This article was published by The McAlvany Intelligence Advisor on Tuesday, June 6, 2017:
The Trump tax reform proposal has put the Democrats into a deliciously difficult position. He wants to eliminate state and local deductions for income and property taxes (but leave charitable and mortgage deductions alone) as part of his attempt to keep his proposal revenue-neutral.
The amounts involved are enormous. The Urban-Brookings Tax Policy Center estimates that, if passed, it would cost the rich $1.3 trillion over the next 10 years. The Tax Foundation ran the same numbers and came up with an even bigger number: $1.8 trillion.
The law currently allows state and local income and property taxes to be deducted in calculating an individual’s federal tax liability. But, as both tax groups noted, those benefitting the most from the deductions happen to live in liberal, Democrat-leaning and supporting states. This forces Democrats to face a conundrum: they usually have no problem supporting a tax increase on the rich. But this time it’s their rich who would get hammered.
According to the Tax Foundation, about 88 percent of the benefits enjoyed in 2014 flowed to those earning more than $100,000, while just 1 percent went to those earning less than $50,000. Furthermore, a mere six states – California, New York, New Jersey, Illinois, Texas, and Pennsylvania – got more than half.
The Tax Policy Center came up with very similar results: 90 percent of the present deductions are enjoyed by those earning over $100,000. Said the Center:
What is clear is that residents in states that impose the highest combination of property taxes and individual and corporate income taxes would pay the most. Taxpayers in 10 states – California, Illinois, Maryland, Massachusetts, New Jersey, New York, Ohio, Pennsylvania, Texas, and Virginia – claim more than half the total amount deducted.
Most of these are dark blue Democrat states, and Democrat support of Trump’s tax reform could have significant negative political blowback. But without elimination of that deduction, Trump would have more difficulty keeping his proposal revenue-neutral. If Trump’s bill fails, the blame would fall on the Democrats.
In 2018, there will be 33 seats open in the Senate: 23 Democrats and 2 independents (who usually vote Democratic), while only 8 Republicans are defending their seats. A wrong decision on Trump’s tax reform bill could cost the Democrats dearly in 2018.
If it passes, it would have negative consequences for those liberal-leaning states as it would crimp their ability to raise taxes at their level. This would, according to critics of Trump’s plan, “undermine the ability of cities and states to raise [additional] revenue” and that would not allow them to expand government services even more.
On the other hand, if Trump’s tax reform bill passes with these deductions eliminated (for the first time since the federal income tax was initiated), it would, according to The Wall Street Journal, have at least two benefits: First, it would create a more equitable income tax code with a broader base and lower rates, and second, it would spur “tax reform in states that are long overdue for a better tax climate.”
That’s the conundrum facing Connecticut Governor Dannel Malloy (as noted here on Monday). His tax base is melting (some say escaping), Hartford is near bankruptcy, and his attempts to keep the rest from leaving through incentives are proving increasingly futile. An increase in federal taxes on his wealthy companies and individuals through Trump’s elimination of those deductions would only hasten their exit and the day of reckoning for his state.
Whether he knows it or not, the president has put the Democrats into a political bind. It’s positively delicious to contemplate.
The Wall Street Journal: Trump’s Blue State Revival Plan
The New York Times: State and Local Tax Deduction: An Item Blurring Party Lines