Fix Social Security secondary earnings threshold reform

changelog.d/fix-secondary-earnings-threshold-donut.fixed.md

@@ -0,0 +1 @@
+Fix the CBO Social Security secondary earnings threshold reform to include self-employment earnings, avoid negative SECA and overlapping tax bases, activate for future-dated thresholds, and preserve Connecticut and Delaware paid-leave contribution bases.

policyengine_us/parameters/gov/contrib/cbo/payroll/secondary_earnings_threshold.yaml

@@ -1,9 +1,9 @@
-description: The US levies payroll taxes on earnings greater than this amount, in addition to earnings below the maximum taxable amount under current law.
+description: The US levies payroll taxes on earnings greater than this amount, in addition to earnings below the maximum taxable amount under current law. With a fixed $250,000 threshold, the model's current-law cap of $254,400 closes the donut in 2035, one year before the 2036 date projected in CBO's 2024 option.
 values:
   2021-01-01: .inf
 metadata:
   unit: USD
   label: Social Security payroll tax secondary earnings threshold
   reference:
     - title: Increase the Maximum Taxable Earnings That Are Subject to Social Security Payroll Taxes, option alternative 2
-      href: https://www.cbo.gov/budget-options/58630
+      href: https://www.cbo.gov/budget-options/60955

policyengine_us/reforms/cbo/payroll/increase_taxable_earnings_for_social_security.py

@@ -8,20 +8,53 @@ class taxable_earnings_for_social_security(Variable):
         label = "Taxable gross earnings for OASDI FICA"
         definition_period = YEAR
         unit = USD
+        reference = (
+            "https://www.cbo.gov/budget-options/60955",
+            "https://www.ssa.gov/OACT/solvency/provisions_tr2025/charts/chart_run418.html",
+        )
 
         def formula(person, period, parameters):
             earnings = person("payroll_tax_gross_wages", period)
             p = parameters(period).gov
-            base_taxable = min_(earnings, p.irs.payroll.social_security.cap)
-            secondary_taxable = max_(
-                0,
-                earnings - p.contrib.cbo.payroll.secondary_earnings_threshold,
+            cap = p.irs.payroll.social_security.cap
+            secondary_threshold = max_(
+                p.contrib.cbo.payroll.secondary_earnings_threshold, cap
             )
+            base_taxable = min_(earnings, cap)
+            # The bases meet without overlapping once the cap closes the donut.
+            secondary_taxable = max_(0, earnings - secondary_threshold)
+            return base_taxable + secondary_taxable
+
+    class social_security_taxable_self_employment_income(Variable):
+        value_type = float
+        entity = Person
+        label = "Taxable self-employment income for computing Social Security tax"
+        definition_period = YEAR
+        unit = USD
+        reference = (
+            "https://www.cbo.gov/budget-options/60955",
+            "https://www.law.cornell.edu/uscode/text/26/1402#b",
+            "https://www.ssa.gov/OACT/solvency/provisions_tr2025/charts/chart_run418.html",
+        )
+
+        def formula(person, period, parameters):
+            earnings = person("taxable_self_employment_income", period)
+            wages = person("payroll_tax_gross_wages", period)
+            p = parameters(period).gov
+            cap = p.irs.payroll.social_security.cap
+            secondary_threshold = max_(
+                p.contrib.cbo.payroll.secondary_earnings_threshold, cap
+            )
+            # Wages fill the combined base first, both below the cap and
+            # above the secondary threshold. Only the remaining SE is taxed.
+            base_taxable = min_(earnings, max_(0, cap - wages))
+            secondary_taxable = max_(0, earnings - max_(0, secondary_threshold - wages))
             return base_taxable + secondary_taxable
 
     class reform(Reform):
         def apply(self):
             self.update_variable(taxable_earnings_for_social_security)
+            self.update_variable(social_security_taxable_self_employment_income)
 
     return reform
 
@@ -32,9 +65,10 @@ def create_increase_taxable_earnings_for_social_security_reform(
     if bypass:
         return create_increase_taxable_earnings_for_social_security()
 
-    p = parameters(period).gov.contrib.cbo.payroll
-
-    if p.secondary_earnings_threshold < np.inf:
+    threshold = parameters.gov.contrib.cbo.payroll.secondary_earnings_threshold
+    # Inspect dated overrides, as in the CA Proposition 3 reform, rather
+    # than only the simulation's start instant or a fixed lookahead window.
+    if any(np.isfinite(value.value) for value in threshold.values_list):
         return create_increase_taxable_earnings_for_social_security()
     else:
         return None

policyengine_us/tests/policy/baseline/gov/irs/self_employment/social_security_taxable_self_employment_income.yaml

@@ -0,0 +1,47 @@
+- name: Default is zero.
+  period: 2024
+  output:
+    social_security_taxable_self_employment_income: 0
+
+- name: Self-employment earnings below the remaining cap are fully taxable.
+  period: 2024
+  input:
+    payroll_tax_gross_wages: 100_000
+    taxable_self_employment_income: 50_000
+  output:
+    social_security_taxable_self_employment_income: 50_000
+
+- name: Self-employment earnings fill the remaining current-law cap.
+  period: 2024
+  input:
+    payroll_tax_gross_wages: 100_000
+    taxable_self_employment_income: 100_000
+  output:
+    # The 168,600 cap leaves 68,600 after wages.
+    social_security_taxable_self_employment_income: 68_600
+
+- name: Wages at the current-law cap leave no taxable self-employment earnings.
+  period: 2024
+  input:
+    payroll_tax_gross_wages: 168_600
+    taxable_self_employment_income: 50_000
+  output:
+    social_security_taxable_self_employment_income: 0
+
+- name: Wages above the current-law cap leave no taxable self-employment earnings.
+  period: 2024
+  input:
+    payroll_tax_gross_wages: 400_000
+    taxable_self_employment_income: 50_000
+  output:
+    taxable_earnings_for_social_security: 168_600
+    social_security_taxable_self_employment_income: 0
+
+- name: A reform or direct input exceeding the cap cannot make self-employment tax negative.
+  period: 2024
+  input:
+    taxable_earnings_for_social_security: 400_000
+    taxable_self_employment_income: 50_000
+  output:
+    social_security_taxable_self_employment_income: 0
+    self_employment_social_security_tax: 0

policyengine_us/tests/policy/contrib/cbo/payroll/ct_employee_paid_leave_contribution.yaml

@@ -0,0 +1,14 @@
+- name: Connecticut paid leave retains the federal wage cap under the secondary threshold reform.
+  period: 2027
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  absolute_error_margin: 0.01
+  input:
+    state_code: CT
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 192_300
+    payroll_tax_gross_wages: 400_000
+  output:
+    # The federal reform is active, but C.G.S. 31-49g(b)(1) retains the cap.
+    taxable_earnings_for_social_security: 342_300
+    # 192,300 * 0.5% = 961.50.
+    ct_employee_paid_leave_contribution: 961.50

policyengine_us/tests/policy/contrib/cbo/payroll/de_employee_paid_leave_contribution.yaml

@@ -0,0 +1,17 @@
+- name: Delaware paid leave retains the federal wage cap under the secondary threshold reform.
+  period: 2027
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  absolute_error_margin: 0.01
+  input:
+    state_code: DE
+    employer_headcount: 25
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 192_300
+    payroll_tax_gross_wages: 400_000
+  output:
+    # 19 Del. C. 3701(24) and 19 DE Admin. Code 1401, section 5.5 retain the cap.
+    taxable_earnings_for_social_security: 342_300
+    de_paid_leave_contribution_rate: 0.008
+    # Each share is 192,300 * (0.4% + 0.08% + 0.32%) * 50% = 769.20.
+    de_employee_paid_leave_contribution: 769.20
+    de_employer_paid_leave_contribution: 769.20

policyengine_us/tests/policy/contrib/cbo/payroll/social_security_taxable_self_employment_income.yaml

@@ -0,0 +1,81 @@
+- name: Self-employment fills the remaining cap and crosses the upper edge of the donut.
+  period: 2027
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  input:
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 192_300
+    payroll_tax_gross_wages: 180_000
+    taxable_self_employment_income: 100_000
+  output:
+    # Remaining cap = 12,300; combined earnings exceed 250,000 by 30,000.
+    social_security_taxable_self_employment_income: 42_300
+
+- name: Combined earnings inside the donut do not add taxable self-employment earnings.
+  period: 2027
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  input:
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 192_300
+    payroll_tax_gross_wages: 200_000
+    taxable_self_employment_income: 40_000
+  output:
+    taxable_earnings_for_social_security: 192_300
+    social_security_taxable_self_employment_income: 0
+
+- name: Combined earnings exactly at the upper edge of the donut add no taxable self-employment earnings.
+  period: 2027
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  input:
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 192_300
+    payroll_tax_gross_wages: 200_000
+    taxable_self_employment_income: 50_000
+  output:
+    social_security_taxable_self_employment_income: 0
+
+- name: The first dollar above the combined earnings threshold is taxable self-employment income.
+  period: 2027
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  input:
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 192_300
+    payroll_tax_gross_wages: 200_000
+    taxable_self_employment_income: 50_001
+  output:
+    social_security_taxable_self_employment_income: 1
+
+- name: Self-employment earnings below the threshold fill only the remaining cap.
+  period: 2027
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  input:
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 192_300
+    payroll_tax_gross_wages: 100_000
+    taxable_self_employment_income: 100_000
+  output:
+    taxable_earnings_for_social_security: 100_000
+    social_security_taxable_self_employment_income: 92_300
+
+- name: Self-employment alone receives both the capped base and earnings above the threshold.
+  period: 2027
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  input:
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 192_300
+    payroll_tax_gross_wages: 0
+    taxable_self_employment_income: 300_000
+  output:
+    # 192,300 below the cap plus 50,000 above the threshold.
+    social_security_taxable_self_employment_income: 242_300
+
+- name: Self-employment dollars are taxed once after the cap exceeds the threshold.
+  period: 2036
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  input:
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 263_100
+    payroll_tax_gross_wages: 240_000
+    taxable_self_employment_income: 40_000
+  output:
+    # 23,100 of remaining cap plus 16,900 above 263,100 equals all 40,000.
+    social_security_taxable_self_employment_income: 40_000

policyengine_us/tests/policy/contrib/cbo/payroll/taxable_earnings_for_social_security.yaml

@@ -0,0 +1,65 @@
+- name: Earnings above the donut threshold do not create negative SECA without self-employment income.
+  period: 2027
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  absolute_error_margin: 0.01
+  input:
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 192_300
+    payroll_tax_gross_wages: 400_000
+    self_employment_income: 0
+  output:
+    # Wage base = 192,300 + (400,000 - 250,000) = 342,300.
+    taxable_earnings_for_social_security: 342_300
+    social_security_taxable_self_employment_income: 0
+    # Employee and employer each pay 342,300 * 6.2% = 21,222.60.
+    employee_social_security_tax: 21_222.60
+    employer_social_security_tax: 21_222.60
+    self_employment_social_security_tax: 0
+
+- name: Self-employment earnings above the threshold join wages in the taxable base.
+  period: 2027
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  absolute_error_margin: 0.01
+  input:
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 192_300
+    payroll_tax_gross_wages: 300_000
+    self_employment_income: 50_000
+  output:
+    # Wage base = 192,300 + (300,000 - 250,000) = 242,300.
+    taxable_earnings_for_social_security: 242_300
+    # Net SE earnings = 50,000 * 0.9235 = 46,175, all above the threshold.
+    taxable_self_employment_income: 46_175
+    social_security_taxable_self_employment_income: 46_175
+    employee_social_security_tax: 15_022.60
+    employer_social_security_tax: 15_022.60
+    # SECA = 46,175 * 12.4% = 5,725.70.
+    self_employment_social_security_tax: 5_725.70
+
+- name: A cap above the threshold taxes each dollar of wages once.
+  period: 2036
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  absolute_error_margin: 0.01
+  input:
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 263_100
+    payroll_tax_gross_wages: 400_000
+    self_employment_income: 0
+  output:
+    # Wage base = 263,100 + (400,000 - 263,100) = 400,000.
+    taxable_earnings_for_social_security: 400_000
+    social_security_taxable_self_employment_income: 0
+    # Each FICA share = 400,000 * 6.2% = 24,800; SECA remains zero.
+    employee_social_security_tax: 24_800
+    employer_social_security_tax: 24_800
+    self_employment_social_security_tax: 0
+
+- name: Wages between the threshold and a higher cap are taxed once.
+  period: 2036
+  reforms: policyengine_us.reforms.cbo.payroll.increase_taxable_earnings_for_social_security.increase_taxable_earnings_for_social_security
+  input:
+    gov.contrib.cbo.payroll.secondary_earnings_threshold: 250_000
+    gov.irs.payroll.social_security.cap: 263_100
+    payroll_tax_gross_wages: 255_000
+  output:
+    taxable_earnings_for_social_security: 255_000