> It is my personal belief that the change in the tax code here was specifically targeted blue states for political reasons by the republicans
While this is definitely true, as someone who also lives in a high tax state and is impacted by this change, it is the policy-wise correct way to do taxation.
Under the old system, state goverments, by enacting an income tax of their own, could essentially steal part of the federal government's tax revenue. There's really no good reason for this. State government's revenue collection shouldn't funge against the federal government's revenue collection.
While I don't like the higher tax burden I think from a federal policy perspective it was the correct move. I'd like to see the states lower their taxes, or switch to a tax scheme other than an income-based one in response, but I wouldn't want to see this change repealed. Unfortunately for my personal finances, it was the right thing to do, even if the motivation on the part of the republicans was as a "fuck you" to blue states.
>state goverments, by enacting an income tax of their own, could essentially steal part of the federal government's tax revenue
Funny that it is the red states that tend to get more federal dollars returned/pumped into their states than they contribute. It's ridiculous to say the the blue states are stealing.
>There's really no good reason for this.
Republicans typically talking about being for smaller [Federal] government should like that the [blue] states are trying to solve the problems most important and local to them via their own means.
If you actually attribute the tax dollars going to red states, the assertion that blue states fund red states is highly misleading. The bulk of what determines Federal dollars go outside of DC is:
- Where people retire. Social Security, Medicare, etc is a large part of this cash flow. In the US, many people move to the sunbelt States (often from blue States), which are almost all red. We can't prevent people in New York from retiring to Florida.
- Where military bases are located, which tend to be in rural red States where the land is cheap and environmental impact will be minimal. There used to be many more blue State military bases but many were closed in the 1990s to save taxpayer money. The greater San Francisco region is littered with former military bases. Military base expenditures and employment are another big chunk of the cash flow to red States.
- Where Federal offices are located. Outside of Washington DC, a large percentage of Federal employees are involved in things like agriculture, land management, national forests, national laboratories, border protection, etc which predominantly and often inherently involve red rural States. The Federal government operations are literally tied to geography, the location of these offices are not arbitrary nor charity.
Of these, only the first is welfare by any ordinary definition, and while it is a large portion of the net tax flow I don't think most people are suggesting that we eliminate it or prevent retirees from moving. The military to the extent it exists need to be put somewhere, preferably somewhere cheap and uninteresting. The rest of the Federal spending disparity can be largely eliminated overnight by eliminating all Federal employment related to managing geography but I don't think many people would support that either. It isn't the fault of the red States that many of the most popular national parks and natural resources are within their borders.
I would point out that the seniority often enjoyed by southern Democrats before about 1968 meant that a lot of southerners headed important committees, and had a good deal of say in where bases and offices should be located.
By making your point, its interesting that you point out just how dependent those red state's economies are dependent on the government. I guess that's one reason the golden cows of conservative fiscal policy is military spending and not touching social security (though they sometimes try for the latter in a way that makes it seem like they're not)
> Funny that it is the red states that tend to get more federal dollars returned/pumped into their states than they contribute. It's ridiculous to say the the blue states are stealing.
And the reason this is true is because states that receive more than they contribute are ones whose citizens make less money. It's like saying we should tax the poor guy a higher rate than the rich guy since the poor guy uses more public services.
> Republicans typically talking about being for smaller [Federal] government should like that the [blue] states are trying to solve the problems most important and local to them via their own means.
One could take that to mean that states ought not to need the SALT deduction subsidy to finance their state-level government.
You are free to support. There is a box on tax return allowing you to pay more taxes that you are required by law. People may not be happy when you coerce them to do the same or more. Supporting and compelling are different.
Yeah, you definitely shouldn't bite the hand that feeds you.
Apropos of nothing, this might be a good place to mention how much I love innovative adtech that makes it possible to follow me around the internet and continuously provide me with advertising and special offers relevant to my modern life.
(No sarcasm) I feel you're being sarcastic but I'm not sure what direction you're going with your comment. At the risk of dissecting a frog, could you rephrase that?
>And the reason this is true is because states that receive more than they contribute are ones whose citizens make less money. It's like saying we should tax the poor guy a higher rate than the rich guy since the poor guy uses more public services.
Not the reason. Alaska has one of the highest incomes AND gets a lot of aid.
> Funny that it is the red states that tend to get more federal dollars returned/pumped into their states than they contribute.
Isn't that just because there are higher incomes in the blue states, and isn't it a democratic policy to tax higher incomes and transfer wealth to those with lower incomes?
> Republicans typically talking about being for smaller [Federal] government should like that the [blue] states are trying to solve the problems most important and local to them via their own means.
Again democrats say taxes should be higher, and more of the wealthy live in the blue states, so this matches democratic tax proposals.
>Isn't that just because there are higher incomes in the blue states, and isn't it a democratic policy to tax higher incomes and transfer wealth to those with lower incomes?
I'm not American so correct me if I got the wrong conclusion from the article, but the changes in this case only lead to higher taxation in wealthy areas that also have high state income taxes, so it's not a redistribution from wealthy to less wealthy regions, which I agree sounds like democratic policy, it is a distribution from rich blue state regions to the on average poorer states.
This seems like a very important difference, because as the article points out, it means that the well off in those poorer states aren't actually affected (hence the motivation to move).
This does not sound like stereotypical democratic policy. It does not seem fair that wealthy people in already high tax environments pay even more taxes for political reasons, than well off people in red states.
Remember that the federal government doesn't tax states, or give (most of) the transfers to states - they mostly go to individuals. The state aggregates are a convenient number for people trying to make a political point, but it doesn't really support what they are suggesting.
This change is a redistribution from people who pay a lot of taxes to people who pay less taxes. Because the US tax system is already progressive (increasing rates with increasing income), this change makes it MORE progressive overall. It could be better targeted at just high-income/high-wealth people, but it generally does pretty well by that measure, because high-income/high wealth people pay most of the taxes.
Low-income, low-asset people will actually get a tax reduction, because of the increased standard deduction, even if they live in a high-tax state. That leaves people with a lot of income and/or a lot of assets - people paying over $10,000/year as STATE income, property, or sales taxes (excluding federal income and payroll taxes!). Various measures show that 88% of that deduction goes to people making over $100,000/year, and only 30-40% of filers even in those rich/expensive states take the deduction today (a much smaller/richer percentage would exceed the $10,000 limit).
If you're really wealthy in any state, you're going to hit that limit in one or more of those areas. You just hit it faster in high-tax states. Take Wyoming for example: "red state", no income tax, low property tax rate, 4% sales tax. Your 2 Bedroom home in Jackson at just shy of $2 million is going to put you over the property tax exclusion. https://www.jacksonholerr.com/PropertyDetails?mls_num=18-305... (there are cheaper 2-br homes in Jackson - and much cheaper homes not far from Jackson)
This also illustrates that the people most hurt by the change will be the "house poor" - moderate income, but own a house in an expensive area, so they have high property taxes. They may also get dinged by the reduced mortgage deduction ($1M debt to $750K debt).
> Isn't that just because there are higher incomes in the blue states, and isn't it a democratic policy to tax higher incomes and transfer wealth to those with lower incomes?
I think part of the issue is that this situation didn't arise in a vacuum.
Some states (generally, "low income" states) pretty explicitly choose to not well-fund communal aspects of society (schools, etc.). Other states (generally, "high income" states) choose to fund communal programs at a higher level. This is where the states are running 50 experiments in the "laboratory of government."
It turns out that after a few generations of the experiment, having better schools (for example) leads to higher incomes and vice versa.
This aspect of the tax bill basically seeks to undo (or at least make more expensive) the strategy that has been shown to correlate with higher incomes.
Some of the architects of this plan would also like to nationalize a healthcare strategy that has been shown in dozens of states to correlate with worse health outcomes.
I'd assert that it's much more the "urban vs rural" difference that accounts for the income disparity, with the network effects of cities providing more economic benefit. This economic advantage existed long before our public school system.
You'd have to have provide pretty powerful evidence to demonstrate that the quality of public schools in the cities is responsible for the economic benefits of cities.
> It turns out that after a few generations of the experiment, having better schools (for example) leads to higher incomes and vice versa.
It's the vice versa, and the vice versa alone. The ranking algorithms have been publicized. Higher incomes lead real estate industry ranking schools better, leads to better education.
> Isn't that just because there are higher incomes in the blue states, and isn't it a democratic policy to tax higher incomes and transfer wealth to those with lower incomes?
That doesn't necessarily need to be true, it just appears to be the case (I have the personal opinion this comes from some sort of religious ideology). A flat percent based tax system does tax the rich more effectively, it's just people seem to think they should take a larger percentage from the rich. This is likely because they have less voting power and thus cannot resist the masses taking their wealth.
A flat percent based tax system does tax the rich more effectively
Where do you get that idea? Most countries have progressive taxes, i.e. tax bands, because it's an effective way to raise a good amount of government income. With a flat rate, the tax burden on the lowest earners would be very heavy, especially as poor people spend a much higher fraction of their earnings on day-to-day essentials rather than luxuries.
Funnily enough poor people in the US don't vote much. Socialists believed that democracy would bring the Revolution with peaceful means. In practice it turned out different.
Moreover, by and large it's not like New Yorkers are paying to have roads built in Texas. The biggest federal expenditures are Social Security and Medicare--if a New Yorker retires to Georgia, that reflects a net transfer to Georgia (the person pays federal taxes while working in New York, then collects Social Security and Medicare after moving to Georgia). How does that fit into the maker/taker narrative?
> Funny that it is the red states that tend to get more federal dollars returned/pumped into their states than they contribute. It's ridiculous to say the the blue states are stealing.
While I 100% agree that red states are the welfare queens of our current system, I don't think it's legitimate to consider that point in this context. The question we have to ask is what is the technocratically correct structure here. If states want to collect tax, that's great, but it shouldn't come at the cost of federal revenue.
> Republicans typically talking about being for smaller [Federal] government should like that the [blue] states are trying to solve the problems most important and local to them via their own means.
There is sort of a reasonable case to be made here, but I think it has major incentive problems. If states were using the revenue they raised to replace federal funds, you might be able to make this case. But as a systemic organizational matter, I don't think i'd want the system to work this way. It's just not a very clean architecture - states are incentivized to levy income taxes more than they otherwise would because it imposes a lower cost on their citizens than other forms of taxes, because of this federal revenue issue. I don't think you want an incentive structure like that.
Personally, I think the correct structure would be for states to tax their resident citizens in whatever way they see fit (property, income, sales, etc). And then Federal gov't taxes the states for a percentage of their tax revenue. That would eliminate the need for completely redundant state and Federal income tax collection systems.
So (for people in states with income taxes), instead of filing two separate tax returns and sending (say) 10% to your state and 30% to the Feds, you file one return sending 40% to your state and the Feds tax your state for 75% of their revenue (which happens to include 30% of your income).
Not at all. Those states already collect their tax through other means (property, sales, etc). They would continue to do so. And the Feds would take a cut of that.
Actually, I do like this incentive structure when put in this way. I think incentivizing people to take responsibility for themselves with only limited amounts of help from the federal government is the right thing to do.
That's not what this structure does, though. It just incentivizes states to collect more revenue than they otherwise would, at the expense of federal collection.
It is not a 1:1 ratio though as it really only lowers your taxable income. I agree that it should be limited but states should be incentivized to not need the federal government for much.
The cited extremes are California (blue) and Mississippi (red).
AP reports that California pays $10,510 per capita in federal taxes and receives $0.96 on the dollar. And Mississippi pays $5,740 per capita in federal taxes and receives $2.13 on the dollar.
The figure that's missing is the actual per capita receipt of federal dollars: $10k for CA and $12k for MS.
So states are receiving approximately the same number of federal dollars per person. However, they are not paying the same number of federal taxes per person.
I don't approve. But on the other hand that's exactly what you'd expect from a progressive tax system, which is widely popular.
It is money given to retirees (Social Security, Medicare, etc) and the location of Federal employees, notably military bases (intentionally located in cheap and rural places) and various agency offices involved in land management and natural resources (inherently distributed in rural, western areas).
Since no one is going to shrink Social Security/Medicare, and military bases need to be put somewhere in flyover country, and no blue State wants to shrink/eliminate the National Parks, forest service, EPA, etc, it starts to become clear why the current flow of Federal spending in rural red States exists.
A huge amount of Federal employment outside of Washington DC is intrinsically tied to extremely rural locales, which tend to be "red". Oftentimes, like with the Department of Interior agencies, the employees aren't even local -- it is an assignment from Washington DC.
>Perhaps we should look into what type of federal dollars are flowing to the red states, and then shrink those programs.
So we're cutting safety net programs for the poor and elderly and agricultural subsidies. Call me crazy here but I don't think "fuck the poor and the farmers" is a very solid plan.
Cutting agg subsidies is an extremely complicated issue that has major economic impact here and around the globe. I'm in favor of killing many of them for the greater global good. Especially cotton.
While shrinking agricultural subsidies from a glance looks like a great way to save a lot of money, the reality of it is not so simple. Those agricultural subsidies are THE reason we don't regularly experience large spikes in food prices and have regular and expected small famines, similar to other regular market fluctuations. And if we do experience a famine from say poor rainfall, or bad storms while nor producing any extra, then we will have almost nobody to turn to to import food from since almost all of our major trading partners are importing our food and have little to export. Not to mention the security risk it posses to be low on food, and further the civil uprisings that desperation would inevitably cause. The vast majority of uprisings and civil revolts throughout history have been triggered by food shortages and famine. The reason agricultural subsidies were initially implemented was to prevent civil strife and rebellion; farmers not losing their asses so bad from a badly timed market shift was just a side benefit.
Medicaid, Medicare, SSDI, regular SS, Department of Education, the VA... basically old people and children eat up the Federal Budget and the rest of the money is left over for discretionary sporting wars internationally and parades/exercises/weapons manufacturing domestically.
As someone who also benefited from the old law, your analysis is dead on. The uncapped SALT deduction was morally indefensible. It makes no sense that earning a billion dollars in San Francisco meant you owe ~$60 million less to the federal government than earning a billion dollars in Seattle.
The economy-wrecking regressive mortgage tax deduction was preserved though, which shows that the tax reform was mainly a cheap abuse of the government to attack blue states for voting Democrat.
Most 'regular' people would itemize if their mortgage interest + SALT + whatever random things were bigger than the standard deduction. Under the new rules, SALT + mortgage interest is unlikely to be close to the standard deduction. I expect the amount of mortgage interest deduction in tax year 2018 to be much smaller than tax year 2017.
I’m not sure it’s stupid. It puts owner occupied housing on (nearly) equal footing with landlord-owned property with respect to deductibility of mortgage interest.
Disclaimer: yea, I use it, so of course I’m somewhat biased to think it’s not stupid.
In theory, I agree. However, why should California and the rest of the blue states be financing the whole country when the other states can collect their own taxes to pay for disaster relief and other items they need. They are already getting more taxes back than they paid in.
Blue states are getting screwed and really aren't getting adequate federal government representation at the levels their tax dollars and populations would in theory dictate they should have.
Shouldn't states be more responsible for their own well being rather than what we have now a situation where states just offload their responsibility as a state to the federal government? ...and the states are subject to the whims of whomever is in power in the federal government at the time which has higher risk than people are accounting for and as you have already alluded to is being abused even if it ultimately is in theory the right policy?
>why should California and the rest of the blue states be financing the whole country
The tax code doesn't say that blue states have to pay more, it says wealthy people have to pay more. As a result, wealthy states pay in more than they get out.
Taxing the rich to fund social programs to help the poor means money will flow from Silicon Valley and Hollywood to rural West Virginia.
Part of it isn't even "wealth" as much as it is "higher cost levels". There's no simple policy answer to this, but increasing marginal tax rates are meant to be a proxy for the diminishing marginal utility of money. In states with a higher price level, citizens are getting taxed at higher rates than their level of wealth would otherwise imply, just due to the inefficiency of the policy.
It's the equivalent of failing to adjust for inflation, just spatially instead of across time. As I said though, there's no easy fix that let's you define cost levels in a principled way and adjust for them, so this isn't quite bad policy as much as an unfortunate imperfection in it.
Being able to pay higher costs shows you are wealthier. Living in California is a luxury good which no one is required to purchase. If I suddenly decide to trade my Toyota in for a Porsche that doesn't lower my taxable income.
I don't really disagree with that. But you'll need to convince democrats of this to make it happen. They are the ones who want really high taxes for wealthy people.
> However, why should California and the rest of the blue states be financing the whole country when the other states can collect their own taxes to pay for disaster relief and other items they need
Why should federal taxes take priority over state? If the state is able to successfully tax its citizens and keep things closer to home—ultimately needing less support from the federal government—shouldn’t that be a good thing?
In a way it seems like double taxation. In some limited instances you may actually be paying twice for the same thing.
I think it's the other way around. The question should be why state taxes should take priority over federal taxes. And my answer is they shouldn't.
If you can deduct state taxes from federal income taxes, then any increase in state tax rates will take some revenue away from the federal government.
If your income is X, why not just have the federal government take Y% and the state take Z%, and have those numbers be independent, so that the total tax you pay is (Y+Z)%?
If you want to have higher state taxes to provide more services to residents of the state, that's perfectly reasonable, but why should it be the federal government's role to soften the blow of a state-level policy decision?
> Why should federal taxes take priority over state? If the state is able to successfully tax its citizens and keep things closer to home—ultimately needing less support from the federal government—shouldn’t that be a good thing?
I'm not sure i'd say that they should take priority per se, but they shouldn't funge against each other, and the federal government was there first, in the case of income.
Under the old system, if a state introduced an income tax, that would proportionally decrease the federal government's revenue collection from their tax base. That's not a very good system. If a state wants to tax, they should tax, but that shouldn't then reduce the federal government's ability to collect taxes from those same people.
> If a state wants to tax, they should tax, but that shouldn't then reduce the federal government's ability to collect taxes from those same people.
I don't understand this. Any tax a state levies on its residents will necessarily reduce the federal government's ability to collect taxes from those same people, because it will make those people poorer.
How so? The current system is income-based, not wealth based. Under the current system, where you cannot deduct state taxes, the federal government's revenue is not reduced by state taxes at all (after the $10,000 limit).
> "Under the old system, state goverments, by enacting an income tax of their own, could essentially steal part of the federal government's tax revenue."
this is such an odd statement. federal and state governments have no entitlement to any type or class of tax, so stealing is an inappropriate description. the federal government can collect taxes in any way congress decides (with implicit citizen support).
with that said, the federal government should really be focused primarily on international relations/defense and mediating inter-state disputes (and certainly not on punitive politics like this). federal taxation should be commensurately limited, with states being the primary taxing authority and facilitator of governmental programs of the citizens' choosing (through state legislators).
[not from the US, this argument is from first principles]
There is an argument that SALT deductions distribute the burden of supporting Federal spending - mainly health & welfare [0] - away from high taxing states towards low-taxing states. Stereotypically, one might believe that this means fiscally conservative Republicans are subsidising fiscally extravagant Democratic states. That would be unfair because the Republicans should enjoy greater personal wealth due to their frugal choices.
The obvious counterargument is that states like California, Illinois and New York are net contributors to the federal budget [1, 2, 3].
Personally, the SALT deduction is clearly a bad idea and the cap is completely appropriate, paying local taxes shouldn't remove a persons responsibility to the Federal system. However (since the overall system may well be biased against wealthy states) the removal of the deduction should have been paired with a commensurate reduction in the tax take so the net tax payed by individuals didn't change.
yes, i agree that the SALT deduction is a bad idea, should be abolished, and fed taxes appropriately adjusted.
this discussion did make me think about whether the fed should tax citizens directly rather than via states, since the federal government should be in service of the states, not vice versa, but that also has other incentive/accountability problems.
> this is such an odd statement. federal and state governments have no entitlement to any type or class of tax, so stealing is an inappropriate description. the federal government can collect taxes in any way congress decides (with implicit citizen support).
Don't get lost in semantics. The point is that deductible state income tax incentivizes states to prefer income taxes to other forms of taxation. There is no explicit reason to encourage this, therefore it should not be encouraged.
Except taxpayers can deduct the greater of sales tax or income tax. Property taxes (paid by homeowners) are deductible in the same way as income tax. States have no incentive to prefer one type over the other. Texas, with no state income tax, is also paying dearly for this new federal tax policy.
There is a reason to encourage this, it encourages taxes and their results to be levied and spent closer to the same place. Across states, it allows for experimentation in our government with different programs and balances.
>While this is definitely true, as someone who also lives in a high tax state and is impacted by this change, it is the policy-wise correct way to do taxation.
Given the amount of federal spending that is just grant money to states for things (not to mention the history of the US as a loose association of strongly governed states under a weak(er) federal government), I'm not sure I agree with this.
If CA or NY lowered their taxes, they'd end up getting back a significant amount of the difference as increased federal grant money to the state. That's what happens in many lower tax states right now! By removing SALT, you change the calculation in a different way. CA doesn't need the money, so the government can spend it elsewhere. Its a different thing.
I'm not sure I follow your argument. The point i'm making is that, as a way to structure taxation, I don't think it makes sense for state taxes to funge against federal taxes. It creates incentive problems that distort policy decisions at the state level. If CA/NY/etc would get money back from the fedgov as grants, then they should do that. They shouldn't have this weird backdoor into grabbing part of the federal government's revenue.
>It creates incentive problems that distort policy decisions at the state level.
What are the negative outcomes of such policies? I'd argue that the outcomes are more self-sufficient state governments with less reliance on federal grant money. The question then is if that's something the federal government should encourage.
I'm pretty sure a fiscal conservative would say yes. As would a states-rights conservative.
Most tax policies are ways to encourage or discourage specific behaviors. Your "weird backdoor" is another person's "explicitly encouraged behavior". You've got to justify why the behavior is bad and should not be encouraged, and I don't think you've done that. You've just (I think) claimed its unfair, but every state works under the same federal government. They could all do the same stuff.
It's bad because it creates an incentive for the state to tax in a particular way that may not be optimal. Income taxes are cheaper for states to levy than all other forms of tax because of this backdoor. That is bad.
> It's bad because it creates an incentive for the state to tax in a particular way that may not be optimal. Income taxes...
But SALT isn't limited to income taxes, it includes sales taxes (which you can more easily track with credit card purchases [than you could in the past]), property taxes, car registration taxes, etc.
They're encouraging them to use a specific form of taxation. Income tax is not especially optimal for a number of reasons, but that's not the point. The federal government simply shouldn't be pushing the states into preferring one style of taxation over another unless it has a good reason to - which they don't.
This applies equally to anything though. You're arguing against taxation as a form of incentive towards rational actors, which is to say that you're arguing against taxation.
> which they don't.
I provided at least one: self sufficient state governments that don't need federal aid.
> This applies equally to anything though. You're arguing against taxation as a form of incentive towards rational actors, which is to say that you're arguing against taxation.
That argument is contingent on certain linear utility curves that are probably not empirically borne out.
> I provided at least one: self sufficient state governments that don't need federal aid.
And how are those things related to deducting state tax?
Giving states the ability to tax more without an additional burden on their population shifts the onus of supporting that population from the federal to the state government.
The state can have a higher tax rate without an overwhelmingly high tax rate on its citizens, and can thereby have enough revenue to provide services without federal aid (that the same revenue would have paid for, just indirectly through the federal government first).
>That argument is contingent on certain linear utility curves that are probably not empirically borne out.
Just because price elasticity isn't linear doesn't mean that price changes have no effect on demand.
> State government's revenue collection shouldn't funge against the federal government's revenue collection.
At an aggregate level, this argument makes some sense. But when you look at individuals who pay lots of tax, there actually is a good reason to allow a deduction from a tax policy perspective.
States like CA and NYC have progressive income tax rates, so the people paying a lot (and whose deductions are being capped) are high-earners. If their incremental tax dollars were being used to essentially fund consumption-like services for high-earners, then it would be proper to deny a federal deduction. The argument would be: well, your state took taxes from rich people in order to fund fancy museums/opera houses, so we shouldn't allow a deduction for this sort of state-intermediated consumption.
But CA and NY's high-earner taxes aren't used for this, for the most part. For example, CA's "millionaire's tax" (Prop 63) is specifically used to fund state-provided mental health services. Presumably none of the rich people who fund this actually receive these services because they already have their own doctors.
Of course, these taxpayers do see an indirect benefit from the provision of social services, insofar as they help keep crime rates lower and such. But in general, the income taxes paid by high earners are not akin to consumption, which would be the tax policy argument that one would make if trying to get rid of the federal deduction.
I'm not sure how this makes the case that these things should come out of the federal government's pocket. If CA/NY want to levy a tax for mental health...then they should do that. They shouldn't get to arbitrarily take part of the federal government's revenue to accomplish it. At least, I don't see how you're making the case that they should be able to.
The point is that at an aggregate level, your argument makes some sense. The fed govt didn't choose to enact this plan, vis a vis the state govt.
However, if you look at the fed govt versus the taxpayer, the calculus shifts. What if every rich person who pays the millionaire's tax voted against it and derives no pleasure from it? Why should they be forbidden a deduction from a tax policy perspective? Companies get unlimited SALT deduction, and until this law, people did too. We can even get tax credits for foreign taxes paid. The general rule is that if some govt took your money, you get to deduct it on your federal return. So if there's going to be an exception to this general rule, there should be a good tax policy reason for it.
This is because it would drive up rents, the costs would accrue fully to the [lower-income] people renting the property not to the landlord.
It would be great to see renters get to deduct the property tax (up to $10k) that they pay intrinsically as part of their rent, but I doubt it will ever happen.
The Fed is already not losing out when renters pay the property tax through their rent, rent is not deductible, so the Fed is getting all the income tax. The rental income is netted against expenses on the landlord side and any excess is taxed again at the landlords marginal rate.
A dollar can be taxed again and again every time it changes hands. Usually every other time it changes hands there’s an opportunity to net out expenses before being taxed, otherwise taxes would completely swamp the economy.
Company A sells Product A, proceeds of which pays Employee B, who pays rent to Landlord C, who buys Product D from Company D.
In just that short sequence what percentage of the money flow went to taxes? Almost certainly well over 50%, perhaps approaching 70%, mostly borne by Employee B through payroll and income taxes, second by the Landlord C paying high marginal taxes on any rental profit, and lastly by the Employee and Landlord in the form of sales taxes. The Companies in this example do hand some dollars to the IRS and their States, but the dollars all actually come from B and C.
Even if the tax is progressive and not related to consumption, why should the federal government foot the bill? That state-provided mental health service wasn't the federal government's idea to build.
> Even if the tax is progressive and not related to consumption, why should the federal government foot the bill?
The federal government is no more footing the bill through deductibility than it is footing the cost of capital acquisition by taxing net gains rather than gross revenue of capital sales; it just isn't taxing the investments state taxpayers make in common facilities which enable their earnings.
Mm which is actually the only reason for the SALT deduction, which still exists. It just now had a nonsensical limit that has no basis besides punishing political revenues and promoting low tax policy regardless of efficiency.
> The federal government is no more footing the bill through deductibility than it is footing the cost of capital acquisition by taxing net gains rather than gross revenue of capital sales; it just isn't taxing the investments state taxpayers make in common facilities which enable their earnings.
There's a difference. In the case of taxing net gains rather than gross revenue on capital sales, every citizen is represented in this decision. Not to mention, the consequential incentive is to increase investment in businesses that create taxable earnings. In the case of the SALT deduction, the consequential incentive is to increase state and local taxes to fund social programs over which only that state's citizens have representation.
The fact that this is skewed a bit to favor those who paid in based on their state of origin I am certainly ok with. The state had a strong hand in creating the business environment for people to thrive in such a way that they could become wealthy to begin with.
So I'm okay if some federal dollars have to be shaved off so states can take care of themselves. I do not believe there is an endless incentive for states to raise taxes at the expense of the federal government.
> it is the policy-wise correct way to do taxation.
If your intent of to artificially promote low tax and spending at the state level, yes; if, OTOH, you want the federal government to be neutral on state policy the correct way is full deductibility.
So, yes, it's “policy-wise correct” for the misconceived policy goals behind it.
> Under the old system, state goverments, by enacting an income tax of their own, could essentially steal part of the federal government's tax revenue.
More accurately, under the old system states could tax as necessary to support the spending policy which create the environment in which people in the state are able to earn income without the federal government artificially disincentivizes policy that produces better net results if it happens to require higher taxes. (And, because it didn't even abandon deductibility but limited it to a fixed dollar amount per taxpayer, artificially discourages policy not just by the level of taxation, but the distribution, on top of artificially punishing states for a high local cost of living, where if they tax the same share of the same real—based on local costs—income as a lower CoL state will see more money taken by the feds.)
> If your intent of to artificially promote low tax and spending at the state level, yes, if you want the federal government to be neutral on state policy the correct way is full deductibility.
This seems like a very odd definition of 'artificial'. The federal government says "we want 30% of your income". Why exactly should the state be able to pre-empt that?
> More accurately, under the old system states could tax as necessary to support the spending policy which create the environment in which people in the state are able to earn income without the federal government artificially disincentivizes policy that produces better net results if it happens to require higher taxes. (And, because it didn't even abandon deductibility but limited it to a fixed dollar amount per taxpayer, artificially discourages policy not just by the level of taxation, but the distribution, on top of artificially punishing states for a high local cost of living, where if they tax the same share of the same real—based on local costs—income as a lower CoL state will see more money taken by the feds.)
You keep using this word 'artificial', but I don't see much justification for it. I also don't see much evidence for "better net results", nor do I think that's even relevant here. If the states want to levy taxes, they should. But I see no serious argument put forward here for why those taxes should come at the expense of federal taxes.
> you want the federal government to be neutral on state policy the correct way is full deductibility.
Why wouldn't the states then just collect 100% of income in taxes (and nothing left for the federal taxes), and then redistribute that back to citizens (proportionally with how much taxes each paid)?
> Why wouldn't the states then just collect 100% of income in taxes (and nothing left for the federal taxes), and then redistribute that back to citizens (proportionally with how much taxes each paid)?
Because if they did, the feds would just not exempt payments from that scheme from federal taxes (such an inverse means test wouldn't be exempt based on the current policy exempting need-based cash aid.)
So it would be essentially the equivalent of just not having taxed the amount paid out in benefits, including for federal tax purposes.
>if, OTOH, you want the federal government to be neutral on state policy the correct way is full deductibility.
Wouldn't that actually incentivize the federal government to take a greater interest in state policy?
If people can deduct all their state taxes, then the federal government will get less from some states than others due to state policies, not simply due to income differences, right? So if we determine that the federal government doesn't want to get less money, wouldn't they be likely to attempt to meddle in state policy to prevent this kind of tax imbalance?
> Wouldn't that actually incentivize the federal government to take a greater interest in state policy?
Maybe, but I’m talking about incentives imposed by federal policy on the states, not incentives imposed by federal policy on federal policy.
Full deductibility means the sign of the net benefit of State policy doesn't change due to federal tax policy, no deductibility, or the actual current policy of limited deductibility, loses that effect; this is undesirable if you take a bottom-up federal view preferring local control of policy in general, the way Republicans like to pretend, it's arguably desirable if you prefer a top-down feudal order where the states are more firmly subordinated, the way Republicans tend to like to accuse Democrats of doing.
> If people can deduct all their state taxes, then the federal government will get less from some states than others due to state policies, not simply due to income differences
Which is a lot more meaningful if you think state policies have no impact on economic outcomes.
Once you acknowledge that they can, you have to acknowledge that any policy which limits deductibility necessarily disincentivizes some set of state policies that increase aggregate income of state taxpayers after state taxes, and thereby increase both federal revenue and (given federal marginal tax rates <100%) state taxpayer’s income after all taxes.
> So if we determine that the federal government doesn't want to get less money, wouldn't they be likely to attempt to meddle in state policy to prevent this kind of tax imbalance?
They can't be more likely to than they would be with limited/no deductibility, because they are 100% likely to meddle with limited/no deductibility, because both of those are forms of meddling.
To your first point, yes, I agree, minus the partisanship - I am not a Republican, nor am I a Democrat, but that said the aggressiveness of your response made me much more likely to just take the opposite position, regardless of the merit of your points - that's one of the reasons I waited.
Beyond your first point -
first, you imply that State policies necessarily have a POSITIVE effect on economic outcomes - I think you'd probably agree with me that while some state policies do, it doesn't apply to all state policies.
Second, while I acknowledge the ability of state policies to have an impact on economic performance, I do not HAVE to acknowledge that this effect is positive. Let's assume that it is, for the moment, though; from there, I logically agree with your premise, given of course that there were no alternative policies (federal, or individual) that would result in better returns.
Finally, to your last point - this doesn't actually make sense to me. Are you saying that because federal governments give a deduction of some kind, this means that they 100% involve themselves in state policy?
I agree, if you have a 1/0 idea of involvement. But if you take a more nuanced view (which I recommend) and understand that there is a gradient of involvement, your statement has no real value - could you clarify or expand it?
[by the way - I know you comment and work here a lot and assume based on your writing that you're an intelligent person - I have been drinking so please forgive me, but do you recognize that the way you write invites immediate aggressive responses and is needlessly complex? For example: "Full deductibility means the sign of the net benefit of State policy doesn't change due to federal tax policy" - this doesn't actually mean anything. I feel like you must know this but I have to be sure. I hope this isn't offensive.]
My state taxes go to fund schools and roads. My federal taxes go to fund bombs, warplanes that can't fly in the rain, a failed drug war, and mass surveillance infrastructure.
It's much more defensible to tax for war expenses than it is for schools. War expenses are necessary for the basic premise of a civilization's government - protection of property and life. Schools, not so much.
What's hard to justify is your claim that the present military spending of our government is in any way a proportional response to actual threats to property and life.
We outspend the next seven countries combined[1]. We could fully fund universal higher education with the money we spend on defense and with the remaining dollars still spend more than three times the amount that the next country does.
> state goverments, by enacting an income tax of their own, could essentially steal part of the federal government's tax revenue
They still can via payroll taxes. Since payroll taxes are a deduction for the company, not the employee, they're still deductible under the new tax code.
With a state payroll tax, your state income tax would only need to cover non-payroll income (investments etc.) which would probably fall under the 10k limit for most people.
Do you mean introducing new payroll taxes? If I understand correctly there are some now levied by states for unemployment, training, and such, but there is only so much money that you can reasonably use for that.
Yes, I mean re-characterizing most income taxes as payroll taxes.
E.g:
Alice lives in Incometaxifornia, she makes $100,000 and pays 10% income tax ($10,000) to Incometaxifornia. The federal government wants to tax her on $100,000 even though her take home after state taxes is only $90,000.
Bob lives in Payrolltaxifornia. He makes $90,000 and his employer pays payroll taxes of 11.11111...% ($10,000) to Payrolltaxifornia. The federal government only wants to tax him on $90,000, which is also his take home after state taxes.
Payrolltaxifornia gets the same tax money as Incometaxifornia, but its citizens are taxed less by the fed. Clearly Payrolltaxifornia is a better place to live.
They are special taxes used to fund employment-related things. Why do you think they could be increased significantly and used to fund general spending, replacing income taxes?
Calling it theft is like calling gift and church deductions theft but one key difference. State taxes are mandatory. Also if federal spending was equal to the tax revenues generated by the state, blue states could lower their taxes. 16th admendement should have never been repealed as it allowed the federal government to unfairly tax minority party controlled states.
This ends up a perfect example of doing the right thing for the wrong reason.
The run-up to the tax cuts proved they didn't really care much about making the cut even close to revenue neutral (not that many tax cuts are, but...) except for folks who don't have favored status in their political philosophy - see also, the attempt to tax PhD tuition waivers.
Aren't there plenty of other ways that state and local entities are taking money away from Federal government ? Example, charitable tax donation ? Also, hasn't the logic for income tax calculations and not charging income tax on capital gains been the theory of double taxation ? It seems to me if this was a good faith policy decision, then the Federal government would have eliminated all those deductions and also implemented income taxes on dividends and capital gains as they are already violating the double taxation rule. This is an absolutely abhorrent policy specifically targeted at blue states that already contribute more to the Federal coffers, without any underlying principle.
I think what's being referred to was the ability to write off state taxes, which lowered your overall net income in the government's eyes, and thus what you were responsible for paying. It's not that states shouldn't be able to tax, it's that this particular write-off made higher state taxes more palatable at the expense of Federal taxes.
I'm not saying states shouldn't levy taxes. I'm saying that state taxes shouldn't diminish federal taxes. Under the old system, if your home state charged say, a 10% income tax, that would reduce your federally taxable income by 10%. That means that states could essentially eat a chunk of the revenue that would otherwise have gone to the federal government.
> Under the old system, if your home state charged say, a 10% income tax, that would reduce your federally taxable income by 10%.
No, it would reduce federally taxable income by more than 10%, because an income tax will lower income levels in the state. Even after eliminating the deduction for local taxes, the state income tax is lowering federal tax receipts. States can always eat a chunk of the revenue that would otherwise have gone to the federal government, by destroying that revenue.
I'm not sure I follow you. How can they eat the federal government's revenue by destroying income if it can't be deducted?
Are you saying that the economic equilibrium of a higher income tax will be lower pre-tax incomes? That's certainly an interesting theory, though it doesn't comport with any of the empirical data.
> How can they eat the federal government's revenue by destroying income if it can't be deducted?
Because you can't collect taxes on income that doesn't exist, obviously.
> Are you saying that the economic equilibrium of a higher income tax will be lower pre-tax incomes? That's certainly an interesting theory, though it doesn't comport with any of the empirical data.
Yes, of course that's what I'm saying. This is the same idea as how taxing oil sales will necessarily lower the dollar volume of oil sales. What model are you aware of that doesn't directly imply this?
The model where the highest tax states have the highest incomes, and the lowest tax states have the lowest incomes. I.e. the one in which we actually live.
Did you have any you were thinking of? You're the one that made a specific claim - that taxes reduce pre-tax income levels. I see no evidence in support of that, and a lot of circumstantial evidence that cuts against it.
What the Republicans should have done was get rid of the federal income tax, have all taxes apportioned, and leave it to the states to decide how they wish to collect the revenue needed to pay the federal government.
How much revenue would you levy from each state? What would be a fair way to decide that?
The point of income taxes is, that we (the society) consider them fair - the high-income-earners don't only pay more taxes in absolute terms, but also in relative terms, because of progressive taxation (personally, I think that tax rates should be based on wealth, not income, and that capital gains should be taxed equally as income, but I'm clearly in the minority with that opinion).
(Personally I think wealth should be taxed somehow too. What's fair? Another conversation. I too think capital gains should be taxed at the same rate or higher than income.)
Republicans would never do this. Republican states are net recipients of federal money. Wealthy democratic states are net givers of federal money. Poor states like Mississipi are funded in large part by the wealth democratic states that their politicians like to attack.
That's certainly an interesting proposal that seems reasonable to me. But I think we both know it's way too radical to be remotely politically feasible. I'd vote for it if I could though.
I would've liked to seen them completely eliminate the mortgage and property tax deduction. Those two aren't taxed at the local level, unlike income which is.
It might be a good idea to do it this way, but it is a very radical change with high chances of errors. What if 10 states enact some abhorrent legislation and makes them broke, or collect no taxes? I'd think this kind of change requires constitution ammendment level coordination.
> have all taxes apportioned, and leave it to the states to decide how they wish to collect the revenue needed to pay the federal government.
Let them crash and burn and serve as an example of the kind of policy you shouldn't enact. There's 50 states and interstate migration is not restricted. At a national level people do very much have the ability to pick one of the 49 other ships if the one they are on is sinking. Sure it would suck for the people who don't see the writing on the wall when their state is going down but I think it would be less damaging in the long term than the status quo.
Well you will need plenty of states to vote this change, and I think they would vote against it, even if on paper it gives them more economic power and independence.
> Under the old system, if your home state charged say, a 10% income tax, that would reduce your federally taxable income by 10%
And under the new system, it would do exactly the same thing, unless your income is over $100,000/yr, because it's simply designed to adversely effect the political calculus for upper-income taxes, both to reduce political pressure for tax progressivity at the state level and to reduce the viability of high-cost-of-living communities.
Lots of people defending the policy here are acting as if it was a principled rejection of the SALT deduction rather than a calculated strategic limitation on its applicability, and are defending a policy that doesn't exist instead of the actual policy.
While this is definitely true, as someone who also lives in a high tax state and is impacted by this change, it is the policy-wise correct way to do taxation.
Under the old system, state goverments, by enacting an income tax of their own, could essentially steal part of the federal government's tax revenue. There's really no good reason for this. State government's revenue collection shouldn't funge against the federal government's revenue collection.
While I don't like the higher tax burden I think from a federal policy perspective it was the correct move. I'd like to see the states lower their taxes, or switch to a tax scheme other than an income-based one in response, but I wouldn't want to see this change repealed. Unfortunately for my personal finances, it was the right thing to do, even if the motivation on the part of the republicans was as a "fuck you" to blue states.