Want More Federal Tax Revenue -- Eliminate Deductibility for State & Local Taxes and Stop Subsidy of High Tax Democrat States

In all the "fiscal cliff" talk about how to raise more revenue for the federal government, one sure-fire way is conspicuously absent from the headlines -- removing or at least limiting the deduction for state and local taxes.  The reason for the non-coverge is a combination of Democrat obfuscation and Republican incompetence.  Obama wants more federal money -- OK, let's eliminate the deduction for state and local taxes, worth a cool quarter of a trillion dollars a year to the feds. 

But this will never happen because this "fiscal cliff" kabuki theater is not about tax fairness -- if it was the deduction would already be gone.  For Obama, it's about protecting Democrats by preserving an incredibly unfair aspect of the tax code.  Allowing taxpayers to deduct their state and local taxes from their federal income tax means they pay a lot less, for a given level of income, than taxpayers in states with low state and local taxes.  Deductibility results in a subsidy from low tax states (read -- Republican controlled) to high tax states (read -- Democrat controlled).

From the Wall Street Journal editorial of 12/17/2012 (link): 

·       One post-election budget surprise has been President Obama's resistance to John Boehner's proposal to get $800 billion in new revenue by closing tax loopholes. Here's one likely reason: the high tax rates of his blue-state Democratic brethren.... 

·       One of Mr. Boehner's ideas, taking a cue from Mitt Romney, would impose a limit on annual deductions....  

·       But suddenly liberals are having second thoughts, and our guess is that this is because residents of high-tax Democratic-run states are about twice as likely to take advantage of tax loopholes as taxpayers in low-tax states....  

·       One tax writeoff in particular illustrates the point: the deduction for state and local income taxes.... Because the highest federal tax rate is 35%, the value of the state and local deduction is enormous for high-tax states....   

·       One pernicious effect, however, is to favor high-tax states at the expense of the nine states with no income tax and those with low rates. That's clear from looking at the IRS tax return data for the 50 states and the District of Columbia.  In 2010, the deduction for state and local income taxes for all states amounted to $249.7 billion....  

·       But here's the blue-state kicker: $51 billion of those writeoffs were claimed by residents of one state, California. And five liberal states—California, New York, New Jersey, Maryland and Massachusetts—accounted for about $121.8 billion.  A mere five states accounted for nearly half the federal revenue lost from this tax deduction.... 

·       All of which helps to explain what appears to be the ebbing liberal support for a tax reform that reduces rates in return for fewer deductions.  Democrats in Congress once supported that kind of reform. But these days they tend to represent states with ever-higher tax rates that prop up state and local governments dominated by public unions that demand ever-higher pay and benefits. The resulting state tax burden would be intolerable if much of it weren't passed off on Uncle Sam.... 

·       Mr. Obama wants to raise tax rates, rather than eliminate deductions, so his fellow Democrats can keep raising state and local taxes without bearing the full economic and political cost....  

I would add to the last clip from the WSJ:  “Mr. Obama wants to raise tax rates, rather than eliminate deductions, so his fellow Democrats can keep raising state and local taxes without bearing the full economic and political cost....” and thus continue to play the taxpayers of Republican-dominated low tax states for suckers.

 

John M Greco