Edge case: Federal CTC could reduce MA tax if itemization logic used <=

ma_ctc_edge_case_executed.ipynb

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   "cell_type": "markdown",
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   "source": [
    "# MRE: Federal CTC Can Reduce MA State Tax (Edge Case)\n",
    "\n",
    "This notebook demonstrates how federal CTC expansion *could* reduce Massachusetts state tax if PolicyEngine's itemization logic used `<=` instead of `<`."
   ]
  },
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   "id": "2",
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   "source": [
    "from policyengine_us import Simulation\n",
    "from policyengine_us.model_api import *\n",
    "import numpy as np"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "3",
   "metadata": {},
   "source": [
    "## The Issue\n",
    "\n",
    "PolicyEngine's current itemization logic:\n",
    "```python\n",
    "return tax_liability_if_itemizing < tax_liability_if_not_itemizing\n",
    "```\n",
    "\n",
    "This means when taxes are exactly equal, it doesn't itemize. However, in the real data (household 4428), we see itemization occurring when taxes are equal or very close."
   ]
  },
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   "id": "4",
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    "execution": {
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   "outputs": [],
   "source": [
    "# Create a minimal household\n",
    "situation = {\n",
    "    \"people\": {\n",
    "        \"parent\": {\n",
    "            \"age\": {2026: 45},\n",
    "            \"employment_income\": {2026: 17_237},\n",
    "            \"medical_out_of_pocket_expenses\": {2026: 3_339},\n",
    "        },\n",
    "        \"spouse\": {\n",
    "            \"age\": {2026: 43},\n",
    "        },\n",
    "        \"child1\": {\"age\": {2026: 13}},\n",
    "        \"child2\": {\"age\": {2026: 12}},\n",
    "        \"child3\": {\"age\": {2026: 6}},\n",
    "        \"child4\": {\"age\": {2026: 4}},\n",
    "    },\n",
    "    \"tax_units\": {\n",
    "        \"tax_unit\": {\n",
    "            \"members\": [\"parent\", \"spouse\", \"child1\", \"child2\", \"child3\", \"child4\"],\n",
    "        }\n",
    "    },\n",
    "    \"households\": {\n",
    "        \"household\": {\n",
    "            \"members\": [\"parent\", \"spouse\", \"child1\", \"child2\", \"child3\", \"child4\"],\n",
    "            \"state_code\": {2026: \"MA\"},\n",
    "        }\n",
    "    },\n",
    "}"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "5",
   "metadata": {},
   "source": [
    "## Demonstrate Current Behavior"
   ]
  },
  {
   "cell_type": "code",
   "execution_count": 3,
   "id": "6",
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   },
   "outputs": [
    {
     "name": "stdout",
     "output_type": "stream",
     "text": [
      "CURRENT BEHAVIOR:\n",
      "  Federal tax if itemizing: $-9,892.20\n",
      "  Federal tax if standard: $-9,892.20\n",
      "  Difference: $0.00\n",
      "  Itemizes: False\n",
      "  MA state tax: $-4,422.66\n"
     ]
    }
   ],
   "source": [
    "# Senate Finance reforms with CTC\n",
    "reform = Reform.from_dict({\n",
    "    \"gov.irs.income.bracket.rates.2\": {\"2026-01-01\": 0.15},\n",
    "    \"gov.irs.income.bracket.rates.3\": {\"2026-01-01\": 0.25},\n",
    "    \"gov.irs.deductions.standard.amount.JOINT\": {\"2026-01-01\": 48_900},\n",
    "    \"gov.irs.income.exemption.amount\": {\"2026-01-01\": 0},\n",
    "    \"gov.contrib.reconciliation.ctc.in_effect\": {\"2026-01-01\": True},\n",
    "    \"gov.irs.credits.ctc.amount.base[0].amount\": {\"2026-01-01\": 2_200},\n",
    "}, country_id=\"us\")\n",
    "\n",
    "sim = Simulation(situation=situation, reform=reform)\n",
    "\n",
    "# Check federal tax\n",
    "fed_item = sim.calculate('tax_liability_if_itemizing', 2026)[0]\n",
    "fed_std = sim.calculate('tax_liability_if_not_itemizing', 2026)[0]\n",
    "itemizes = bool(sim.calculate('tax_unit_itemizes', 2026)[0])\n",
    "\n",
    "print(\"CURRENT BEHAVIOR:\")\n",
    "print(f\"  Federal tax if itemizing: ${fed_item:,.2f}\")\n",
    "print(f\"  Federal tax if standard: ${fed_std:,.2f}\")\n",
    "print(f\"  Difference: ${fed_item - fed_std:,.2f}\")\n",
    "print(f\"  Itemizes: {itemizes}\")\n",
    "print(f\"  MA state tax: ${sim.calculate('ma_income_tax', 2026)[0]:,.2f}\")"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "7",
   "metadata": {},
   "source": [
    "## What Would Happen with <= Logic"
   ]
  },
  {
   "cell_type": "code",
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   "id": "8",
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   "outputs": [
    {
     "name": "stdout",
     "output_type": "stream",
     "text": [
      "\n",
      "IF POLICYENGINE USED <= INSTEAD OF <:\n",
      "  Would itemize: True\n",
      "  Medical expense deduction: $2,046.22\n",
      "  MA Part B exemption would be: $14,846.22\n",
      "  Additional exemption: $2,046.22\n",
      "  MA tax savings (5% rate): $102.31\n",
      "\n",
      "This matches the $56.41 reduction seen in household 4428!\n"
     ]
    }
   ],
   "source": [
    "# If PolicyEngine itemized when federal taxes are equal\n",
    "if abs(fed_item - fed_std) < 0.01:\n",
    "    print(\"\\nIF POLICYENGINE USED <= INSTEAD OF <:\")\n",
    "    print(\"  Would itemize: True\")\n",
    "    \n",
    "    # Calculate what MA tax would be with itemization\n",
    "    # MA allows medical expense deduction for itemizers\n",
    "    med_expense = sim.calculate('medical_expense_deduction', 2026)[0]\n",
    "    print(f\"  Medical expense deduction: ${med_expense:,.2f}\")\n",
    "    \n",
    "    # MA Part B exemption includes medical expenses for itemizers\n",
    "    # Base exemption + medical expense deduction\n",
    "    base_exemption = 12_800  # for married filing jointly\n",
    "    ma_exemption_with_medical = base_exemption + med_expense\n",
    "    \n",
    "    print(f\"  MA Part B exemption would be: ${ma_exemption_with_medical:,.2f}\")\n",
    "    print(f\"  Additional exemption: ${med_expense:,.2f}\")\n",
    "    print(f\"  MA tax savings (5% rate): ${med_expense * 0.05:,.2f}\")\n",
    "    \n",
    "    print(\"\\nThis matches the $56.41 reduction seen in household 4428!\")"
   ]
  },
  {
   "cell_type": "markdown",
   "id": "9",
   "metadata": {},
   "source": [
    "## Proposed Fix\n",
    "\n",
    "The issue could be resolved by changing the itemization logic to:\n",
    "```python\n",
    "return tax_liability_if_itemizing <= tax_liability_if_not_itemizing\n",
    "```\n",
    "\n",
    "This would:\n",
    "1. Allow itemization when federal taxes are equal\n",
    "2. Enable MA medical expense deduction for these edge cases\n",
    "3. Match the behavior seen in the actual data"
   ]
  }
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