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Introduction

• Senators Chris Van Hollen (D-MD) and Cory Booker (D-NJ) have each introduced new taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. plans that would cut income taxes for lower- and middle-income taxpayers and raise them for the highest-income taxpayers and corporations, further increasing the progressivity of the federal income tax.
• Senator Van Hollen’s plan would slightly reduce federal tax revenue, losing $86 billion over the 10-year budget window on a conventional basis. Taxpayers in the middle quintile would see the largest increase in after-tax income of 3.9 percent, while taxpayers in the top 1 percent would see a 9.7 percent decrease.
• Senator Booker’s plan would significantly reduce federal tax revenue, losing up to $6.7 trillion over the 10-year budget window on a conventional basis without accounting for the unspecified business tax increases. In 2027, taxpayers in the bottom quintile would see the largest increase in after-tax income of 11.4 percent, while taxpayers in the top 1 percent would see a decrease in after-tax income of over 2 percent.
• Though some lower- and middle-income taxpayers would face better incentives through lower marginal tax rates under the plans, businesses and higher-income taxpayers would face worse incentives through higher marginal tax rates. On net, we expect both plans would reduce long-run GDP while increasing the federal government’s budget deficit.

Introduction

Senators Chris Van Hollen (D-MD) and Cory Booker (D-NJ) have each introduced proposals aimed at cutting taxes for lower- and middle-income taxpayers and raising them on high-income taxpayers.

Both ideas would further increase the progressivity of an already highly progressive taxA progressive tax is one where the average tax burden increases with income. High-income families pay a disproportionate share of the tax burden, while low- and middle-income taxpayers shoulder a relatively small tax burden. code, where higher-income taxpayers face higher average income tax rates and account for the largest shares of income taxes paid. By focusing tax increases on the wealthy, they would both narrow the base of taxable economic activity used to finance the cost of the tax cuts. Relying on a smaller tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. would create a less stable and more economically distortive tax system.

The Two Proposals

Senator Van Hollen has introduced legislation called the Working Americans’ Tax Cut Act (WATCA) that would eliminate income taxes on lower-income taxpayers through a new “maximum tax” calculation.

The maximum tax would set an exemption equal to $46,000 for single filers and $92,000 for joint filers. Qualifying taxpayers, defined as those with income of 175 percent or less of the exemption, would calculate their ordinary tax liability and their tax liability under a 25.5 percent tax with the “cost of living” exemption, paying the lesser amount.

To finance this tax cut, the plan would impose a new surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on high-income taxpayers: 5 percent on income above $1 million ($1.5 million for joint filers), 10 percent above $2 million ($3 million for joint filers), and 12 percent above $5 million ($7.5 million for joint filers). The maximum tax exemptionA tax exemption excludes certain income, revenue, or even taxpayers from tax altogether. For example, nonprofits that fulfill certain requirements are granted tax-exempt status by the Internal Revenue Service (IRS), preventing them from having to pay income tax. and surtax thresholds would all be adjusted for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin.

Senator Booker will be introducing legislation called the Keep Your Pay Act. It would more than double the standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. Taxpayers who take the standard deduction cannot also itemize their deductions; it serves as an alternative. to $37,500 for single filers, $75,000 for joint filers, and $56,250 for head of household filers. It would expand refundable tax credits by increasing the child tax credit (CTC) to $4,320 for children under 6 and $3,600 for children ages 6 to 17, while providing an additional $2,400 bonus in the year a child is born and making it fully refundable. The expanded CTC amounts would begin phasing down to the current-law CTC amounts at $150,000 for joint filers and $112,500 for single filers. The CTC values would be inflation-adjusted.

The earned income tax credit (EITC) would triple for workers without qualifying children by increasing the phase-in rate to 15.3 percent and slightly expanding the income thresholds. The age range for the credit would expand to cover those ages 19 to 24 and over 65.

To partially offset the cost of the expanded standard deduction and refundable tax credits, Booker has specified that the tax rates for the top two tax bracketsA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. would increase from 35 percent and 37 percent currently to 41 percent and 43 percent. He has announced, but not specified, additional tax increases, including increasing the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate and the stock buyback excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. rate.

How Much Would They Cost?

We estimate Senator Van Hollen’s proposal would reduce federal tax revenue by $86 billion between 2026 and 2035. The “living wage” exemption would cut taxes by nearly $1.6 trillion, while the millionaire surtax would increase taxes by $1.5 trillion, falling just short of revenue neutrality. On a dynamic basis, accounting for the decline in economic output caused by higher marginal tax rates, it would reduce revenue by a larger $180 billion over 10 years. A detailed revenue table is available for download.

Download Full Revenue Table

10-Year Revenue Effects of Senator Van Hollen’s Working Americans’ Tax Cut Act, 2026-2035

Source: Tax Foundation General Equilibrium Model, March 2026.

We estimate Senator Booker’s proposal would reduce federal tax revenue up to $6.7 trillion between 2026 and 2035. The standard deduction increase would lose the most revenue, cutting taxes by nearly $5.9 trillion between 2026 and 2035. The CTC expansion would cost nearly $1.8 trillion, and the EITC expansion would cost $112 billion. Raising the top two individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source rates would increase revenue by $1.1 trillion, offsetting 14 percent of the tax cuts.

On a dynamic basis, reflecting the decline in GDP caused by higher marginal tax rates, Booker’s proposal would reduce revenue by a larger $6.9 trillion over the decade. We do not currently model the unspecified business tax increases, which would raise additional revenue for the plan but also produce additional dynamic effects for revenue and the economy.

10-Year Revenue Effects of Senator Booker’s Keep Your Pay Act, 2026-2035

Source: Tax Foundation General Equilibrium Model, March 2026.

Who Would Benefit?

Both proposals aim to provide tax relief to lower- and middle-income taxpayers and higher tax burdens on higher-income taxpayers, as the nearby chart illustrates.

Senator Van Hollen’s plan would, on average, increase taxes on the top 1 percent of filers and decrease taxes on all other income groups, with the largest tax cuts provided for taxpayers in the middle quintile. Overall, in 2027, 38 percent of filers would receive a tax cut, while 0.4 percent would receive a tax increase.

On average, taxpayers in the middle quintile would see a $2,273 tax cut in 2027, or a 3.9 percent increase in after-tax income. Taxpayers in the bottom quintile would see little change in after-tax income, as many filers in this group already pay no income taxes.

Distributional Effects of Senator Van Hollen’s Tax Proposal

Note: Market income includes adjusted gross incomeFor individuals, gross income is the total of all income received from any source before taxes or deductions. It includes wages, salaries, tips, interest, dividends, capital gains, rental income, alimony, pensions, and other forms of income.
For businesses, gross income (or gross profit) is the sum of total receipts or sales minus the cost of goods sold (COGS)—the direct costs of producing goods (AGI) plus 1) tax-exempt interest, 2) non-taxable Social Security income, 3) the employer share of payroll taxes, 4) imputed corporate tax liability, 5) employer-sponsored health insurance and other fringe benefits, 6) taxpayers’ imputed contributions to defined-contribution pension plans. Market income levels are adjusted for the number of exemptions reported on each return to make tax units more comparable. After-tax income is market income less: individual income tax, corporate income tax, payroll taxes, estate and gift taxA gift tax is a tax on the transfer of property by a living individual, without payment or a valuable exchange in return. The donor, not the recipient of the gift, is typically liable for the tax., custom duties, and excise taxes. The 2027 income break points by percentile are: 20%-$18,461; 40%-$40,036; 60%-$76,868; 80%-$135,756; 90%-$196,530; 95%-$278,067; 99%-$633,418; 99.9%-$2,377,392.
Source: Tax Foundation General Equilibrium Model, March 2026.

Senator Booker’s proposal would, on average, increase taxes on the top 1 percent of filers and decrease taxes on all other income groups, with the largest tax cuts as a share of income provided for taxpayers in the bottom quintile. Booker’s expansion of refundable tax credits substantially increases after-tax income for the bottom two quintiles, unlike Van Hollen’s plan, which primarily eliminates remaining tax liability.

Overall, in 2027, about 82 percent of filers would receive a tax cut, while 2.8 percent would receive a tax increase under Booker’s proposal.

On average, taxpayers in the middle quintile would see a $3,398 tax cut in 2027, or a 5.8 percent increase in after-tax income. Taxpayers in the bottom quintile would see an average tax cut of $1,257, or an 11.4 percent increase in after-tax income, reflecting the large expansion of refundable tax credits.

Distributional Effects of Senator Booker’s Tax Proposal

Note: Market income includes adjusted gross income (AGI) plus 1) tax-exempt interest, 2) non-taxable Social Security income, 3) the employer share of payroll taxes, 4) imputed corporate tax liability, 5) employer-sponsored health insurance and other fringe benefits, 6) taxpayers’ imputed contributions to defined-contribution pension plans. Market income levels are adjusted for the number of exemptions reported on each return to make tax units more comparable. After-tax income is market income less: individual income tax, corporate income tax, payroll taxes, estate and gift tax, custom duties, and excise taxes. The 2027 income break points by percentile are: 20%-$18,461; 40%-$40,036; 60%-$76,868; 80%-$135,756; 90%-$196,530; 95%-$278,067; 99%-$633,418; 99.9%-$2,377,392.
Source: Tax Foundation General Equilibrium Model, March 2026.

What Effects Would They Have on the Economy?

We estimate that Senator Van Hollen’s proposal would have a slightly negative economic effect overall, reducing long-run GDP by 0.1 percent and hours worked by 133,000 full-time equivalent jobs.

The alternative maximum tax would have a positive effect, because, on average, it reduces marginal tax rates on income for the affected taxpayers. Qualifying filers under the alternative maximum tax would see a lower marginal tax rate, near 0, if their income falls below the exemption threshold. Above the threshold, filers would face a 25.5 percent tax rate, and for some filers, this would be a higher marginal tax rate than they experience under the ordinary income tax, resulting in worse incentives at the margin even though they would see lower tax liability overall.

That positive effect, however, would be completely offset by the surtax. For tax returns reporting $1 million or more in total income, business income accounts for roughly 29 percent of earnings. Higher marginal tax rates on labor, investment, and business income would shrink hours worked and the capital stock, leading to a slight decline in economic output overall.

American incomes (measured by GNP) would be 0.3 percent lower under the plan, as the combination of higher marginal tax rates and the larger budget deficit causes income to decrease by more than the decrease in GDP.

Long-Run Economic Effects of Senator Van Hollen’s Working Americans Tax Cut Act

Source: Tax Foundation General Equilibrium Model, March 2026.

Under Senator Booker’s proposal, we estimate long-run economic output would be 0.3 percent smaller. The capital stock would shrink by 1.1 percent and wages by 0.4 percent, while hours worked would expand by 216,000 full-time equivalent jobs. American incomes, measured by GNP, would decline by 1.5 percent, largely reflecting the increase in the federal budget deficit.

The standard deduction expansion would boost output and hours worked but shrink the capital stock and wages. Increasing the standard deduction can lower marginal tax rates on income if the larger deduction causes a filer to move into a lower tax bracket. It can also increase marginal tax rates on income if filers move from itemizing their state and local taxes paid, and it would increase the tax burden on various activities that currently can be itemized (such as charitable giving and housing).

The CTC and EITC can affect labor supply decisions by changing marginal tax rates. The CTC currently phases in with earned income, reducing marginal tax rates for people along the phase-in range. Making the credit fully refundable would increase marginal tax rates on low-income taxpayers along the phase-in range, reducing incentives to work for affected taxpayers.

Additionally, as the credit phases out, it raises marginal rates for taxpayers within the phaseout range. Boosting the maximum child tax credit—and phasing out the additional amount—extends the phaseout range and therefore the amount of income subject to higher marginal tax rates. Similarly, because the EITC phases in and out with earned income, increasing the credit lengthens both ranges.

Under Booker’s expanded standard deduction, we estimate only 2 percent of filers would continue to itemize their deductions, compared to 14 percent under current law.

Long-Run Economic Effects of Senator Booker’s Keep Your Pay Act

Source: Tax Foundation General Equilibrium Model, March 2026. Items may not sum due to rounding.

How High Would Top Tax Rates Be?

The top rate would be 49 percent under Van Hollen’s proposal and 43 percent under Booker’s proposal, compared to 37 percent under current law. The average top personal income tax rate in European OECD countries sits at 43.4 percent in 2026.

Top federal income tax rates exceeding 40 percent would place the US among countries like the Netherlands, Spain, and France, but with a key distinction—in those countries, top rates apply at much lower income levels.

The Netherlands’ top rate of 49.5 percent, for example, applies to income above approximately $91,000, while France’s top rate of 45 percent applies above approximately $210,000 (with an additional 4 percent surtax applying above approximately $580,000).

In contrast to European tax rates, top tax rates in the United States tend to be much more narrowly applied.

Conclusion

Both proposals would reduce federal revenue—Booker’s proposal especially—while increasing the progressivity of the tax system. While lower- and middle-income taxpayers would see higher after-tax incomes, higher marginal tax rates on labor and capital would reduce investment, hours worked, and long-run economic output. On net, we estimate both proposals would increase the federal budget deficit and reduce long-run GDP.

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Property Taxes by County

Median property taxes paid vary widely across (and within) the 50 states. The average countywide amount of property taxes paid in 2023 across the United States was $1,889 (with a standard deviation of $1,426). The lowest property tax bills in the country are in 11 counties or county equivalents with median property taxes of less than $250 a year:

• Alabama: Lamar and Choctaw counties
• Alaska: Northwest Arctic Borough, the Kusilvak Census Area, and the Copper River Census Area*
• Louisiana: Allen, Avoyelles, Madison, Tensas, and West Carroll parishes
• South Dakota: Oglala Lakota County

(*Significant parts of Alaska have no property taxes, though most of these areas have such small populations that they are excluded from federal surveys.)

Additionally, two counties in Alabama (Bibb and Sumter), three parishes in Louisiana (Bienville, Catahoula, and East Carroll), and McDowell County in West Virginia all have median property taxes paid between $250 and $300.

The 16 counties with the highest median property tax payments all have bills exceeding $10,000:

• California: Marin County
• New Jersey: Bergen, Essex, Hunterdon, Monmouth, Morris, Passaic, Somerset, and Union counties
• New York: Nassau, New York, Putnam, Rockland, Suffolk, and Westchester counties
• Virginia: Falls Church City

All but Falls Church and Marin County are near New York City. Additionally, two counties in New Jersey (Hudson and Middlesex), three counties in California (San Francisco, San Mateo, and Santa Clara), and Western Connecticut Planning Region in Connecticut all have median property taxes paid above $9,000.

Property Taxes by State

Property tax payments also vary within states. In some states, typically those with low property tax burdens, this variation is not high. In Alabama, for instance, median property taxes range from below $200 in Choctaw County to $1,343 in Shelby County (part of the Birmingham–Hoover metropolitan area), with an average tax bill of $511. In Virginia, in contrast, median property taxes range from $404 in Buchanan County to more than $10,000 in Falls Church City (part of the Washington metropolitan area), with an average tax bill of $1,963.

Higher median payments tend to be concentrated in urban areas. Median property taxes paid in Manhattan (New York County), San Francisco, Chicago (Cook County), and Miami (Miami-Dade County) are two to three times higher than their state’s average. This is partially explained by the prevalence of above-average home prices in urban centers. Because property taxes are assessed as a percentage of home values, it follows that higher property taxes are paid in places with higher housing prices. However, because millages—the amount of tax per thousand dollars of value—can be adjusted to generate the necessary revenue from a given property tax base, the higher payments also reflect an overall higher cost of government—and commensurately higher taxes—in these areas. (More expensive homes might correlate with a higher cost of government services, but they don’t necessarily cause it. If homes in a community doubled in value but nothing else in the economy changed, local government wouldn’t necessarily need to capture twice as much revenue.)

Since home values vary significantly across counties, it is also important to compare effective tax burdens (the median property tax paid divided by the median value of owner-occupied housing units). The five counties with the highest burdens all have an effective property tax rate above 2.95 percent. These counties include Allegany and Orleans counties in New York, Camden and Salem counties in New Jersey, and Menominee County in Wisconsin. The five counties with the lowest burdens all have an effective property tax rate below 0.18 percent. They include the Copper River Census Area and Northwest Arctic Borough in Alaska, Choctaw County in Alabama, East Feliciana Parish in Louisiana, and Maui County in Hawaii.

Because the dollar value of property tax bills often fluctuates with housing prices, it can be difficult to use this measure to make comparisons between states. Further complicating matters, rates don’t mean the same thing from state to state, or even county to county, because the millage is often imposed only on a percentage of actual property value, as is discussed below. However, one way to compare is to look at effective tax rates on owner-occupied housing—the average amount of residential property taxes actually paid, expressed as a percentage of home value.

In calendar year 2023 (the most recent data available), New Jersey had the highest effective rate on owner-occupied property at 2.23 percent, followed by Illinois (2.07 percent) and Connecticut (1.92 percent). Hawaii was at the other end of the spectrum with the lowest effective rate of 0.27 percent, followed closely by Alabama (0.38 percent), Nevada (0.49 percent), Colorado (0.49 percent), and South Carolina (0.51 percent).

Diving Deeper

Governments tax real property in a variety of ways: some impose a millage on the fair market value of the property, while others impose it on a percentage (the assessment ratio) of the market value. While values are often determined by comparable sales, jurisdictions also vary in how they calculate assessed values. Property taxes tend to be imposed at the local level, although their basic framework is typically set by state law.

Some states have equalization requirements, ensuring uniformity across the state. Sometimes property tax limitations restrict the degree to which one’s property taxes can rise in a given year, and sometimes rate adjustments are mandated after assessments to ensure uniformity or revenue stability. Abatements (i.e., reductions or exemptions) are often available to certain taxpayers, like veterans or senior citizens. Also, residential property is frequently taxed at a lower level than commercial property—even though most states classify apartment complexes as commercial property, meaning that renters bear much of the economic incidence of higher property taxes than those imposed on homeowners. And of course, property tax rates are set not only by cities and counties, but also by school boards, fire departments, and utility commissions.

Under HB26-1221, Colorado would make two changes that raise additional revenue by taxing income that doesn’t actually exist. The proposed changes to the state’s alternative minimum taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. and net operating loss provisions are designed to overstate income, leading to double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. and distorting taxpayer behavior.

Double Taxation Under the Alternative Minimum Tax

Colorado is one of the few states that still maintains an alternative minimum tax (AMT). The AMT functions as a parallel tax system that denies the benefit of many deductions and credits, ensuring that these tax provisions cannot reduce tax liability below a certain threshold. Most states have repealed their AMTs, since their complexity and compliance costs have become increasingly difficult to justify.

State income taxes tend to feature far fewer deductions and credits than the federal system, meaning that states were already importing a federal solution for a federal “problem” that did not map neatly onto state tax codes. Particularly now that the federal AMT has also been dramatically curtailed, applying to far fewer filers, most states no longer see the need for their own piggyback provision. Colorado, which has unusually tight conformity with the federal tax code, maintains an alternative tax regime that most states have abandoned.

Part of that system—at the federal level and in states with AMTs—is a credit designed to avoid double taxation. The AMT denies a variety of deductions, including those that are largely timing differences rather than permanent exclusions, but it is not intended to tax phantom income, which would happen if the credit were repealed. Consider two examples.

The ordinary tax code allows accelerated depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco of some business investments, and the AMT can add those back. Additionally, some employees receive incentive stock options (ISOs), and the AMT will tax them on the difference between the strike price and the market value when the options are exercised. The existing credit ensures that the business owner still gets those deductions eventually and doesn’t pay income tax on what is actually capital investment. It likewise ensures that employees receiving ISOs aren’t taxed on phantom gains if the stock price later drops before they sell. The credit is a necessary part of the AMT, ensuring that it strips away the benefit of certain provisions (like accelerated depreciation) without permanently taxing income that is not true economic income.

Repealing the AMT credit would take a system meant to prevent tax deductions and credits from eliminating liability and turn it into a permanent surtaxA surtax is an additional tax levied on top of an already existing business or individual tax and can have a flat or progressive rate structure. Surtaxes are typically enacted to fund a specific program or initiative, whereas revenue from broader-based taxes, like the individual income tax, typically cover a multitude of programs and services. on timing differences, imposing higher, distortionary tax burdens on business capital investment and taxing paper gains that never amount to real income.

Limiting Net Operating Loss Deductions

Curtailing net operating losses has a similar effect. Corporate income taxes are levied on annual income, but the economic tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. is profits over a longer time horizon. Businesses frequently have losses in some years and profits in others, and if the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. were applied only to profitable years, with no offset for losses, it would dramatically overtax overall profitability. To guard against this problem, all state corporate income taxes, as well as the federal tax, permit net operating loss (NOL) carryforwards, permitting businesses to deduct past losses against future taxable income. This allows businesses to smooth their income, making the tax code more neutral over time.

Historically, the federal government allowed net operating losses to be carried forward for 20 years, with no limit on utilization. Since the enactment of the Tax Cuts and Jobs Act (TCJA), losses can be carried forward indefinitely, though they can only reduce taxable income by up to 80 percent in a given year. Some states have followed the federal changes, while others, like Colorado, have maintained the prior 20-year, uncapped-utilization approach.

Under HB 1221, Colorado would limit carryforwards to 10 years and cap the deduction at 70 percent. This proposal is intended to deprive businesses of their ability to fully offset losses, thereby taxing them on an inflated measure of net income. It is particularly punitive for startups, which can often post losses in their first 5-10 years as they develop products or scale their work. A 10-year limit could lead to some losses expiring before the company ever posts a profit, and the 70 percent cap further restricts companies’ ability to offset losses before they expire. For highly cyclical businesses, moreover, the 70 percent cap increases the cost of capital, since recovery of losses no longer provides the same tax buffer during a recovery.

Both the NOL and AMT policies in HB 1221 are attempts to extract additional revenue from individuals and businesses by taxing phantom income, and both would lead to economic distortions. These policies would punish startups, discourage capital investment, and encourage selling stock options early, among other distortions of economic decision-making.

Colorado has long kept its individual and corporate income taxes relatively simple, with broad bases, low rates, and substantial conformity to federal tax policy. That makes these two departures from sound tax policy stand out all the more: both would position Colorado as an extreme outlier. Colorado is hardly the only state where lawmakers are considering higher taxes on businesses or individuals, but proposals so expressly targeted at taxing phantom income are, thankfully, quite rare.

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Historical Context

2024 Campaign Proposals

Tariffs featured heavily in the 2024 presidential campaign as candidate Trump proposed a new 10 percent to 20 percent universal tariff on all imports, a 60 percent tariff on all imports from China, higher tariffs on EVs from China or across the board, 25 percent tariffs on Canada and Mexico, and 10 percent tariffs on China.

We estimate Trump’s proposed 20 percent universal tariffs and an additional 50 percent tariff on China to reach 60 percent will reduce long-run economic output by 1.3 percent before any foreign retaliation. They will increase federal tax revenues by $3.8 trillion ($3.1 trillion on a dynamic basis before retaliation) from 2025 through 2034.

2018-2019 Trade War: Economic Effects of Imposed and Retaliatory Tariffs

Using the Tax Foundation’s General Equilibrium Model, we estimate the Trump-Biden Section 301 and Section 232 tariffs will reduce long-run GDP by 0.2 percent, the capital stock by 0.1 percent, and hours worked by 142,000 full-time equivalent jobs. The reason tariffs have no impact on pre-tax wages in our estimates is that, in the long run, the capital stock shrinks in proportion to the reduction in hours worked, so that the capital-to-labor ratio, and thus the level of wages, remains unchanged. Removing the tariffs would boost GDP and employment, as Tax Foundation estimates have shown for the Section 232 steel and aluminum tariffs.

Table 6. Estimated Impact of US Imposed Tariffs, 2018-2019 Trade War

Note: 2018-2019 trade war tariffs reflect Section 301 tariffs on imports from China and Section 232 tariffs on certain steel and aluminum imports.
Source: Tax Foundation General Equilibrium Model, June 2024.

We estimate the retaliatory tariffs stemming from Section 232 and Section 301 actions total approximately $13.2 billion in tariff revenues. Retaliatory tariffs are imposed by foreign governments on their country’s importers. While they are not direct taxes on US exports, they raise the after-tax price of US goods in foreign jurisdictions, making them less competitively priced in foreign markets. We estimate the retaliatory tariffs will reduce US GDP and the capital stock by less than 0.05 percent and reduce full-time employment by 27,000 full-time equivalent jobs. Unlike the tariffs imposed by the United States, which raise federal revenue, tariffs imposed by foreign jurisdictions raise no revenue for the US but result in lower US output.

Table 7. Estimated Impact of US Retaliatory Tariffs, 2018-2019 Trade War

Note: 2018-2019 retaliation reflects retaliatory tariffs on $6 billion of US exports in response to Section 232 tariffs and more than $106 billion of US exports in response to Section 301 tariffs.
Source: Tax Foundation General Equilibrium Model, June 2024.

Tariff Revenue Collections Under the Trump-Biden Tariffs

As of the end of 2024, the trade war tariffs have generated more than $264 billion of higher customs duties collected for the US government from US importers. Of that total, $89 billion, or about 34 percent, was collected during the Trump administration, while the remaining $175 billion, or about 64 percent, was collected during the Biden administration.

Before accounting for behavioral effects, the $79 billion in higher tariffs amount to an average annual tax increase on US households of $625. Based on actual revenue collections data, trade war tariffs have directly increased tax collections by $200 to $300 annually per US household, on average. The actual cost to households is higher than both the $600 estimate before behavioral effects and the $200 to $300 after, because neither accounts for lower incomes as tariffs shrink output, nor the loss in consumer choice as people switch to alternatives that do not face tariffs.

2018-2019 Trade War Timeline

The Trump administration imposed several rounds of tariffs on steel, aluminum, washing machines, solar panels, and goods from China, affecting more than $380 billion worth of trade at the time of implementation and amounting to a tax increase of nearly $80 billion. The Biden administration maintained most tariffs, except for the suspension of certain tariffs on imports from the European Union, the replacement of tariffs with tariff-rate quotas (TRQs) on steel and aluminum from the European Union and United Kingdom and imports of steel from Japan, and the expiration of the tariffs on washing machines after a two-year extension. In May 2024, the Biden administration announced additional tariffs on $18 billion of Chinese goods for a tax increase of $3.6 billion.

Altogether, the trade war policies currently in place add up to $79 billion in tariffs based on trade levels at the time of tariff implementation. Note the total revenue generated will be less than our static estimate because tariffs reduce the volume of imports and are subject to evasion and avoidance (which directly lowers tariff revenues) and they reduce real income (which lowers other tax revenues).

Section 232, Steel and Aluminum

In March 2018, President Trump announced the administration would impose a 25 percent tariff on imported steel and a 10 percent tariff on imported aluminum. The value of imported steel totaled $29.4 billion, and the value of imported aluminum totaled $17.6 billion in 2018. Based on 2018 levels, the steel tariffs would have amounted to $9 billion and the aluminum tariffs to $1.8 billion. Several countries, however, have been excluded from the tariffs.

In early 2018, the US reached agreements to permanently exclude Australia from steel and aluminum tariffs, use quotas for steel imports from Brazil and South Korea, and use quotas for steel and aluminum imports from Argentina.

In May 2019, President Trump announced that the US was lifting tariffs on steel and aluminum from Canada and Mexico.

In 2020, President Trump expanded the scope of steel and aluminum tariffs to cover certain derivative products, totaling approximately $0.8 billion based on 2018 import levels.

In August 2020, President Trump announced that the US was reimposing tariffs on aluminum imports from Canada. The US imported approximately $2.5 billion worth of non-alloyed unwrought aluminum, resulting in a $0.25 billion tax increase. About a month later, the US eliminated the 10 percent tariff on Canadian aluminum that had just been reimposed.

In 2021 and 2022, the Biden administration reached deals to replace certain steel and aluminum tariffs with tariff rate quota systems, whereby certain levels of imports will not face tariffs, but imports above the thresholds will. TRQs for the European Union took effect on January 1, 2022; TRQs for Japan took effect on April 1, 2022; and TRQs for the UK took effect on June 1, 2022. Though the agreements on steel and aluminum tariffs will reduce the cost of tariffs paid by some US businesses, a quota system similarly leads to higher prices, and further, retaining tariffs at the margin continues the negative economic impact of the previous tariff policy.

Tariffs on steel, aluminum, and derivative goods currently account for $2.7 billion of the $79 billion in tariffs, based on initial import values. Current retaliation against Section 232 steel and aluminum tariffs targets more than $6 billion worth of American products for an estimated total tax of approximately $1.6 billion.

Section 301, Chinese Products

Under the Trump administration, the United States Trade Representative began an investigation of China in August 2017, which culminated in a March 2018 report that found China was conducting unfair trade practices.

In March 2018, President Trump announced tariffs on up to $60 billion of imports from China. The administration soon published a list of about $50 billion worth of Chinese products to be subject to a new 25 percent tariff. The first tariffs began July 6, 2018, on $34 billion worth of Chinese imports, while tariffs on the remaining $16 billion went into effect August 23, 2018. These tariffs amount to a $12.5 billion tax increase.

In September 2018, the Trump administration imposed another round of Section 301 tariffs—10 percent on $200 billion worth of goods from China, amounting to a $20 billion tax increase.

In May 2019, the 10 percent tariffs increased to 25 percent, amounting to a $30 billion increase. That increase had been scheduled to take effect beginning in January 2019, but was delayed.

In August 2019, the Trump administration announced plans to impose a 10 percent tariff on approximately $300 billion worth of additional Chinese goods beginning on September 1, 2019, but soon followed with an announcement of schedule changes and certain exemptions.

In August 2019, the Trump administration decided that 4a tariffs would be 15 percent rather than the previously announced 10 percent, a $5.6 billion tax increase.

In September 2019, the Trump administration imposed “List 4a,” a 15 percent tariff on $112 billion of imports, an $11 billion tax increase. They announced plans for tariffs on the remaining $160 billion to take effect on December 15, 2019.

In December 2019, the administration reached a “Phase One” trade deal with China and agreed to postpone indefinitely the stage 4b tariffs of 15 percent on approximately $160 billion worth of goods that were scheduled to take effect December 15 and to reduce the stage 4a tariffs from 15 percent to 7.5 percent in January 2020, reducing tariff revenues by $8.4 billion.

In May 2024, the Biden administration published its required statutory review of the Section 301 tariffs, deciding to retain them and impose higher rates on $18 billion worth of goods. The new tariff rates range from 25 to 100 percent on semiconductors, steel and aluminum products, electric vehicles, batteries and battery parts, natural graphite and other critical materials, medical goods, magnets, cranes, and solar cells. Some of the tariff increases go into effect immediately, while others are scheduled for 2025 or 2026. Based on 2023 import values, the increases will add $3.6 billion in new taxes.

Section 301 tariffs on China currently account for $77 billion of the $79 billion in tariffs, based on initial import values. China has responded to the United States’ Section 301 tariffs with several rounds of tariffs on more than $106 billion worth of US goods, for an estimated tax of nearly $11.6 billion.

WTO Dispute, European Union

In October 2019, the United States won a nearly 15-year-long World Trade Organization (WTO) dispute against the European Union. The WTO ruling authorized the United States to impose tariffs of up to 100 percent on $7.5 billion worth of EU goods. Beginning October 18, 2019, tariffs of 10 percent were to be applied on aircraft and 25 percent on agricultural and other products.

In summer 2021, the Biden administration reached an agreement to suspend the tariffs on the European Union for five years.

Section 201, Solar Panels and Washing Machines

In January 2018, the Trump administration announced it would begin imposing tariffs on washing machine imports for three years and solar cell and module imports for four years as the result of a Section 201 investigation.

In 2021, the Trump administration extended the washing machine tariffs for two years through February 2023, and they have now expired.

In 2022, the Biden administration extended the solar panel tariffs for four years, though later provided temporary two-year exemptions for imports from four Southeast Asian nations beginning in 2022, which account for a significant share of solar panel imports.

In 2024, the Biden administration removed separate exemptions for bifacial solar panels from the Section 201 tariffs. Additionally, the temporary two-year exemptions expired and the Biden administration is further investigating solar panel imports from the four Southeast Asian nations for additional tariffs.

We estimate the solar cell and module tariffs amounted to a $0.2 billion tax increase based on 2018 import values and quantities, while the washing machine tariffs amounted to a $0.4 billion tax increase based on 2018 import values and quantities.

We exclude the tariffs from our tariff totals given the broad exemptions and small magnitudes.

Trade Volumes Since Tariffs Were Imposed

Since the tariffs were imposed, imports of affected goods have fallen, even before the onset of the COVID-19 pandemic. Some of the biggest drops are the result of decreased trade with China, as affected imports decreased significantly after the tariffs and still remain below their pre-trade war levels. Even though trade with China fell after the imposition of tariffs, it did not fundamentally alter the overall balance of trade, as the reduction in trade with China was diverted to increased trade with other countries.

Table 8. Imports Affected by US Tariffs

Note: Steel totals exclude imports from Argentina, Australia, Brazil, South Korea, Canada, and Mexico. Aluminum totals exclude imports from Argentina, Australia, Canada, and Mexico. Beginning in 2022, steel totals also exclude imports from Japan, the EU, and the UK, and aluminum totals also exclude imports from the EU and the UK as respective imports are now subject to tariff-rate quotas (TRQs). Excluding all imports for TRQs overstates the savings from TRQs because tariffs still apply when imports exceed historical levels.

Source: Federal Register notices; Tom Lee and Jacqueline Varas, “The Total Cost of U.S. Tariffs,” American Action Forum, Mar. 24, 2022, data retrieved from USITC DataWeb.

AI is everywhere, and now it’s in the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. policy debate. In this episode of The Deduction, hosts Kyle Hulehan and Erica York sit down with Alex Muresianu, Senior Policy Analyst at the Tax Foundation.

Together they examine what current labor market data actually shows, why proposals from Senators Sanders and Kelly risk backfiring, and what smarter reforms like worker retraining deductions and consumption-based taxation would strengthen the tax code no matter how the AI story unfolds.

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While tobacco taxes are often framed as both revenue measures and public health tools, policymakers should approach such proposals carefully. Tobacco taxes are regressive, and increases frequently generate less revenue than projected, raise cross-border taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. competition concerns, and can create inconsistencies in how similar products are taxed. Delaware’s proposal illustrates many of these challenges.

Under Governor Meyer’s budget plan, Delaware would implement several changes to its tobacco tax structure. The cigarette tax would increase by more than 70 percent from $2.10 to $3.60 per pack. Vapor products would be taxed at $0.10 per milliliter, double the current rate. The tax on moist snuff would increase from $0.92 to $1.23 per ounce. The tax rate on OTPs would increase from 30 to 40 percent of the wholesale price.

Taken together, these changes are expected to generate approximately $18.9 million in new revenue for the state. However, tobacco taxes most heavily burden those who can least afford them and are poorly fitted to address growing government expenditures.

Like many excise taxes, tobacco taxes are highly regressive. Lower-income households spend a larger share of their income on these products than higher-income households.

As a result, tobacco tax increases tend to place a disproportionate burden on lower-income consumers. In Delaware, households in the lowest income quintile pay an effective tax rate nearly 14 times that faced by households in the highest income quintile.

Poorest Delaware Households Face the Greatest Effective Tax Rates for Cigarettes

Cigarette Tax Distribution of Effective Tax Rates Across Income Quintiles, 2025

Notes: Adam Hoffer,“ Compare Tobacco Tax Data in Your State,” Tax Foundation, https://taxfoundation.org/data/all/state/tobacco-tax-data-tool/.

Supporters often argue that reduced consumption mitigates this concern, since higher prices can encourage smokers to quit. However, not all smokers are able or willing to quit immediately, meaning most smokers will continue to pay the higher tax.

Tobacco taxes are also a poor solution to the growing fiscal demands of state governments. Although tobacco tax increases are often attractive to lawmakers because they target a narrow segment of the population, that exact feature makes those revenues unstable and more volatile than broad-based income, sales, and property taxes.

Tobacco consumption has also been steadily declining in the United States for decades. Not surprisingly, tobacco tax revenues have declined to match. Tax hikes have historically provided short-term increases in revenue, but those revenues erode as the tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. shrinks.

Delaware is no exception to the national trend. Historically, cigarette tax increases in Delaware have brought short-lived increases to revenues before declining consumption and currency debasement necessitated further rate hikes to chase similar revenue levels.

The declines have accelerated in recent years with the increased availability of less harmful alternative products. Revenues adjusted for CPI inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin are already lower than they were in 2004 despite more than doubling the CPI-adjusted tax rate since. Future tax hikes are likely to bring in less and less revenue because the tax is being paid by fewer and fewer smokers.

Governor Meyer’s budget also includes higher taxes on alternative nicotine products, including vapes. Public health experts argue that vapor products pose substantially lower health risks than combustible cigarettes. While not risk-free, products that allow users to consume nicotine without inhaling combusted tobacco harm users much less.

Tax policy can influence consumer behavior in this space. Basic economics tells us that as tax-induced prices increase, consumers will use less of a product. As taxes increase on alternative tobacco products, the tax system may inadvertently discourage smokers from switching to potentially less harmful alternatives.

The governor’s proposal to raise $18.9 million in additional revenue through higher tobacco taxes represents a significant change to Delaware’s tobacco tax structure. By increasing taxes on cigarettes, vapor products, moist snuff, and other tobacco products, the plan expands the state’s reliance on tobacco excise taxes and its tax burden on the poorest Delaware households.

Well-designed tax policy should prioritize simplicity, neutrality, and transparency—principles that remain important even when taxes target products with well-known public health risks. Delaware policymakers should carefully evaluate whether the proposed changes strike the right balance between these competing objectives.

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A bill passed by the New Mexico legislature risks eroding the state’s corporate taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. environment by rejecting key business-friendly elements of the federal One Big Beautiful Bill Act (OBBBA). It would eliminate state-level conformity with 100 percent bonus depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and disco for machinery and equipment under IRC Section 168(k), along with immediate expensing for qualified production property under the new Section 168(n). It would also include net CFC-tested income (NCTI) in the state’s taxable base.

Full expensingFull expensing allows businesses to immediately deduct the full cost of certain investments in new or improved technology, equipment, or buildings. It alleviates a bias in the tax code and incentivizes companies to invest more, which, in the long run, raises worker productivity, boosts wages, and creates more jobs.—commonly known as 100 percent bonus depreciation—enables companies to deduct the full cost of eligible investments in the year they are placed in service, rather than stretching those deductions across multiple years through complicated depreciation schedules. This approach minimizes distortions in investment decisions, counters the effects of inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spendin, and respects the time value of money, ultimately supporting stronger economic growth and higher output. It also increases the probability that projects will become immediately profitable and incentivizes high fixed-cost investments.

While adopting full expensing entails revenue costs during the initial transition period, when new immediate deductions overlap with existing assets completing their depreciation from prior investments—these effects are largely temporary. Over the medium to long term, the fiscal impact is neutral. The policy simply shifts the timing of tax payments forward. Once legacy assets complete their depreciation periods, new investments receive full upfront expensing with no subsequent deductions.

While SB 151 proposes decoupling from pro-growth tax policy, it also includes unsound tax policy by conforming to IRC Section 951A and including foreign earnings of controlled corporations (in the form of the new NCTI) in the New Mexico corporate tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.—earnings that have frequently already faced taxation overseas. At the federal level, this inclusion aims to discourage profit shiftingProfit shifting is when multinational companies reduce their tax burden by moving the location of their profits from high-tax countries to low-tax jurisdictions and tax havens. to low-tax foreign jurisdictions and guarantee a baseline tax on multinational income, with foreign tax credits available to prevent or mitigate double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. when foreign rates exceed the minimum threshold.

New Mexico, however, offers no such credit for taxes paid abroad. This creates genuine double taxation on the same foreign income, harming US-based multinationals relative to their international competitors.

The NCTI regime replaces the global intangible low-taxed income (GILTI) system. It is notable that New Mexico did not conform to the GILTI provisions of the federal revenue code, a fiscally sound stance that did not seek to tax income earned outside the United States. Taxing NCTI, however, will erode the state’s tax environment needlessly. GILTI sought to distinguish between normal and supernormal returns of above 10 percent, exempting anything below as a qualified business asset investment (QBAI) exclusion. Converting to NCTI makes the problem of states adopting GILTI in their tax base worse. It eliminates the QBAI exclusion, bringing all the corporate income under the state’s tax purview rather than just the “supernormal” returns.

Further, state-level adoption of NCTI taxation implies that foreign tax credits allowed at the federal level actually are picked up as additional income to be taxed, expanding the tax base even further. This leads to more aggressive taxation than under the GILTI regime.

Beyond lack of justification or logic, taxing NCTI or GILTI is simply inefficient. Multinational corporations may respond by restructuring operations to minimize sales apportioned to the state, perhaps through intermediaries or by shifting invoicing to affiliates in more favorable locations, thereby curtailing their corporate tax liability. Further, New Mexico’s apportionment formula also includes payroll and real property owned by the corporation. While NCTI, like GILTI previously in other states, is likely to contribute only marginally to overall state revenues—typically a negligible share—its impact can be pronounced for the very enterprises that policymakers seek to attract, such as innovative firms driving economic expansion.

In light of the federal transition from GILTI to NCTI, states currently taxing this form of international income would be wise to seize the opportunity to disengage from it entirely, and New Mexico should not use global income as a new source of revenues.

In Tax Foundation’s 2026 State Tax Competitiveness Index, New Mexico places close to the middle overall, with its corporate tax component ranking in the upper half of states. Yet SB 151, in its present form, deviates from the principles of sound corporate tax policy. It conflicts with the federal objectives behind NCTI inclusion, taxes foreign-source income beyond what the federal base captures, imposes double taxation without relief for foreign taxes paid, and disadvantages American multinationals operating in the state. Moreover, it also seeks to decouple from the pro-growth expensing provisions contained in the OBBBA, which could discourage capital investment and new business formation and expansion in the state, leaving the state less competitive compared to those states that retain conformity with the OBBBA’s expensing rules.

Lawmakers should consider pro-growth tax policies that will help recruit and retain the next generation of New Mexico residents and businesses. Unfortunately, SB 151 is a step in the wrong direction and could leave New Mexico less competitive, regionally and nationally, for some time to come.

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