Repealing the State and Local Tax Deduction Will Help the Republican Party in High-Tax Blue States

Time for a confession. My left-wing friends are correct. I’m an idiot.

Why?

Because I’m an anti-tax libertarian, yet I keep writing favorably about a provision that will raise my taxes. I’m talking specifically about the provision, currently in both the House and Senate tax plans, to eliminate the deduction for state and local income taxes (and maybe also property taxes, though the House proposal will retain deductibility for the first $10,000).

I think this distortion in the tax code is very bad policy and I hope the loophole is entirely eliminated (including the property tax deduction).

But as I look at all the provisions in both bills and speculate about the contours of a final agreement, it’s highly likely that the net result will be a tax hike on one of my favorite people – me!

Sigh. I’ve joked in the past that “it ain’t easy being libertarian,” but it will definitely hurt to put my money where my mouth is (and it reminded me why GOPers should have made tax reform a tax cut by including some spending restraint).

That being said, let’s remind ourselves why the deduction is a bad idea.

Citing the self-destructive example of a recent tax hike in Illinois, Andrew Wilford of the National Taxpayers Union points out that the deduction enables and encourages state and local politicians to impose higher taxes.

…eliminating SALT would…remove this incentive for local governments to overtax its citizens. … this incentive to hike taxes can prove significant enough to drive state policy. In Illinois, residents were forced to bear the burden of a 32 percent hike on their taxes because of the state’s unwillingness to tackle its growing pension funding problem. Tax increases did not solve this underlying spending problem, but it was politically expedient— in part because state lawmakers knew that the federal government would pick up part of the tab.

It also violates my ethical-bleeding-heart rule, as Brian Riedl explains in the New York Post.

Wealthy families are four times more likely to utilize SALT than other families. Only 24 million of 125 million tax filers earning under $100,000 take the deduction, typically lowering their taxes by $1,000. By contrast, 20 million of the 25 million filers earning over $100,000 take the deduction… In fact, half the savings accrue to the richest 5 percent of taxpayers — and in New York, half of the SALT savings go to families making over $500,000.

But I don’t want today’s column to fixate on the policy argument.

Instead, let’s look at whether voting to get rid of the deduction is electoral suicide for Republicans from high-tax states such as New York and California.

Looking at the situation in the Golden State, that’s certainly the argument from the folks at Vox.

Just three of the 14 California House Republicans went against leadership… Republicans in California clearly ran on cutting taxes — but this tax bill could raise taxes on their constituents. …it also sets up their constituents for more risk. Cutting the state and local tax deduction puts undue burden on the state’s budget… “At this point it looks like California Republicans are eager to lose their seats in 2018,” Tyler Law, a spokesperson for the Democratic Congressional Campaign Committee, said.

Though Kimberly Strassel of the Wall Street Journal has a more upbeat (if you’re a Republican) assessment. She starts by explaining how California GOPers were targeted.

The House GOP passed its tax-reform bill on Thursday, and special medals of valor go to the 11 of 14 California Republicans who voted in support. The lobbyist brigade had joined with Democrats to target the Golden State delegation, seeing it as their best shot at peeling off enough Republicans to kill the bill. The assault was brutal, dishonest and all-out. …Gov. Jerry Brown unleashed on state Republicans, calling them “sheep” for supporting an end to most state and local tax, or SALT, deductions, and sending them letters deploring the tax hit on residents of high-tax California. Minority Leader Nancy Pelosi accused them of “looting” the state. Her Senate counterpart, New York’s Chuck Schumer, warned of “political fallout” that would be “catastrophic.”

They fought back by arguing that the Democrats are the high-tax party.

What proved most effective, however, was the state Republicans’ willingness to go on offense and throw SALT in Gov. Brown’s face. California has the heaviest tax burden in the country and only just implemented a punishing new 12-cent-a-gallon-increase in its gasoline tax. Mr. McCarthy used the occasion to release a video pouncing on that hike and noting that “if Gov. Brown is worried about the tax burden, let’s make cutting [taxes] a federal and state project.” Other state Republicans ran with that message, even more bluntly. “Why punish the rest of the nation because California is stupid?” asked Rep. Duncan Hunter in a local TV interview. Even Rep. Darrell Issa, who voted “no” on Thursday (along with Dana Rohrabacher and Tom McClintock ), zapped a letter back to Gov. Brown, noting that if SALT had become a big issue, it was “a direct result of the tremendous weight that your misguided policies have put on California taxpayers.”

At the risk of sounding like a mealy-mouthed Washington apparatchik, I’m going to agree with both Vox and the Wall Street Journal.

The bottom line is that voting for tax reform probably does endanger GOP lawmakers from high-tax states, which is the message that the leftists at Vox are peddling in hopes of preserving the awful status quo.

But I want to close with the observation that enacting tax reform will improve the electoral outlook for blue-state Republicans even if it’s not necessarily good for current GOP incumbents.

That’s because voters in high-tax states will be much more likely to resist bad state tax policy if there’s no federal deduction to mitigate the burden.

And that means politicians in blue states will be under even greater pressure to lower tax rates rather than increase tax rates. If they don’t do the right thing, more and more taxpayers will escape, as the Wall Street Journal opines.

The liberal tax model is to fleece the rich to finance spending on entitlements and government programs that invariably grow faster than the economy and revenues. IRS data on tax migration show this model is now breaking down in progressive states as the affluent run for cover and the middle class is left paying the bills. Between 2012 and 2015 (the most recent data), a net $8.5 billion in adjusted gross income left New Jersey while $6.2 billion poured out of Connecticut—4% of the latter state’s total income. Illinois lost $13.6 billion. During that period, Florida with no income tax gained $39.3 billion in AGI. …As these state laboratories of Democratic governance show, dunning the rich ultimately hurts people of all incomes by repressing the growth needed to create jobs, boost wages and raise government revenues that fund public services. If the Republican House and Senate tax-reform bills follow through with eliminating all or part of the state and local tax deduction, progressive states will have an even harder time hiding the damage. They should be the next candidates for reform.

Indeed, the mere prospect of tax reform already is causing statists to rethink their approach.

Even in New Jersey.

The Republican tax reform…already it’s having a political impact in at least one high-tax, ill-governed state. Democrat Steve Sweeney, president of the New Jersey Senate, said last week that the GOP decision to eliminate the state and local tax deduction could throw a new tax increase on millionaires into doubt. …Excellent news. Making politicians in Trenton, Albany, Sacramento and Springfield nervous about raising taxes is one desirable outcome of tax reform. These politicians have been passing the burden of their tax-and-spend policies onto taxpayers in other states via the state and local deduction. If that goes away, Democrats will have to rethink their policies lest they drive from their states the affluent taxpayers who finance most of state government. …Here’s a radical idea: Cut taxes and make New Jersey more desirable for people to work and invest. Tax reform in Washington could also spur reform in the states.

If tax reform happens and the deduction for state and local taxes is eliminated, the left’s class-warfare agenda will become much less appealing – and much harder to implement.

And in that kind of environment, it should be much easier for Republican politicians to win votes.

For all intents and purposes, tax reform for Republicans could be like ObamaCare for Democrats.

Allow me to explain. When ObamaCare was enacted, I worried that it might be a long-term political victory for the left even though it was very painful for Democrats in the short run. Simply stated, voters in the future (and we’re now entering that future) would become more reluctant to vote for Republicans once they were hooked on the heroin of government dependency.

Federal tax reform would have a similar impact, except the GOP will be the long-run winners. Voters in high-tax states will be more reluctant to vote for Democrats once a $100 tax hike (for instance) actually costs $100. Which is why genuine tax reform is a win-win situation.