We who applaud the boldness of Rep. Dave Camp’s tax reform plan need not like everything in it. The part that would repeal the deduction for state and local taxes is an abomination, to put it mildly.
The Michigan Republican, head of the House Ways and Means Committee, largely delivers on his vow to simplify the tax code, cut marginal rates and close loopholes.
But the deduction for state and local taxes is not a loophole. It is a cornerstone of modern federalism — the belief that power should be moved from Washington to the governments closest to the people. Using the federal tax code to hurt state and local governments’ ability to raise revenues is an attack on their authority.
Though conservatives talk a big game in favor of shifting power downward, many can’t pass on an opportunity to meddle in the decisions state and local governments make. Basically, they are betraying principles to play politics.
The high-tax states tend to be liberal. Ending the deduction for state and local taxes would drain more money from blue America. Several red state politicians are trying to pretty up the money grab with the self-flattering lie that lowtax conservative states subsidize the high-tax liberal ones.
Conservative Ramesh Ponnuru neatly reveals the agenda. Writing for Bloomberg View, Ponnuru calls the deduction for state and local taxes “a subsidy from people in low-tax states to those in hightax ones.” He adds approvingly, “It also puts a federal thumb on the scales in the debate over how big state and local governments should be.”
The size of a state or local government should be no business of Washington’s. This is a matter for the people living in these places, something a self-proclaimed federalist should understand.
In practice, low-tax America doesn’t subsidize high-tax America.
The opposite is the case.
It’s true that taxpayers in hightax states who itemize on their federal returns enjoy a bigger deduction than those of equal income in low-tax states. But it happens that high-tax states — generally in the Northeast, in the upper Midwest and on the West Coast — also have steeper incomes, pushing their people into higher federal tax brackets. These states largely pay for the federal government.
Democrats are not the only ones to make this point. New Jersey Gov. Chris Christie called out Sen. Rand Paul’s crashing hypocrisy when the Kentucky Republican called Christie — demanding federal aid for Superstorm Sandy — the “King of Bacon.”
“In fact,” Christie responded, “New Jersey is a donor state, and we get 61 cents back on every dollar we send to Washington. And interestingly, Kentucky gets $1.51 on every dollar they send to Washington.”
The federal tax code doesn’t care that a $65,000 salary goes further in El Paso than in San Francisco. To enjoy a similar standard of living, the San Franciscan would have to make $115,000, exposing him to a higher federal tax bracket.
In any case, the deduction for state and local taxes is not a true “tax expenditure” — wonk talk for government spending that parades as a tax break. Rather, Citizens for Tax Justice notes, it is “a way to define the amount of income a taxpayer has available to pay federal income taxes.”
Also, many high-tax states use these revenues to support worldclass universities, research centers and infrastructure for commerce, benefiting all the country. Some states may use their low tax rates to attract educated workers, but where did those workers get their education?
This is beside the point, however. State and local tax policy should be between these governments and their residents. Washington politicians owe these governments respect of a genuine kind.