By Erick Cutler
In the United States, political controversies surrounding taxation inevitably focus on personal income and corporate revenue taxes. In many ways, that dynamic makes sense, as both types of taxes are high-profile and clearly visible to most voters. However, income and revenue taxes are only one component of the entire taxation landscape, and the gap between those amounts and the total amount of taxes collected by federal and state governments is filled with “buried taxes.”
From imports and cigarettes to paycheck withholding and more, here are five of the most common hidden taxes:
A “sin tax” is a colloquial term for any tax levied on a product that society at large views as harmful. Tobacco products, gambling, and alcohol are the types of products that come to mind for most people when they think of a sin tax, but the term can also include any tax by which the stated purpose is to discourage unwanted consumer and lifestyle behavior.
Most sin taxes are “hidden” in the sense that you won’t see a line item for their cost on your receipts the way you usually do for a sales tax.
The burden of a sin tax can vary widely, as illustrated by tobacco taxes. In Alaska, consumers of tobacco products are assessed a hidden tax of $2.00 per pack of cigarettes, while most shoppers in New York State are assessed $4.35. Residents of New York City pay a combined total of $5.85 in taxes for every pack.
The Marriage Penalty
In most cases, married couples who file joint tax returns end up paying a lower collective amount than they would if filing as single individuals. However, in some circumstances and tax jurisdictions, the reverse is true, and couples end up paying more in taxes as joint filers. This especially true when filers are on the borderline between tax brackets.
Take the case of two individuals who each make $100,000 per year. Each person would pay around 28 percent in taxes as an individual filer, for $43,234 in combined taxes between the two. If those two people were instead married and filed a joint tax return, their total tax owed would be closer to $44,070, a difference of nearly $850.
In reality, credits, deductions, and other marriage-oriented loopholes typically forestall people from paying higher taxes when filing as married, but it remains a possibility depending on the particular financial circumstances involved.
With border taxes and economic protectionism making headlines in the current political climate, it’s important to remember that your consumer activity already brings you into frequent contact with import and other excise taxes.
The tax landscape for imports is notoriously complex, so it’s difficult to calculate the impact on any given product. Still, most research falls in line with a study from Progressive Economy which shows tariffs and other import-related taxation increase the price of an average inexpensive sneaker by nearly 30 percent, from around $15 to more than $23.
In nearly every case, the cost incurred by importers to bring goods into the country is passed directly onto the consumer and simply adds to the final suggested retail price behind the scenes, making such costs the very definition of a hidden tax.
In most cases, any taxes assessed directly on the households and businesses buying gas, electricity, and water are clearly itemized on their utility bills. However, an entirely separate layer of taxation that impacts the amount you owe runs under the surface. Usually, these taxes are levied on the utility itself, which then passes the cost on to its customers.
Consider the residents of New York City, most of whom buy gas and electricity from the iconic Con Edison utility. Since New York is one of the most expensive real estate markets in the country, Con Edison’s various properties, from office buildings to electrical substations, sit on very expensive land, requiring the utility to pay commensurately expensive property taxes. The cost of those taxes is passed on to the utility’s customers, without being specifically noted on the bill. In Con Edison’s case, the utility estimates that such expenses comprise 25 to 30 percent of the average customer’s billed total.
Working Americans are very familiar with the list of itemized fees and taxes withheld from their paychecks every month. While some are clearly noted, as is the case with FICA withholdings, most employers don’t include many of the tax expenses they factor into your wages.
Medicare, Social Security, and unemployment taxes are typical examples, as all employers are required to pay those expenses for each and every employee, but many don’t itemize them on your pay stub. Instead, they simply factor such costs (along with things like health care expenses, when relevant) into the total wage they’re willing to offer you. In this way, even though it’s a tax owed by the employer, not the employee, the final amount is ultimately deducted from the employee’s wages, not the company’s bottom line.
Ultimately, the usefulness of understanding these hidden taxes varies by person, but in discussions of the overall tax landscape, these hidden expenses are inarguably relevant. In some cases, such buried taxes can have a larger financial impact than clearly visible taxes, making it vital to understand exactly what you’re paying, and when.
Contact the tax experts at Goldin Peiser & Peiser for additional information on this subject or any other topic related to your taxes.
Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.