As we debate tax reform, there seems to be a growing consensus among conservative commentators that in order to pay for lower rates, we need to target deductions, which is largely correct. One specific target, however, is misguided. That target is the state tax deduction. The arguments being offered for eliminating this “give away” are somewhat surprising and far from “conservative.”
It seems that the odious calculations of “identity politics” with which many Democrats have gleefully played for generations, joined lately by growing numbers within the Republican coalition, now are starting to influence the opinions of many conservatives as to what makes good tax policy. Kevin Williamson in National Review, for instance, writes of his support for eliminating the state income tax deduction, in large part because “it constitutes a very substantial tax increase on the sort of well-kept and comfortable lefty Californians and New Yorkers from whom we tend to hear more than maybe we really want to on all sorts of political issues.” Considerations of fairness and justice seem to be losing out to calculations about who such policies would help, and, perhaps more importantly, who such policies would hurt.
As a matter of full-disclosure, I was born and raised in California and still live and work in the state. In 2016, as in most years, I itemized deductions on my federal tax return, and my largest deduction was my state tax (California has the highest income tax rates in the country). But though I get a federal deduction for my California taxes paid, I, like most people who itemize deductions, also effectively have that benefit capped by the insidious alternative minimum tax, which is, in essence, a sliding cap on aggregate deductions of any sort. My own federal tax savings, consistent with studies by the Joint Committee on Taxation and others estimating the impact of the deduction on those who itemize deductions on taxable income under $200,000 per year, was modest. And if an elimination of the state tax deduction were to be paired with an increase in the standard deduction to $24,000 and/or an elimination of the alternative minimum tax (as has been floated), the net cost to me (and many others) of losing the state income tax deduction would be small, indeed. So I may have a small economic incentive here, but hardly one large enough to induce me to sell my intellectual soul. Having gotten that out of the way, let me explain why getting rid of the state income tax deduction is wrong.
For conservatives, the most important question for evaluating policy should be whether it is just to the individual. So I put the question to you, is it just to tax someone on income he never sees? If someone has his income taxed by the state government, is it just that the federal government then tax that person on that portion of his income taken by his state government — whether that state be a high-tax state like California, or a lower-tax state like Colorado? The principle that individuals should not be taxed at the federal level on income already taxed away by the state is one that conservatives should fight for reflexively. Do conservatives really want to sacrifice this principle simply because people in high-tax “Blue” states get more of a “benefit” from this?
Investor’s Business Daily editorializes that the state tax deduction is bad because the biggest beneficiaries are mostly high-tax “blue” states. In addition to sounding like Bernie Sanders, bemoaning that 88% of the benefits of the state tax deduction go to people earning over $100,000 per year, IBD specifically targets California (which has about 12% of the nation’s population) for receiving an estimated 20% of the value of the deductions. So, what’s the point here? Should we also be against lowering marginal rates because most of the benefit will go to people making over $100,000 a year, and will go disproportionately to states with the highest taxable incomes (which are not coincidently often high tax states, as well)? After all, one reason that Californians have higher than average incomes is employers here need to offer more to compensate employees for the high cost of living — which is high, in large part, because of the high tax burden.
IBD and other conservative commentators, including the usually clear-thinking Kevin Williamson, argue that the state income tax deduction is a “subsidy” for high-tax “blue” states. Though the deduction does make a high state tax slightly less onerous, it does not “encourage” states to raise their own tax rates. I don’t know of anyone who even attempts to quantify the “benefit” of the state income tax deduction in order to plug it into some calculation of whether to continue to live in a high-tax state. And no one making, say $150,000 a year, is going to sell his house, quit his job, and move his family to another state as a result of losing an approximate net $1,000 tax break. And the argument that eliminating the deduction is merely “sticking it” to people who freely vote for high taxes anyway conveniently ignores the fact that in any state “taxpayers” are only a subset of “voters.”
Perhaps the argument can be made by conservatives to cap the state income tax deduction at some very high level that would impact a very few high-income individuals who don’t “need” a deduction, in order to introduce a further level of progressivity to the overall “tax reform” package. That would be an argument of practical, political expediency. Let’s not pretend that it would represent an advancement of conservative ideology.
Again, it is important to remember that we are talking about the taxing of individuals, not of states. Individuals in “Blue” states like California are not just all rich, liberal Hollywood moguls and Silicon Valley tech company executives. It should not matter to conservatives who these taxpayers are, but they are also mechanics in Fresno and Marine Corps officers in Oceanside. And in California, you don’t need to make a lot of money to be taxed at high rates. The marginal rate for an individual making more than $40,733 is 8%, and that jumps to 9.3% at only $51,530.
Would it be right for auto workers in Ohio, or oil workers in Oklahoma, or office managers in Arizona to have to pay federal taxes on income taxed away by their state governments? Does the answer to that question depend on whether their counterparts in California or New York or Minnesota pay higher state income taxes? If conservatives believe the answer to either of those questions is “yes” then conservatism has, indeed, lost its bearings.