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Friday, December 7, 2012

NY Times: Keep the State & Local Tax Deduction

New York Times editorial:  Keep the State Tax Deduction:

As they continue to wrangle over the year-end fiscal deadline, both Democrats and Republicans are considering caps on federal income-tax deductions.

That could be very bad news for residents of New York, New Jersey and other states and cities that rely heavily on their own income taxes. Such a cap would reduce the value of the deduction for state and local income taxes, which has been part of the federal tax code for a century (though the deduction has been diluted by the alternative minimum tax). That could substantially reduce middle-class disposable incomes in high-tax states, which, in turn, would put pressure on those states to cut taxes and the services they have long chosen to provide. (A cap would also affect property and sales taxes, though those are spread around more evenly among all the states.)

The theory behind the deduction was that the amount paid to states in taxes is not really part of an individual’s disposable income, because it is obligatory and, therefore, should not be taxed twice. Over time, the deduction has become the equivalent of a subsidy from the federal government to states that believe in a strong and active government. That may infuriate conservatives in low-tax states like Texas, who hate subsidizing states with different views of government’s role, but it’s actually a good thing for the country.

The deduction is Washington’s way of supporting states that support their most vulnerable citizens and neediest cities. The seven states that account for 90 percent of state and local tax deductions (including sales and property taxes) — New York, New Jersey, California, Pennsylvania, Maryland, Illinois and Massachusetts — generally do a better job of providing for the health and welfare of their citizens, and are more willing to pay for institutions that are good for society as a whole.

From the Tax Foundation:

Map

(Hat Tip: Mike Talbert.)

http://taxprof.typepad.com/taxprof_blog/2012/12/ny-times--3.html

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Comments

Wow, they're serving up some self-serving BS there.

Why should the feds be subsidizing the high tax states? What's wrong with the citizens who benefit from the "strong and active government" paying full freight for it?

"[The high tax states] generally do a better job of providing for the health and welfare of their citizens, and are more willing to pay for institutions that are good for society as a whole." Well, except they don't sound too willing to pay 100% of the cost in this op-ed.

(Don't get me wrong, I like the benefit of the deduction, but let's not get delusional.)

Posted by: Cut Spending | Dec 7, 2012 6:10:56 PM

Why is property tax not included on that map?

Posted by: AMTbuff | Dec 7, 2012 11:04:47 PM

Hoping to see heads explode. Note that the "wealthy" typically live in states that take the highest deduction. So taking away the deduction would be "taxing the rich". Except the Democrats rely on the votes from these people, so we should not raise *their* taxes.

I guess "taxing the rich" only applies if they live in red states.

Posted by: Darth Chocolate | Dec 8, 2012 5:12:25 AM

These State and local taxes aren't involuntary. Under our Federal system, the voters in those jurisdictions choose to be so taxed. They deduct the taxes and get back income tax free services from their government. Why people in other States should subsidize the Federal income tax-laundering their incomes though Albany, Sacramento or Trenton is hard to fathom.

Posted by: Joseph W. Mooney | Dec 8, 2012 6:37:17 AM

I agree that the map is of limited use because it doesn't have deductions for property tax added in, as some states make up for having low/no income tax by having high property taxes. NY of course is high on both sides, so I suspect it would retain its #1 position. The other question (and this might depend on the data the Tax Foundation had access to) is whether this is adjusted for AMT - i.e. many people in places like New York may claim the deduction for state/local taxes on their Schedule A but then "give it back" via the AMT so it does them no good bottom-line and numbers based on just aggregating Schedule A's will be misleading.

Posted by: JWB | Dec 8, 2012 7:30:39 AM

"The deduction is Washington’s way of supporting states that support their most vulnerable citizens and neediest cities."

As Mr. Chocolate said, above, the deduction is actually a way of giving a subsidy to rich people. Whatever state the rich person lives in, the state-tax deduction helps him more than it helps a poor taxpayer-- particularly the property-tax deduction. Of course, in addition rich people choose to live in high-tax states, e.g. Cal and NY. So this must be one of hte most regressive bits our tax code. Has someone measured this and written it up?

Posted by: Eric Rasmusen | Dec 8, 2012 10:58:30 AM

Tax away, this is what they voted for!

Posted by: Sandy P. | Dec 8, 2012 12:10:22 PM

It would appear to me that there is a better case for a state and local tax deduction than for a charitable contribution deduction.

Posted by: Anonymous | Dec 9, 2012 3:11:45 PM

They probably should have mentioned how the states that benefit most from the state tax deduction pay more in federal taxes than the services they receive in return - effectively subsidizing the red states.

Posted by: A. Nomus | Dec 10, 2012 7:14:15 AM

Yet more mind-numbing hypocrisy from the Times. Just like when they're only for filibusters when their guys are the minority party in the Senate.

Posted by: Elmer Stoup | Dec 10, 2012 7:36:46 AM