In light of the Obergefell decision issued by the Supreme Court Friday, June 26, I wondered what impact this decision might have on the federal government’s tax revenue. After all, as part of the decision, the IRS will be required to treat all married couples equally, regardless of the genders of the two partners. And, despite many attempts to eliminate it, there is still a marriage tax penalty likely to apply to quite a few of these newlyweds.
As always, my methods are transparent. Click here to download the Excel workbook.
The U.S. Census Bureau collects data on same-sex partnerships via its regular American Community Survey (ACS). Wikipedia contains an exhaustive history of global changes in same-sex marriage laws, including the dates on which same-sex marriage became legal. Luckily, they include individual U.S. states. Finally, the Tax Policy Center has a handy web page that calculates the penalty (or bonus). Pulling together these disparate elements, my estimate is that the federal government will collect about $375 million in additional tax revenue. But there are many, many assumptions and calculations behind that number. I strongly recommend reading this entire article so you can see what I did and how you might want to change my assumptions.
First, I gathered the data on same-sex couples from the American Community Survey. The data is broken down by age, income, and the usual demographic elements. But what interested me was the breakdown by state. After all, some states (27 to be precise) had legalized same-sex unions before Obergefell made it the law of the land. I combed the history provided by Wikipedia. The ACS created “Tab 3” in the Excel workbook, but I added some information, specifically which states fall into which groups (legal and not legal pre-Obergefell) and the month and year on which each of the 27 states approved these marriages.
If only it was that easy. Until this year the IRS did not allow same-sex couples to file joint tax returns. Therefore, all those who married before Obergefell will also be subject to the marriage tax penalty.
The marriage tax penalty was calculated using a handy web page at the Tax Policy Center. I have copied and pasted both the inputs and outputs into the Excel workbook (the MarriageTaxPenalty tab). However, users should beware: this is Excel, not Turbo-Tax. If you want to change my assumptions about income, deductions, or other items you’ll need to use the website. The only number on that tab that feeds into the rest of the calculations is cell E30, the marriage tax penalty.
Calculating the number of same-sex couples who were married pre-Obergefell is straightforward. The ACS reports the number of same-sex households (by state). They also report the “Percent of all same-sex households who are same-sex spouses.” Multiply the number of households by the percentage married gives a total. Note that this applies to all 50 states. Many states in which same-sex marriage was not recognized pre-Obergefell reported a significant percentage of same-sex married couples. California, for example, reported that 37.35% of same-sex households were married couples. This is actually above the national average of 34.00% in states where same-sex marriage was legal! That creates certain problems in the data analysis which, fortunately, are easily overcome.
The real issue is the number of unmarried same-sex households that will decide to marry in light of the Obergefell decision. To calculate that figure, I first calculated the expected increase in the percentage of same-sex couples that would get married. I used the difference between the national average in legal states (34.00%) and the actual percent married in each state. For states like California in which the actual percentage was greater than 34.00%, I entered zero. I then multiplied the expected increase in percent married by the percentage unmarried, giving the expected percentage of unmarried couples likely to marry. Finally, I multiplied that percentage by the total number of same-sex households. After all that work, it looks like about 8,092 couples in states where same-sex marriage was not legal pre-Obergefell will decide to get married. The impact on tax revenue is a paltry $11.7 million.
But there are 251,695 same-sex households that are already married. Until now these folks have not been subjected to the marriage tax penalty. In total, government tax revenue will increase by about $375 million as same-sex couples get to experience the same treatment that different-sex couples have endured practically ever since the graduated income tax was introduced. Welcome!
The Marriage Tax Penalty
The marriage tax penalty is inevitable as long as tax rates are progressive. In a progressive tax system your marginal tax rate rises as your income rises. That means two people, each earning $50,000 per year, will have a joint income of $100,000 per year and (most likely) pay a higher tax rate.
Conclusion and Warnings
This is really a quick-and-dirty look at a complicated issue. Here are a few of the many issues I did not take into account.
- State income taxes are deductible from income at the federal level for those who itemize deductions. California, notably, has a high state income tax as well as many same-sex households (107,991 is the ACS number). That will probably reduce my estimates somewhat. Mitigating this is the fact that the Tax Policy Center’s calculator asks about state income taxes.
- Looking only at the states in which same-sex marriage was legal pre-Obergefell, there is an interesting (and significant) downward trend. States that legalized same-sex marriage in 2009 had a 50% marriage rate. This falls to 30% for states that legalized in 2014. A trend like this is to be expected. After all, unmarried same-sex couples in states that legalized in 2009 have had five years to make plans and decisions. A cartoon making the rounds shows a same-sex couple. One is saying to the other, “You said you’d do it once it was legal.” Exactly. Negotiating a marriage proposal and working out the details takes time. The Excel workbook contains an SPSS linear regression that may be helpful. On average, for each additional year same-sex marriage is legal, the percentage married increases by about two percentage points. Note, however, that the fit is far from exact (to put it mildly).(Warning: if you try to duplicate my results you need to use the SPSS coding for Julian dates. For your convenience, these are shown in the Excel workbook on the tab LegalStatesOnly.)
- I’m certain that there are many issues related to income distribution and incentives that I have overlooked. I hope to hear from some readers and will happily publish alternative analyses.
I started this as what I thought would be a simple exercise. It has taken me the better part of two days to finish it. My lovely wife tells me this sort of thing is good for my brain. I hope she’s correct.
 Another interesting point: the average percentage married in legal states was 34.00% while the corresponding percentage in illegal states was 36.58%.