The success of proposed tax reform legislation is a life or death issue in the minds of many Republicans, and the success of that legislation may well hinge on the votes of Republican members of Congress from high tax, blue states. At issue is the ability of taxpayers in those states to deduct state and local taxes on their federal income tax returns. Eliminating that tax deduction is worth an estimated $1 trillion as a revenue offset to cuts in tax rates. That trillion dollars comes from the pockets of taxpayers in high tax states, for whom losing that deduction well turn the proposed nominal cuts in income tax rates into a tax increase. Republicans members in those states are being asked to fall on their sword for the broader interests of their party and their President, even if their constituents must pay a price.
Last month, the Senate went on record on a party line vote supporting the repeal of the state and local tax deduction. In language that is more Bernie Sanders than Mitt Romney, West Virginia Republican Senator Shelley Moore Capito argued that the state and local tax deduction disproportionately benefits the wealthy and would be better spent on tax relief for the working class. It was a framing of the issue that should have caused GOP traditionalists to cringe. Only in the nation's capital, after all, would taxing less of people's hard earned money be considered spending. That money, Republicans used to insist, does not belong to the government. Congressman Peter King--a Republican from high tax New York--tried to strike a middle ground, suggesting that the deduction for state and local taxes should be means-tested--available to middle class taxpayers but not to the wealthy.
King might have mastered the new world rhetoric of the GOP as the party of the working class, but he is going to have to bone up on his math. The typical middle class taxpayer cited over the past week as the Tax Cuts and Jobs Act was introduced is a household earning $59,000 or thereabouts. A quick glance at the IRS tax tables suggests that those households pay an average federal income tax rate of 2.6%. According to Empire Center data, the middle quintile of taxpayers living in New York City--the area of the state with the highest taxes--pay around 5.5% in combined state and local taxes. That would translate into around $3,245 on their $59,000 of income. A deduction of those taxes against a federal return at a 2.6% federal income tax rate would generate a whopping $84 in tax savings, or $7.03 per month.
Capito and King are missing the larger point that should be part of this discussion. Describing the state and local tax deduction as a subsidy or giveaway to wealthy people in blue states ignores both what it is that those high-tax states do with those tax revenues, and how their proclivity to tax and spend directly benefits low tax states like West Virginia. As a representative of one of the poorest states in the country, Shelly Moore Capito, in particular, might consider paying more attention to why people in those blue states tend to be wealthier, despite paying higher taxes, while those in her state continue to struggle.
If the repeal of the state and local tax deduction goes into effect, public finance analysts fully expect that it will place greater pressure on higher tax states to reduce taxes and roll back spending, as taxpayers in those states will effectively see a tax cut for the rest of the country translated into a tax increase for them. While this is exactly the impact that many Republicans in Congress would like to see, there are potentially significant consequences for both the low tax states as well as the high tax states as the impacts reverberate through the economy.
As things stand--and as the low federal income tax rate paid by a New York middle income household illustrates--the progressive federal income tax system raises the lion's share of federal revenues from wealthier taxpayers, as the top 20% of taxpayers pay approximately 90% of the federal income tax. Looking at the same data on a state-by-state basis, one sees that the wealthier states pay a similarly disproportionate share of federal income taxes relative to the less wealthy states. To be specific, the ten states that contributed the most on a per capita basis (DE, MN, MA, CT, NJ, NY, OH, IL, MD, RI) contributed a combined $236 billion more in federal income taxes than the average, while the lowest contributors (WV, MI, NM, SC, AL, AZ, ME, MO, HA, OK) contributed an aggregate $126 billion less than the average.
More important than who contributed what is why these disparities are so stark. The ten highest contributing states have a gross domestic product per person that is 46% higher on average than the lower contributing states. Higher GDP equates to higher personal incomes, which puts people in a higher tax bracket under a progressive tax system. Shelly Moore Capito, a senator from the lowest contributing state, might want to explore why these differentials are so significant--and based on historical data so enduring--and what the lessons might be for West Virginia beyond seeking greater "tax relief" for her constituents. Her constituents, after all, pay next to nothing federal income taxes--$3,600 on average (most of which is the payroll tax) compared to $14,970 for their counterparts a couple of hundred miles to the east in Delaware--and one has to imagine that a few dollars more a month from the federal government would have less impact on their lives and futures than figuring out how it is that their brethren in Delaware have been doing so much better than them, decade after decade.
While it is easy to confuse correlation with causation, the scatterplot above illustrates the correlation over time between state education rankings--which reflect investment in K-12 and higher education over time--and household incomes. The cohort of economically successful states noted above spend on average 27% more per capita on education, and--as illustrated in the graphic below--have achieved higher levels of educational attainment across their populations, which is critical to both state economic development and the sustainability of family incomes over time.
Among the most damaging trends within today's Republican Party is the decline in support for higher education. Over the past two years, support for higher education has declined sharply among Republicans from the 60% range to the mid-30s. This decline is arguably less about the value of higher education itself than it is about the knee-jerk shifts in attitudes within the GOP across a number of issues--the decline in support for free trade, the decline in support for Bob Corker and increased affection for Vladimir Putin, to name a few. It reflects a herd mentality that is as destructive as it is disturbing. Just keep staring at the graph below that tracks the relationship between educational attainment to unemployment: education, not tax cuts, is the key to the economic future and resiliency of the middle class.
There may be great satisfaction for many in the GOP in eliminating the state and local tax deduction, and in particular in seeing the cutbacks that will ensue in both higher education and K-12 funding. For Republicans in Congress, it is both a way to offset the costs of tax cuts that they have promised to deliver, and at the same time snub their noses at the profligate ways of high tax liberalism--to say nothing of sticking it to the liberal professoriate who have emerged as a pet peeve of the GOP. But in a world of progressive income taxation, red state Republicans have been free riders on the backs of those profligate blue states, who now do the heavy lifting when it comes to the funding of the federal government. Over the near term, the impact of eliminating the state and local tax deduction may be to increase revenues from high tax, blue state America, but if the longer-term consequence is to undermine education funding and economic growth in those states, it would be a pyrrhic victory. After all, the only thing worse for taxpayers who resent rich people--and rich states--is a world without them, when everyone else is forced to pay the bills.
Read it at the HuffPost.
Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit: Why Federalism is Not Just For Racists Anymore."
Artwork by Jay Duret. Check out his political cartooning at www.jayduret.com. Follow him on Twitter @jayduret or Instagram at @joefaces.
Last month, the Senate went on record on a party line vote supporting the repeal of the state and local tax deduction. In language that is more Bernie Sanders than Mitt Romney, West Virginia Republican Senator Shelley Moore Capito argued that the state and local tax deduction disproportionately benefits the wealthy and would be better spent on tax relief for the working class. It was a framing of the issue that should have caused GOP traditionalists to cringe. Only in the nation's capital, after all, would taxing less of people's hard earned money be considered spending. That money, Republicans used to insist, does not belong to the government. Congressman Peter King--a Republican from high tax New York--tried to strike a middle ground, suggesting that the deduction for state and local taxes should be means-tested--available to middle class taxpayers but not to the wealthy.
King might have mastered the new world rhetoric of the GOP as the party of the working class, but he is going to have to bone up on his math. The typical middle class taxpayer cited over the past week as the Tax Cuts and Jobs Act was introduced is a household earning $59,000 or thereabouts. A quick glance at the IRS tax tables suggests that those households pay an average federal income tax rate of 2.6%. According to Empire Center data, the middle quintile of taxpayers living in New York City--the area of the state with the highest taxes--pay around 5.5% in combined state and local taxes. That would translate into around $3,245 on their $59,000 of income. A deduction of those taxes against a federal return at a 2.6% federal income tax rate would generate a whopping $84 in tax savings, or $7.03 per month.
Capito and King are missing the larger point that should be part of this discussion. Describing the state and local tax deduction as a subsidy or giveaway to wealthy people in blue states ignores both what it is that those high-tax states do with those tax revenues, and how their proclivity to tax and spend directly benefits low tax states like West Virginia. As a representative of one of the poorest states in the country, Shelly Moore Capito, in particular, might consider paying more attention to why people in those blue states tend to be wealthier, despite paying higher taxes, while those in her state continue to struggle.
If the repeal of the state and local tax deduction goes into effect, public finance analysts fully expect that it will place greater pressure on higher tax states to reduce taxes and roll back spending, as taxpayers in those states will effectively see a tax cut for the rest of the country translated into a tax increase for them. While this is exactly the impact that many Republicans in Congress would like to see, there are potentially significant consequences for both the low tax states as well as the high tax states as the impacts reverberate through the economy.
As things stand--and as the low federal income tax rate paid by a New York middle income household illustrates--the progressive federal income tax system raises the lion's share of federal revenues from wealthier taxpayers, as the top 20% of taxpayers pay approximately 90% of the federal income tax. Looking at the same data on a state-by-state basis, one sees that the wealthier states pay a similarly disproportionate share of federal income taxes relative to the less wealthy states. To be specific, the ten states that contributed the most on a per capita basis (DE, MN, MA, CT, NJ, NY, OH, IL, MD, RI) contributed a combined $236 billion more in federal income taxes than the average, while the lowest contributors (WV, MI, NM, SC, AL, AZ, ME, MO, HA, OK) contributed an aggregate $126 billion less than the average.
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| Source: Wallethub.com |
While it is easy to confuse correlation with causation, the scatterplot above illustrates the correlation over time between state education rankings--which reflect investment in K-12 and higher education over time--and household incomes. The cohort of economically successful states noted above spend on average 27% more per capita on education, and--as illustrated in the graphic below--have achieved higher levels of educational attainment across their populations, which is critical to both state economic development and the sustainability of family incomes over time.
 |
| Data Source: US Census Bureau |
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| Unemployment Rate by Educational Attainment Source: Macrotrends. |
Read it at the HuffPost.
Follow David Paul on Twitter @dpaul. He is working on a book, with a working title of "FedExit: Why Federalism is Not Just For Racists Anymore."
Artwork by Jay Duret. Check out his political cartooning at www.jayduret.com. Follow him on Twitter @jayduret or Instagram at @joefaces.
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