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Another Good Tax Reform That Will Never Happen

Phil Klein opines that there’s one tax deduction worth bucking Grover Norquist over; the one for state and local taxes, because:

[I]t means that Americans who choose live in low-tax states have to effectively subsidize those who choose to live in high-tax states. It also means that people who live in high-tax states are somewhat insulated from the effects of electing politicians who raise taxes to pay for more government. The deduction also disproportionately benefits taxpayers with higher incomes.

Eliminating the deduction would raise $38 billion more in revenue over a decade than the president’s proposal to let the Bush tax rates expire for the top 2 percent of income-earners. And while it’s less targeted, state and local tax deductions do disproportionately benefit high-income earners. So it’s a tax hike with at least some progressivity, which ought to appeal to Democrats.

Charles Lane and the Examiner‘s editorial board–where Klein writes–have inked similarcolumns in recent weeks calling to end the deduction. Lane gives some details:

Two states, California and New York, reaped almost 30 percent of the deduction’s value in 2009, the latest year for which I could find Internal Revenue Service data. Other states that benefit disproportionately include Connecticut, New Jersey, Illinois, Massachusetts and Maryland.

In 2009, 73 percent of the deduction’s benefits went to taxpayers with annual incomes above $100,000, according to theCongressional Budget Office; fully 20 percent of the benefits went to taxpayers with annual incomes above $1 million.

Eliminating it would be a huge boost to state Republican parties as the burden of state taxes is felt more heavily in overwhelmingly blue states, a political incentive Klein supports:

… it would trigger an anti-tax revolt at the state level. Residents of high-tax states would put more pressure on state lawmakers to cut taxes. State lawmakers would now have to weigh more heavily the economic consequences of increasing taxes, because they’d be competing more fairly with lower-tax jurisdictions.

In response, a New Jersey legislator writes in to the WaPo touting the familiar argument that, in terms of federal tax receipts, blue states actually tend to subsidize red states:

Far from a “federal tax subsidy for ‘blue’ state governments,” New Jersey is the ultimate donor state, paying far more to the federal government in taxes than it gets back. We effectively subsidize states that have considerably lower property taxes.

On a basic level it makes sense that the high-earning, highly-populated blue states that subsidize flyover country ought not be asked to do so even more. But I don’t think tax expenditures like the state and local deduction are counted in the Tax Foundation’s analysis. So the effect may be less than we’ve been led to believe. It’s entirely plausible that the reason why those blue states don’t seem to mind subsidizing low-tax, limited-service red states is that they’re able to write off their own state-level safety nets.

Talk of eliminating it is likely to remain talk, though, especially with Republicans prepping a ‘doomsday‘ do-nothing plan, and if we’re to believe the legislators forecasting a headlong dive off the cliff. Still, it wouldn’t hurt for Republicans to offer it.

about the author

J. Arthur Bloom is managing editor of Modern Age and the former editor of The American Conservative online. He was previously deputy editor of the Daily Caller and a columnist for the Catholic Herald. He holds masters degrees in urban planning and American studies from the University of Kansas. His work has appeared in the Washington Post, the Washington Times, the Spectator (U.K.), the Guardian, Quillette, the American Spectator, Modern Age, and Tiny Mix Tapes.

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