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Gay Marriage and the Marriage Tax Penalty

In response to my post raising some questions about how gay marriage might interact with the marriage penalty, law professor Dennis Ventry sent along some very thoughtful and detailed analysis, which I’m glad that he’s allowed me to reproduce:

1. In states that recognize gay marriage, does state tax law likewise impose a marriage penalty? If so, will it be applied to gay marriages? Presumably, yes. If so, will gays be less likely to marry in states with a marriage penalty?
Whether a state income tax system imposes marriage tax penalties (and bonuses) depends on the structure of that state’s income tax. “Marriage tax penalties” are variously produced, created by rate structure, tax brackets and credit, deduction, and exemption phase-outs.

Consider a simple income tax system with one rate schedule applying to all taxpayers. After accounting for personal exemptions and the standard deduction (or itemized deductions), our hypothetical income tax system taxes the first $10,000 of taxable income at 10 percent, the second $20,000 at 20 percent, all the way up to 100 percent tax liability on all income above $100,000.
Now consider two single taxpayers, Barack and Michelle. They each earn $50,000 of “taxable income” (i.e., total income subject to tax after exemptions and deductions, but before credits). As two single taxpayers under our hypothetical tax system, they each pay $15,000 in taxes.

$0-10,000 @ 10% = $1,000
$10,001-20,000 @ 20% = $2,000
$20,001-30,000 @ 30% = $3,000
$30,001-40,000 @ 40% = $4,000
$40,001-50,000 @ 50% = $5,000

Tax liability = $15,000

Together, they pay a total of $30,000 in taxes ($15,000 x 2). If Barack and Michelle married, their tax liability would remain the same, because they would be subject to the same rates and brackets, and they would not be required to aggregate family income. Each would continue to pay $15,000 on their respective incomes, and their total tax liability would remain $30,000.

Our current (sadly, non-hypothetical) federal income tax, however, uses four tax schedules for four different categories of taxpayers: (i) single; (ii) married filing jointly; (iii) married filing separately; and (iv) head of household.  The tax brackets for each tax schedule are different as well. Each contains the same number of tax brackets, six (10%, 15%, 25%, 28%, 33%, 35%), but the width of the brackets (that is, the amount of income falling into each bracket) varies among the tax schedules. It is the varying width of the brackets that causes marriage penalties and marriage bonuses associated with the rate structure. (Please note (i) the 10% and 15% brackets are double the width for married taxpayers, so no penalties, and (ii) that low- and middle-income families experience additional and severe tax penalties associated with the phasing out of refundable and nonrefundable tax credits whereby combined income as a result of marriage-though modest by any standard-pushes families beyond the qualifying income range for receipt of, say, EITC payments).

So, for instance, if, upon marriage, Barack and Michelle were required to aggregate family income (as under the married filing jointly schedule) and were further subject to tax brackets that were less than double the width for single taxpayers, and assuming progressive rates, the act of marriage would likely result in a tax penalty. In other words, if our above hypothetical tax system treated the family as a single tax unit and imposed rates above 50% on income less than $100,000 for married couples, you’d have marriage tax penalties.

Though I don’t know about the tax systems in other states that recognize same-sex marriages/partnerships/unions, I do know that California’s state income tax imposes the same rates (1, 2, 4, 6, 8, 9.3%) on single, head-of-household, and married taxpayers, AND it provides married and head-of-household taxpayers brackets exactly double the width of those for singles. The result: no marriage tax penalty (though possibility for marriage tax bonuses).

2.  If the federal government recognizes gay marriage, and the marriage penalty applies to such marriages, how much tax revenue would be generated?

You pose the question in an interesting manner-i.e., assuming increased tax revenues in the aggregate in the presence of same-sex marriage-if only because opponents of same-sex marriage argue that allowing same-sex couples to marry would be a revenue loser for the government. However, in a 2004 Congressional Budget Office study, we learned that the economic effect of treating same-sex partners the same under federal law as opposite-sex spouses could improve the federal budget’s bottom line by nearly $1 billion annually, primarily due to subjecting same-sex couples to marriage tax penalties that currently fall exclusively on opposite-sex spouses. See CBO, The Potential Budgetary Impact of Recognizing Same-Sex Marriages (June 21, 2004). State income tax revenues would rise, too. See James Alm, M.V. Lee Badgett, and Leslie A. Whittington, “Wedding Bell Blues: The Income Tax Consequences of Legalizing Same-Sex Marriage,” 53 Nat’l Tax J. 201 (June 2000); M.V. Lee Badgett, Money, Myths, and Change: The Economic Lives of Lesbians and Gay Men (Chicago: University of Chicago Press, 2001).

3.  Would application of the federal marriage penalty affect the rate of gay marriage?
4.  Some believe that there are some hetero couples who do not marry specifically so as to avoid the marriage penalty. If gays were subject to the marriage penalty, would the deterrent effect of the penalty on gays be greater or lesser than it is on heterosexuals? And why?

Numbers 3 and 4 make the same inquiry, I think. Researchers have shown that taxes produce a small but statistically significant effect on the aggregate marriage rate as well as the timing of marriage, and a slightly stronger effect on the aggregate divorce rate. See James Alm and Leslie A. Whittington, “Does the Income Tax Affect Marital Decisions?” 48 Nat’l Tax J. 565 (December 1995); Stacy Dickert-Conlin, “Taxes and Transfers: Their Correlation with Marital Separation,” 299, Proceedings of the 89th Annual Conference on Taxation, National Tax Association, November 10-12, 1996; Alexander M. G. Gelardi, “The Influence of Tax Law Changes on the Timing of Marriages: A Two-Country Analysis,” 49 National Tax Journal 17 (March 1996); George R.G. Clarke and Robert P. Strauss, “Effects of the Federal Individual Income Tax on Marriage and Divorce Decisions,” Rochester Center for Economic Research, Working Paper No. 436, November 1996; Leslie A. Whittington, “Manipulating Marriage? Federal Income Taxes and the Household Structure Decision,” 16 NYLS J. of Human Rights 129, Symposium on “Women, Equity and Federal Tax Policy: Open Questions” (1999). Compare David L. Sjoquist and Mary Beth Walker, “The Marriage Tax and the Rate and Timing of Marriage,” 48 Nat’l Tax J. 547 (December 1995).

For couples who remain married despite tax penalties, research also suggests that some of them lie to the IRS about their marital status. See Daniel Feenberg and Harvey S. Rosen, “Recent Developments in the Marriage Tax,” 48 Nat’l Tax J. 91 (March 1995).

It will be interesting to see the extent to which the same factors (especially labor supply elasticities) that seemingly influenced behavioral modifications in the earlier studies of marriage tax penalties/bonuses on hetero couples influence opposite-sex couples.

Very best,
djvj