	1.28 (g)	.77 (g)
South Dakota	21	33	3.93	0.93	0.27
Tennessee	21	13	4	1.1	0.125
Texas	20	41	2.4	0.204	0.198
Utah	24.5	51.5	13% (b)	13% (b)	0.355
Vermont	19	44	25% (b)	0.55	0.265
Virginia	17.5	2.5	20% (b)	1.51	0.256
Washington	23	82.5	17.6% (b)	0.87	0.154 (h)
West Virginia	20.5	17	5% (b)	1	0.177
Wisconsin	24.8 (a)	44	3.25	0.25	0.065
Wyoming	9	12	N.A. (b)	(b)	0.02

Source: Tax Foundation, Facts and Figures on Government Finance.

(a) Indexed for inflation. Nebraska's indexed rate is revised quarterly. North Carolina's indexed rate is revised every six months.
Wisconsin's indexed rate is revised every April 1.

(b) Control states. Rates represent tax over and above state store markup.

(c) Rates represent native wine/non-native wine.

(d) Effective July 31, 1997, the annual surcharge for native wine will use an annual graduated rate: 5 cents per liter for the first 9,000 liters,
3 cents per liter for the next 36,000 liters, and 1 cent per liter for all additional amounts.

(e) 0.5 cents per unit of proof per wine gallon.

(f) .48387 per gallon in barrels holding at least 7.75 gallons. .53376 per gallon in barrels holding less than 7.75 gallons.

(g) 9% surtax.

(h) Plus $4.78 per barrel beginning July 1, 1997.

Appendix 2:
Hidden Employment Taxes for an Average Manufacturing Wage Worker

	State Unemployment Insurance Tax Burden	Workers' Compensation Contribution	Combined Burden
Alabama	$72	$1,485	$1,557
Alaska	$532	$1,153	$1,685
Arizona	$119	$1,047	$1,166
Arkansas	$180	$1,017	$1,197
California	$266	$1,311	$1,577
Colorado	$120	$1,496	$1,616
Connecticut	$480	$1,507	$1,987
Delaware	$221	$1,303	$1,524
District of Columbia	$279	N.A.	N.A.
Florida	$112	$1,716	$1,828
Georgia	$111	$1,439	$1,550
Hawaii	$520	$2,470	$2,990
Idaho	$378	$971	$1,349
Illinois	$243	$1,292	$1,535
Indiana	$91	$685	$776
Iowa	$152	$868	$1,020
Kansas	$72	$1,371	$1,443
Kentucky	$160	$1,534	$1,694
Louisiana	$131	$2,154	$2,285
Maine	$259	$2,239	$2,498
Maryland	$204	$830	$1,034
Massachusetts	$400	$1,567	$1,967
Michigan	$409	$1,632	$2,041
Minnesota	$212	$1,248	$1,460
Mississippi	$98	$1,159	$1,257
Missouri	$160	$1,450	$1,610
Montana	$192	$1,934	$2,126
Nebraska	$56	$1,055	$1,111
Nevada	$258	N.A.	$258
New Hampshire	$80	$1,692	$1,772
New Jersey	$465	$1,227	$1,692
New Mexico	$199	$1,847	$2,046
New York	$308	$1,923	$2,231
North Carolina	$36	$982	$1,018
North Dakota	$128	N.A.	N.A.
Ohio	$207	N.A.	N.A.
Oklahoma	$100	$2,002	$2,102
Oregon	$420	$968	$1,388
Pennsylvania	$336	$1,640	$1,976
Rhode Island	$651	$2,258	$2,909
South Carolina	$140	$783	$923
South Dakota	$35	$1,224	$1,259
Tennessee	$126	$1,221	$1,347
Texas	$135	$1,716	$1,851
Utah	$142	$930	$1,072
Vermont	$208	$1,436	$1,644
Virginia	$96	$612	$708
Washington	$426	N.A.	N.A.
West Virginia	$240	N.A.	N.A.
Wisconsin	$210	$982	$1,192
Wyoming	$183	N.A.	N.A.
U.S. Average	$223	$1,395	$1,618

Source: Dean Stansel, "The Hidden Burden of Taxation: How the Government Reduces Take-Home Pay," Cato Institute Policy Analysis No. 302, April 15, 1998.

Appendix 3:
Policies That Alter Marginal Tax Rates for Individuals

Provision

Tax Rate

Applicable AGI Range

Taxpayers Affected (Millions)

Phaseout of exclusion of Social Security benefits	1.5 times the statutory rate for first tier	Single: $25,000-various 1	5
		Joint: $32,000-various 1
	1.85 times the statutory rate for second tier	Single: $34,000-various 1
		Joint: $44,000-various 1
"Pease" limitation on itemized deductions	1.03 times the statutory rate	$124,500-various	4.5
7.5-percent floor on medical deduction	1.075 times the statutory rate	Any taxpayer itemizing medical deductions	4.5
2-percent floor on miscellaneous deductions	1.02 times the statutory rate	Any taxpayer itemizing miscellaneous deductions	8.8
10-percent floor on casualty loss	1.10 times the statutory rate	Any taxpayer itemizing deductions for casualty loss	0.2
Phaseout of personal exemption	The statutory rate multiplied by 1.0 plus 0.0216 for each exemption	Single: $124,500-$247,000	1.4
		Head/househ.: $155,650-$278,150
		Joint: $186,800-$309,300
Phase-in of earned income credit	No children: statutory rate minus 7.65 percentage points	$0-$4,460 2	4.4
	One child: statutory rate minus 43 percentage points	$0-$6,690 2
	Two children: statutory rate minus 40 percentage points	$0-$9,390 2
Phaseout of earned income credit	No children: statutory rate plus 7.65 percentage points	$5,570-$10,030 2, 3	11.7
	One child: statutory rate plus 15.98 percentage points	$12,260-$26,473 2, 3
	Two children: statutory rate plus 21.06 percentage points	$12,260-$30,095 2, 3
Phaseout of child credits	Statutory rate plus 5 percentage points	Single: $75,000-various 3	0.6
		Joint: $110,000 3
Partial phaseout of dependent care credit	Statutory tax rate plus 2.4 percentage points (generally 17.4 percent)	$10,000-$28,001	1.6
Phaseout of eligibility for deductible IRA	Between 1.0 and 1.2 times statutory rate 4	Single: $30,000-$40,000	1.5
		Joint: $50,000-$60,000
Phaseout of eligibility for Roth IRA	Single: between 1.0 and 1.133 times the statutory rate 4	Single: $95,000-$110,000	Not available
	Joint: between 1.0 and 1.2 times the statutory rate 4	Joint: $150,000-$160,000
Phaseout of eligibility for education IRA	Greater than statutory rate by a percentage determined by the 5 percent or 3.3 percent phaseout rate and the interest rate	Single: $95,000-$110,000	Not available
		Joint: $150,000-$160,000
Phaseout of HOPE credit	Single: statutory rate plus 15 percentage points for each $1,500 in credits	Single: $40,000-$50,000 3	1.2 (includes lifetime learning credit)
	Joint: statutory rate plus 7.5 percentage points for each $1,500 in credits	Joint: $80,000-$100,000 3
Phaseout of Lifetime learning credit	Single: statutory rate plus 15 percentage points for each $1,500 in credits	Single: $40,000-$50,000 3	Included in estimate of HOPE credit
	Joint: statutory rate plus 7.5 percentage points for each $1,500 in credits	Joint: $80,000-$100,000 3
Phaseout of deductibility of interest on qualified student loans	1.167 times statutory rate (for maximum deduction available in 2001)	Single: $40,000-$55,000 3 Joint: $60,000-$75,000 3	0.3

Phaseout of exclusion of interest from education savings bonds	Single: (1 + exclusion amount/$15,000) times statutory rate	Single: $52,250-$67,250 3	Not available
	Married: (1 + exclusion amount/$30,000) times statutory rate	Head/househ.: $52,250-$67,250 3
		Married: $78,350-$108,350 3
Phaseout of credit for elderly and disabled	Statutory rate plus 7.5 percentage points	Single: $7,500-maximum of $17,500	0.2
		Joint: $10,000-maximum of $20,000

Phaseout of adoption credit and exclusion

Credit: credit amount/$40,000 plus statutory rate

$75,000-$115,000 3

Not available

Exclusion: (1+ exclusion amount/ $40,000) times statutory rate

Phaseout of first-time homebuyer credit for D.C.	Statutory rate plus 25 percentage points	Single: $70,000-$90,000 3	Not available
		Joint: $110,000-$130,000 3
Phaseout of rental real estate losses under passive loss rules	1.5 times statutory rate 5	$100,000-$150,000	Not available
Phaseout of rehab tax credit under passive loss rules	1.5 times statutory rate	$200,000-$250,000	Not available
Income phase-in of recapture of subsidy of qualified mortgage bonds	Statutory rate plus percentage pointsequal to the taxpayer's recapture amount divided by 5,000	Defined relative to area median income	Not available

Source: Joint Committee on Taxation.

¹ Applicable range defined by reference to provisional income and modified AGI is used in lieu of AGI.

² Assumes all income is earned income.

³ Income range measured by reference to modified AGI.

⁴ Phaseout affects future year tax liability. Present value of effective marginal tax rate depends on length of time the account is maintained and the interest rate.

⁵ Stated effective rate overstates lifetime effect as provision allows suspended losses in future years.

Endnotes

2. Not including withholding of income and payroll taxes from paychecks.

3. Personal consumption spending from Bureau of Economic Analysis National Income and Product
Accounts, http://www.bea.doc.gov/bea/dn/pitbl.htm; state taxes from Bureau of the Census, http://www.census.gov/govs/statetax/96tax.txt; federal taxes from Office of Management and Budget, Historical Tables, Budget of the United State Government, Fiscal Year 1999; local taxes estimated
from 1994 Census data based on the ratio of state to local government revenue, http:// www.census.gov/govs/estimate/94stlus.txt.

4. For example, states without an income tax tend to have a lower tax burden than states that maintain an income tax on top of other taxes, and countries that impose value-added taxes in addition to income taxes tend to have a higher tax burden than those that don't. See Richard Vedder, "State and Local Taxation and Economic Growth," http://www.senate.gov/~jec/sta&loc.html.

5. Calculated from Census Bureau and Office of Management and Budget data.

6. U.S. Bureau of the Census, "Governments Finance and Employment Classification Manual," http:// www.census.gov/govs/manual/ch7.txt.

7. According to Americans for Tax Reform, Americans must work more than half the year on average
to finance the total cost of government, including regulatory, paperwork, and other costs. See http:// www.atr.org/.

8. 1996 data except for 1993 Workers' Compensation from U.S. Bureau of the Census 1997 Statistical Abstract of the United States.

9. Author's calculation from Office of Management and Budget, Historical Tables, Budget of the United State Government, Fiscal Year 1999, and population data from the U.S. Bureau of the Census.

10. For a more detailed exploration of this issue, see "The Incidence of the Corporate Income Tax,"
Congressional Budget Office, March 1996.

11. In Daniel Mitchell, The Flat Tax: Freedom, Fairness, Jobs, and Growth, The Heritage Foundation, 1996, p. 13.

12. Arthur B. McKinnickell, Martha Starr-McCluer, and Annika E. Sunden, "Family Finances in the U.S.: Recent Evidence from the Survey of Consumer Finances," Federal Reserve Bulletin, January 1997, p. 11.

13. U.S. Department of Transportation, Bureau of Transportation Statistics, Transportation Studies Annual Re-port, 1997: Mobility and Access, pp. 95-79, http://www.bts.gov/programs/transtu/tsar/tsar97/ tsar97pt.html.

14. U.S. Department of Transportation, Bureau of Transportation Statistics, National Transportation
Statistics 1997, Table 2-8, http://www.bts.gov/btsprod/nts/tbl2x8.html. (Numbers may not add exactly due to rounding.)

15. Ed Brown, "Where Your Gas Money Goes," Fortune, April 27, 1998.

16. Stephen Moore, "Give Motorists a Tax Break," Cato Institute Commentary, December 2, 1997.

17. U.S. Department of Transportation, Bureau of Transportation Statistics, Federal, State, and Local Transportation Financial Statistics: Fiscal Years 1982-94, BTS97-E-02, p. 34 (totals may not exactly add due to rounding).

18. Adam Thierer, "Heady With the Power to Tax Beer," Washington Times, September 15, 1996.

19. "The Tax Burden on 80 Million Beer Drinkers," DRI/McGraw-Hill Study, June 1996. Graphic inspired by Coors Brewing Company.

20. "No More Increases in the Federal Excise Tax on Distilled Spirits," Distilled Spirits Council of the United States Fact Sheet, http://www.discus.health.org/nomorfet.htm.

21. "Soak the Poor?" Investor's Business Daily, April 15, 1998.

22. Joint Committee on Taxation, "Description of Present Law and Proposals Relating to Tobacco Tax and Trust Fund and Other Provisions," statement before the U.S. Senate Committee on Finance, May 14, 1998.

23. Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 1999.

24. "What is the Price of Universal Service?: Impact of Deaveraging Nationwide Urban/Rural Rates,"
Telecommunications Industries Analysis Project, Cambridge, Mass., 1993, cited in Wayne Leighton, "What to Do About Universal Service Subsidies: Support for High-Cost Areas," Citizens for a Sound Economy Issue Analysis Number 39, September 30, 1996.

25. Office of Management and Budget, Historical Tables, Budget of the United States Government, Fiscal Year 1999.

26. S. 1909, introduced April 2, 1998.

27. "Taxes, Taxes, and More Taxes," Washington Times editorial, August 25, 1996; see also www.atr.org.

28. George Nastas and Stephen Moore, "A Consumer's Guide to Taxes: How Much Do You Really Pay in Taxes?," Cato Institute Briefing Paper No. 18, April 15, 1992.

29. News release, "Cellular Telecommunications Industry Association (CTIA) Hails Introduction [of] House & Senate Legislation to Repeal the 3% Federal Excise 'Tax on Talking,'" April 1, 1998.

30. Telecommunications Act of 1996, section 254.

31. Kent Lassman, "Somebody is on the Take: Universal Service at Home on the Range," Washington Times, February 16, 1998.

32. Stephen J. Entin, Institute for Research on the Economics of Taxation, "Hidden Phone Tax a Bad Way to Pay for Internet Access," IRET Congressional Advisory, December 30, 1997, p. 2.

33. The Honorable Harold Furchgott-Roth, "FCC Report to Congress on Universal Service," FCC 98-67, April 10, 1998, p. 138.

34. Michael O. Leavitt, Letter to FCC Re: CC Docket 96-45, January 22, 1998.

35. In "FCC Report to Congress on Universal Service," p. 140.

36. Statements of The Honorable James C. Miller III, Counselor, Citizens for a Sound Economy, and John E. Berthoud, Ph.D., President of the National Taxpayers Union, before the U.S. House of Representatives Committee on the Judiciary, Subcommittee on Commercial and Administrative Law, February 26, 1998.

37. In James K. Glassman, "A New Tax for the New Year," Washington Post, December 2, 1997.

38. "Comments of Sprint Corporation before the FCC," CC Docket 96-45, January 28, 1998, p. 2.

39."The FCC's Universal Service and Access Reform Decisions," December 1997, http://www.fcc.gov/ccb/universal_service/fcc97157/ factsheet.txt.

40. FCC Chairman Reed Hundt, "Notable and Quotable," Wall St. Journal, June 23, 1997, p. 18.

41. In Charlotte Twight, "Evolution of Federal Income Tax Withholding: The Machinery of Institutional Change," Cato Journal, Vol. 14 No. 3.

42. Cited in Charlotte Twight.

43. See Dennis J. Ventry, Jr., and Joseph J. Thorndike, "The Plan that Slogans Built: Current Collection, Withholding, and Tax Forgiveness Under the Revenue Act of 1943," The Tax History Project at Tax Analysts, http://www.taxhistory.org/ Studies%20in%20Tax%20History/studies2.htm.

44. Cited in Charlotte Twight.

45. H.R. 340, introduced January 7, 1997.

46. U.S. House of Representatives, Committee on Ways and Means, 1996 Green Book, November 4, 1996.

47. Walter Williams, "Medical Benefit Fact and Fiction," Washington Times, Nov. 27, 1989, p. F3.

48. Gary and Aldona Robbins, "Tax Deduction for Payroll Taxes: An Analysis of the Ashcroft Proposal,"
IPI Quick Study, 1997, p. 1.

49. U.S. House of Representatives, Committee on Ways and Means, 1996 Green Book, November 4, 1996.

50. Estimate based on payroll tax revenue from Budget of the United States and employment data from the U.S. Small Business Administration.

51. George C. Leef, "Time to Rethink Unemployment Insurance," Mackinac Center for Public Policy
Research Viewpoint on Public Issues, December 7, 1992.

52. Martin Feldstein, "Unemployment Compensation: Adverse Incentives and Distributional Anomalies," National Tax Journal, June 1974, p. 231, cited in George Leef.

53. Bureau of Labor Statistics, http:// stats.bls.gov/news.release/ecec.t01.htm.

54. Source: Dean Stansel (Cato Institute), "Concealed Pay Bites," Washington Times, April 14, 1998.

55. Dean Stansel, "The Hidden Burden of Taxation: How the Government Reduces Take-Home Pay," Cato Institute Policy Analysis No. 302, April 15, 1998.

56. Richard Vedder and Lowell Gallaway, Out of Work: Unemployment and Government in 20th Century America (Oakland, CA: Independent Institute, 1992).

57. Erni Johnson, December 16, 1997, http://www.innsite.com/innkeeping/archives/9712/0035.html.

58. Bob Weinman, December 15, 1997, http://www.innsite.com/innkeeping/archives/9712/0019.html.

59.American Hotel Foundation, Impact of Tax Increases in the Lodging Industry, 1998, p. 3.

60. Travel Industry Association of America News Release, "17 Cities Sock it to Travelers to Pay for
Stadiums," December 4, 1996.

61. Susanna P. Barton and Sougata Mukherjee, "Tourism Taxes for Stadiums Draw Fire," Jacksonville Business Journal, April 7, 1997.

62. Marty Greenberg, director of the National Sports Law Institute at Marquette University, quoted in Barton and Mukherjee.

63. In Barton and Mukherjee.

64. Office of Management and Budget, Analytical Perspectives, Budget of the United States Government, Fiscal Year 1999.

65. Air Transport Association of America, "Taxes and Fees" Fact Sheet, Washington, D.C., March 1998.

66. Greg Groeller and Susan Miller, New York Times News Service, "Airlines Beat Clinton to Increasing Fares: President Will Reinstate Today the 10 Percent Excise Tax on Tickets," August 20, 1996.

67. Author's calculation.

68. Herbert D. Kelleher, letter to House Committee on Transportation and Infrastructure Chairman Bud Shuster, June 15, 1998.

69. Rep. Neil Abercrombie News Release, "Abercrombie Bill to Block Air Ticket Tax Raise," July 31, 1997.

70.. Michael R. Baye and Dan A. Black, "Indexation and the Inflation Tax," Cato Institute Policy Analysis
No. 39, July 12, 1984.

71. Federation of Tax Administrators, "State Individual Income Tax Rates," http://www.taxadmin.org/fta/rate/ind_inc.html.

72. Samuel Staley and Robert Lawson, "Ohio Keeps Poor Down with Unfair Taxes," Buckeye Institute Perspective, April 1997, p. 1.

73. Edison Electric Institute, "Why Doesn't Electricity Cost the Same Everywhere?," Electric Utility/
Restructuring Issues, http://www.eei.org/Industry/structure/power3.htm.

74. U.S. Department of Energy news release, "Administration's Plan Will Bring Competition to Electricity, Savings to Consumers," March 25, 1998.

75. Milton Friedman and Rose Friedman, Free to Choose (New York: Harcourt, Brace, Jovanovich, 1979),
p. 240.

76. Monique Landers, cited in Cascade Update, Cascade Policy Institute, Spring/Summer 1994, p. 2.

77. Dan B. Hogan, The Regulation of Psychotherapists, Vol. I: A Study in the Philosophy and Practice of Professional Regulation (Cambridge, Mass.: Ballinger Publishing, 1979) p. 282, in Stanley J. Gross, "Professional Licensure and Quality: The Evidence," Cato Institute Policy Analysis No. 79, December 9, 1986, p. 27.

78. Randall Collins, The Credential Society: An Historical Sociology of Education and Stratification (New York: Academic Press, 1979) p. 198, in Stanley J. Gross, "Professional Licensure and Quality: The Evidence," Cato Institute Policy Analysis No. 79, December 9, 1986, p. 27.

79. U.S. Department of Commerce, The Emerging Digital Economy, April 15, 1998.

80. Dean F. Andal, California Tax Board Chairman, letter to Rep. Chris Cox (R-CA) and Ron Wyden (D-OR), March 12, 1997.

81. National Council of State Legislatures, "Which States Tax Internet Access?," March 1998, http:// www.ncsl.org/programs/fiscal/intertax.htm.

82. U.S. Department of Commerce, The Emerging Digital Economy, Chapter 3, Electronic Commerce Between Businesses, April 15, 1998.

83. H.R. 1054/S. 442. See http://www.house.gov/cox/ nettax/ for details.

84. Joint Committee on Taxation, "Present Law and Analysis Relating to Individual Effective Marginal Tax Rates," February 3, 1998.

85. William G. Gale, "Tax Reform is Dead, Long Live Tax Reform," Brookings Institution Policy Brief No. 12.

86. "AICPA Legislative Simplification Proposal on Phase-Outs Based on Income Level," January 1998, http://www.aicpa.org/.

87. James K. Glassman, "A New Tax for the New Year," Washington Post, December 2, 1997.

88. On the other side of the coin, some companies may prefer to keep the cost of taxes hidden. For example, retailers trying to sell a $300 suit might not want their customers to know that the suit is actually worth much less after taxes are taken into account.

89. See www.mackinac.org for more information.

90. "Showing Government's Burden," Investor's Business Daily Perspective, April 1, 1997, p. B1, http://www.mackinac.org/topics/special/special.htm.