The Distribution of Income, Wealth and Taxes Across Washington Households Presented by Lorrie Jo Brown, Ph.D. Washington State OFM PNREC, May 2013, Spokane

OVERVIEW A legislative mandated study. Analysis done by 3 Agencies, OFM, Department of Revenue, House Ways and Means Committee Staff. Led by OFM Forecasting.

There are 5 parts of the study: Washington Income Deciles from Income Mobility: Tracking 2005 Households Through 2009 Washington Wealth Distribution Washington State and Local Tax Burden by Income Decile History of Tax Burden over Time For entire report:

Part 1: Washington Income Deciles from 2005 to 2009

Income Distribution Over Time In 2005, 57.4% of total Washington income went to the top 20% of households, 1.5% of income went to the bottom 20% of households. The second-to-lowest quintile earned 7.5% of income. In 2009, 54.8% of total Washington income went to the top 20% of households, 1.6% of income went to the bottom 20%. The second-to- lowest quintile earned 7.5% of income. Note that only the top quintile lost a percentage of the share of total income between 2005 and 2009.

100% of FPL Approximately Corresponds to the Top of the 2 nd Decile, 200% of FPL to the 4 th Decile

All Income Deciles Decreased in Real Terms from 2005 to 2009

WASHINGTON INCOME DISTRIBUTION METHODOLOGY Income Distribution—Used IRS microdata. The tricky part was defining Households. Decided to define households as economic units. Matched married tax returns, also matched children to parents returns. Used a 3-step process for unmarried partners. First, matched non-married returns by address. Second used ACS data. Took all ACS respondents that live in a household with non-relatives and grouped them into the first-cut income quintiles. ACS also asks if the respondents live with an unmarried partner. The percentage that answered affirmative within each quintile subset of non-relative HHs was calculated. IRS non-relative households were randomly assigned non-married partner status based upon the above probabilities. Deciles and Quintiles re-run with new households.

Part 2: Income Mobility, Tracking Individual Households from 2005 to 2009

More Households that Were in WA in 2005 Moved Up Than Down from 2005 to 2009

INCOME MOBILITY METHODOLOGY Used IRS microdata longitudinally. Merged 5 years of tax return data for 2005 households that were also in 2009 (about 1.9 out of 2.5 million returns). Compared the 2009 decile with the 2005 decile for each decile.

Part 3: Washington Wealth Distribution

Washington 2010 Wealth Distribution by 2010 Wealth Quintiles Distribution from Matching SCF with ACS Washington Data Percentile of 2010 WealthShare of Total Wealth (Net Worth) Less than 20 %-0.6% 20 to 40%0.9% 40 to 60%4.8% 60 to 80%14.0% Over 80%80.8% Estimates from a match of 2010 American Community Survey PUMS data for Washington with 2010 Survey of Consumer Finance PUMS Twenty Percent of Households Own Over 80% of Wealth

The Top Income Quintile Owns Over 50% of Wealth Washington 2010 Wealth Distribution by 2010 Income Quintiles Distribution from Matching SCF with ACS Washington Data Percentile of 2010 IncomeShare of Total Wealth (Net Worth) Less than 20 %12.2% 20 to 40%8.4% 40 to 60%12.3% 60 to 80%16.2% Over 80%50.9% Estimates from a match of 2010 American Community Survey PUMS data for Washington with 2010 Survey of Consumer Finance PUMS

Less than half the Households in the Lower Two Quintiles Own Retirement Assets (Note that SS and Defined Benefit Plans not Included)

The top 5% of wealth holders own over half the total wealth in Washington State. (Note that wealth estimates for the wealthiest Washingtonians are probably understated.) Wealth owned by the top one percent of Washingtonians (excluding the seven “Forbes 400” wealth holders) is an estimated 10% of total Washington wealth. Including the seven individuals, the estimated percentage is 19%. (Note that these percentages are probably conservative.) The net worth of the approximately one percent highest wealth owners in Washington declined by 14% from 2007 to 2010 during the Great Recession. The top seven wealth holders have a total net worth estimated to be $111.1 billion by Forbes.

WEALTH DISTRIBUTION METHODOLOGY Wealth Distribution—”Hot-Decked” Survey of Consumer Finance Data with Washington State American Community Survey data using several criteria for matching. Wealth Distribution for the top 1% (with gross assets over $2 million)--Used Washington Estate Tax microdata as a sample. Used mortality tables by age and sex to determine the sample weights of each decedent.

Part 4: Washington State and Local Tax Burden by Income Decile

Taxes as Percentage of Personal Income is Over 4.5 Times as Large for the Lowest Income Decile Compared to the Highest Decile. For the 2 nd to Lowest Decile it is Almost 2.5 Times as Large

TAX BURDEN BY INCOME DECILE METHODOLOGY “Hot-Decked” Consumer Expenditure Survey data with American Community Survey for Washington State and Combined with WA tax Rates and Base.

Part 5: Washington State and local Taxes over Time

State and Local Taxes as a Percent of Personal Income Have Generally Been Declining Since 1995

State Taxes as a Percent of Personal Income Have Been Declining, Local Taxes Have Been Increasing

HISTORY OF TAX BURDEN METHODOLOGY Most of the analysis is done by the US Census Bureau.