MT income tax difference with TAXSIM35

[martinholmer]

The following integration test fails. It is not yet known whether the
tax logic problem is in TAXSIM35 or in the current PEUS code, or
whether there are problems in both models. This topic is meant to
facilitate discussion of why this test fails, primarily by reporting
the results of hand calculations required to fill out the relevant tax
form.

- name: Tax unit with taxsimid 21195 in e21.its.csv and e21.ots.csv
  absolute_error_margin: 0.01
  period: 2021
  input:
    people:
      person1:
        age: 55
        employment_income: 13010
        taxable_interest_income: 5505.0
        ssi: 0  # not in TAXSIM35
        state_supplement: 0  # not in TAXSIM35
        wic: 0  # not in TAXSIM35
        ma_covid_19_essential_employee_premium_pay_program: 0  # not in TAXSIM35
      person2:
        age: 55
        employment_income: 146010
        taxable_interest_income: 5505.0
        ssi: 0  # not in TAXSIM35
        state_supplement: 0  # not in TAXSIM35
        wic: 0  # not in TAXSIM35
        ma_covid_19_essential_employee_premium_pay_program: 0  # not in TAXSIM35
      person3:
        age: 16
        ssi: 0  # not in TAXSIM35
        state_supplement: 0  # not in TAXSIM35
        wic: 0  # not in TAXSIM35
        ma_covid_19_essential_employee_premium_pay_program: 0  # not in TAXSIM35
      person4:
        age: 16
        ssi: 0  # not in TAXSIM35
        state_supplement: 0  # not in TAXSIM35
        wic: 0  # not in TAXSIM35
        ma_covid_19_essential_employee_premium_pay_program: 0  # not in TAXSIM35
      person5:
        age: 16
        ssi: 0  # not in TAXSIM35
        state_supplement: 0  # not in TAXSIM35
        wic: 0  # not in TAXSIM35
        ma_covid_19_essential_employee_premium_pay_program: 0  # not in TAXSIM35
      person6:
        age: 16
        ssi: 0  # not in TAXSIM35
        state_supplement: 0  # not in TAXSIM35
        wic: 0  # not in TAXSIM35
        ma_covid_19_essential_employee_premium_pay_program: 0  # not in TAXSIM35
    tax_units:
      tax_unit:
        members: [person1, person2, person3, person4, person5, person6]
        premium_tax_credit: 0  # not in TAXSIM35
        local_income_tax: 0  # not in TAXSIM35
        state_sales_tax: 0  # not in TAXSIM35
        ca_use_tax: 0  # not in TAXSIM35
        il_use_tax: 0  # not in TAXSIM35
        nm_2021_income_rebate: 0  # not in TAXSIM35
        nm_additional_2021_income_rebate: 0  # not in TAXSIM35
        nm_supplemental_2021_income_rebate: 0  # not in TAXSIM35
        ny_supplemental_eitc: 0  # not in TAXSIM35
        ok_use_tax: 0  # not in TAXSIM35
        pa_use_tax: 0  # not in TAXSIM35
    spm_units:
      spm_unit:
        members: [person1, person2, person3, person4, person5, person6]
        snap: 0  # not in TAXSIM35
        tanf: 0  # not in TAXSIM35
    households:
      household:
        members: [person1, person2, person3, person4, person5, person6]
        state_fips: 30  # MT
  output:  # expected results from patched TAXSIM35 2024-02-05 version
    mt_income_tax: 8887.64

[PavelMakarchuk]

@martinholmer I believe one of the issues here is that PE assigns the household a Montana EITC of 98.85 USD,
The household is eligible for the EITC (which logic I assume is true in PE) and Montana provides a 3% match of the credit.

I believe in the out file there is no credit amount

[martinholmer]

@PavelMakarchuk said is discussion topic #3834:

I believe one of the issues here is that PE assigns the household a Montana EITC of 98.85 USD.
The household is eligible for the EITC (which logic I assume is true in PE) and Montana provides a 3% match of the credit.

I believe in the out file there is no credit amount

I don't understand your line of reasoning. This tax unit is ineligible for the federal EITC (which TAXSIM35 shows as a zero federal EITC). Because 3% of zero is zero, TAXSIM35 assigns this tax unit a zero MT EITC amount.

So, the real question here is why is Policyengine-US assigning this tax unit a MT EITC amount of $98.85.

[PavelMakarchuk]

@martinholmer I apologize, I was looking at the wrong file output.

Here are some of the questions that are actually relevant:
I am reallocating the deductions for married filing separate cases in #3886 and I believe this is the optimal way of doing so:

If implemented, the changes in #3886 will cause a significant amount of differences between TAXSIM and PE but I believe this is the most optimal allocation way

Just to describe my process:

1. Determine the diff. between and head and spouse AGI
2. Allocate the exemptions and deductions (ed) to the person with the higher AGI until the diff. is 0
3. Halve the rest of the ed and allocate to the head and spouse equally

Let me know you thoughts, I am hesitant to merge until having some input as, based on other integration tests, this will cause in PE underestimating the income tax compared to TAXSIM in some cases
The .out file shows the same amount of taxable income in PE and TAXSIM but PE produced now a lower income tax amount

[martinholmer]

Does MT law allow any kind of allocation of the exemptions and deductions?
If so, what you describe in discussion topic #3834 sounds sensible.

Why not commit your changes and I'll look at the remaining differences between PEUS and TAXSIM?

[PavelMakarchuk]

I do not see anything in the tax form instructions or in the law, given the absence of any language regarding the rules, would you think that the approach would hold up if a filer would attempt to do so on their return?

[martinholmer]

Given what you say, this kind of strategy of reducing tax liability seems legal in MT.
Why not merge this and we'll see where we stand in the testing.