Patterico's Pontifications

11/6/2017

A Contrary View: Deductions for State and Local Taxes Are Good Policy

Filed under: General — Patterico @ 9:00 am

Supporters of the Republican “tax cut” plan — which actually raises taxes on many in the middle class, including me — argue that eliminating the deduction for state and local taxes is good policy. I am here to tell you that it is not. Not only is it bad policy, it is unseemly to the point of being almost immoral.

This may sound shocking. You’re so used to hearing the opposite, you may never have heard the argument. But think about what is happening when you disallow the deduction. You are allowing one sovereign to tax money that the taxpayer is already paying to another sovereign.

Imagine an extortionist on a highway who takes 10% of your stuff so you can pass. Now imagine that you run into a second extortionist who takes another 10% — but says he’s taking 10% of your original amount, because it’s not his fault the first extortionist was there. It’s adding insult to injury. If you eliminate the deduction, you are telling taxpayers: you see this money that you are already being charged in taxes by one government? We’re going to pretend you still have it, and take part of it from you as well.

Moreover, allowing one sovereign to tax money already being paid to another poses genuine issues relating to the power relationship between the two sovereigns. This insight is not mine; it came from a reader of mine, who explained it this way:

I have always been of the view that it is not ok for one sovereign to tax money being paid to another sovereign. The money you pay in federal taxes should not be included in the tax base used to calculate state taxes, and the money you pay in state taxes should not be included in the tax base used to calculate federal taxes. OTHERWISE, one sovereign or the other has the power to use the tax code to control the behavior of the other, and, in extremis, to destroy it.

It seems to me that if we’re going to have a system of divided sovereignty, that’s a fundamental requirement for it to work.

So *ideologically* I am opposed to doing away with the SALT deduction, for that reason.

In response, a lot of Republicans argue that states without income taxes are “subsidizing” states that do have an income tax.

I find the premise of this argument a little puzzling. States without income taxes are not funded by fairy dust. They are also funded by tax money. In a state like Texas without an income tax, more of the money that funds state government comes from other taxes, like property taxes and sales taxes. But those are deductible too. Real estate taxes are deductible. And sales taxes are deductible for people who don’t deduct income taxes:

If you file a Form 1040, and itemize deductions on Schedule A, you have the option of claiming either state and local income taxes or state and local sales taxes (you can’t claim both).

As a California resident, I never deduct sales taxes because the IRS gives me the choice between itemizing state income tax and state sales tax, and I do better itemizing the former. But someone living in Texas can deduct their property taxes (generally a higher rate than California property taxes) and their sales taxes. I could argue that this is unfair (and I do). I pay both sales tax and state income tax and can deduct only one. Texans pay sales tax and no state income tax, and get to deduct the only one of those two taxes that they pay. But note that I don’t respond to that by whining about how it’s unfair. I don’t say Texans or Floridians should not be able to deduct sales taxes. I want lower taxes for all.

The better argument has to do, not with the type of state and local taxes being paid, but the fact that some states just tax less. So then we get the argument that low-tax states are “subsidizing” Californians. Well. Let’s please keep in mind that some states pay more in federal taxes than they take in federal benefits. These are called “donor” states, and California is one of them. Indeed, many large states with major urban areas, like California, New York, and Illinois, are donor states. So enough with this whining about you’re subsidizing states with large urban areas such as my state of California. On the contrary: we are subsidizing you.

But let’s say you still believe that citizens of lower-tax states are being treated unfairly. There are different ways of achieving fairness. Not all of them involve hurting the other guy. To illustrate, let me tell a story. This is taken from the book Red Notice, by Bill Browder. It is a famous Russian story about the character of the Russian people:

One day, a poor villager happens upon a magic talking fish that is ready to grant him a single wish. Overjoyed, the villager weighs his options: “Maybe a castle? Or even better—a thousand bars of gold? Why not a ship to sail the world?” As the villager is about to make his decision, the fish interrupts him to say that there is one important caveat: whatever the villager gets, his neighbor will receive two of the same. Without skipping a beat, the villager says, “In that case, please poke one of my eyes out.”

This sentiment is not unique to Russia. The desire to see one’s neighbor screwed is universal. Just pretend that the neighbor in the story is a smug urban Democrat. All of a sudden you’re willing to poke out one of your own eyes to see two of his poked out, aren’t you?

And indeed, with a little tweaking, the current argument over SALT deductions fits this proverb. Having both houses of Congress and the Presidency is a little like having a magic talking fish. In theory, you should be able to get what you want. So let’s say what you really want is fairness — and you have had one of your eyes poked out, while your neighbor hasn’t had any. Should you ask the talking fish to poke out one of your neighbor’s eyes? Or is it rather the sensible thing to ask the talking fish to restore your own poked-out eyeball?

If you’re not into parables about eyes getting poked out, there’s always the Rush song “The Trees” which makes a similar point:

If you don’t know the song, the story is that the shorter trees are upset at the taller trees for taking too much light. They demand equal rights, and eventually get them — when all the trees are cut down entirely, achieving total equality for all! Yay!

I never thought I’d see Republicans looking to add thousands of dollars to the tax bill of middle-class Americans in the interest of “fairness.” But that’s apparently where we are. The desire of one man to cut another man down for the sake of “equality” is, it seems, not limited to socialists and Democrats. This ugly sentiment lies in the hearts of Republicans as well.

If you think it’s unfair for those of us who live in high-tax states to have that money deducted, while you are not able to deduct so much, agitate for lower taxation for yourself. As a conservative living in a high-tax state, I’ll be right there with you. But if you are agitating for a bill that is going to add several thousand dollars to my tax liability — as this bill would do — then you and I are in a political fight. And guess what? I think you’re going to lose this one.

Small-staters (and sometimes others) also like say to California conservatives like me: “Well, this is the incentive you need to get your state government to tax less.” Pardon me a moment while I laugh uproariously.

You think I have any control over what our insane California legislature and governor do? I can assure you that I have as much control over the California legislature as you have over what Congress does with ObamaCare repeal. None. If I say to you: “Gee, looks like you have a problem with ObamaCare. You should really speak to your legislator about that!” you will likely respond that you have done so until you are blue in the face and it gets you nowhere. Guess what? That’s how conservatives in California feel. We have no control and we are shouldering a huge state income tax burden against our wishes. Piling on even more taxes from the feds is not acceptable.

And if you respond to that by saying: “OK, so then move to Texas if you don’t like paying high state income tax!” I will say in response: “OK, so then move to California if you don’t like being unable to deduct lots of state income tax!” Arguments like that are annoying point-scoring achieving nothing, ignoring the fact that people live where they live for all kinds of different reasons, of which politics and tax policy is only one among many.

Don’t get me wrong. I agree with the arguments that we should be simplifying the tax code. For example, the home mortgage interest deduction, from which I benefit, distorts the home sales market. Unlike the deduction for SALT, the home mortgage interest deduction has no similarly compelling principle behind it, like avoidance of one sovereign taxing money that is already being paid to a second sovereign. The deduction should be eliminated.

But only in a way that does not raise my overall tax bill.

The TEA in “TEA Party” stands for “Taxed Enough Already” and that is how I feel. The federal government is drunk on spending. We have a $20 trillion deficit and that is a spending problem, not a revenue problem. So I deeply resent any suggestion that I should have to pay more. Rand Paul may be preoccupied with other issues today, but he was right when he said this:

What I will not accept is a tax hike on the middle and upper middle class, sacrificing their paychecks on the altar of “reform.”

Not one American outside of Washington, D.C., cares about bullet points on some tax wonk’s white paper, eagerly presented over lunch at a think tank. All they justifiably care about is “will I pay more or less under your plan than I do now?” The answer, for the sake of the GOP and our economy, must be LESS for everyone.

So go ahead and smooth out your distortions in the tax code. But do not cost my household thousands of dollars per year while you do it.

As it stands right now, this GOP plan is hitting the working upper middle class to give big tax breaks to the very wealthy. I’m FOR big tax breaks for the wealthy. But I will fight them if they try to pay for them by taking it out of my hide.

Between doing nothing and doing something that will cost me thousands, you’re damned right I am for nothing. And there are many, many more like me. If politicians pass this bill without fixing the parts that raise taxes on us, there will be hell to pay next November.

[Cross-posted at RedState and The Jury Talks Back.]


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