Tax reform is coming to Congress and the controversial issue of the State and Local Income Tax Deduction will be coming up. The deduction allows taxpayers to deduct the amount they paid in state and local income taxes from their taxable income thereby allowing them to pay less in federal income taxes. It has become an issue for both the Republican and Democrat parties and there is often large disagreement between conservatives, liberals, and populists.
The deduction was originally added in order to help lower the tax burden on individuals. It is an itemized deduction which means it is taken if the taxpayer chooses to opt out of the standard deduction. Taxpayers who itemize their deductions are usually high-income wage earners. In fact, 88% of all taxpayers who use the State & Local income tax deduction are making an excess of $100,000 a year. California and New York, both highly taxed, Democrat-controlled states benefit the most from the deduction. The contention between Republicans and Democrats on this issue brings to light the underlying differences between the parties.
The official party platform of the GOP is to remove the State and Local Income Tax Deduction while the Democratic Party takes no specific stance on their platform. From this, we can confer a few things, and wonder why these stances seem to buck the normal trend:
- Republicans are either, despite popular narrative, not favoring tax policy for the wealthy,
- or are targeting Democratic-led state governments
- Democrats are either, despite popular narrative, favoring tax policy for the wealthy,
- or are trying to protect from discontent over high taxes in Democratic-led states
Numbers 1 and 3 focus on the ideological platforms of the two parties while numbers 2 and 4 focus on what is perhaps, their nefarious intentions. While analyzing the differences between Democrats and Republicans, we will analyze the differences between ideology and politics.
Democrats:
Democrats cannot continue to berate the GOP for “favoring the wealthy” when the GOP takes a negative stance on a tax deduction that obviously favors the upper class. Perhaps, Democrats find justification in this by acknowledging that states like California and New York are the some of the largest contributors to the federal coffers. This is a fair argument to justify the protection of these states. However, it is problematic as it does not align with the party’s stance on wealth redistribution on the individual level.
According to the Democrats progressive tax policies, the rich should pay more as a percentage of their income because it is only fair. Instead of debating what is fair, I will point out what is an ideological contradiction; the state of New York and California are a couple of the richest in the country and by progressive ideals this means they should be paying more taxes than the rest of the states, especially in regards to the State and Local income tax deduction which almost exclusively benefits the wealthy.
Republicans:
Republicans who claim to be the party of small government & lower taxes run into a conundrum. This leaves the party in an ideological contradiction as well; however, it is arguably not as prominent as the Democrats’. Removing this deduction grants more tax revenue to the federal government, thereby, expanding it power. That being said, removing deductions such as this help simplify the tax code and reduce the power of the IRS and while there is an increase tax revenue, there is no increase in the marginal tax rates.
We must then consider the possible political reasons for why the GOP pursues the removal of this deduction enough to include it in the official party platform. It can be inferred that the Republicans are trying to gain leverage on Democrat politicians from states like New York or California. For fear of losing this deduction, Democratic politicians may concede to the Republicans on other policy points like lowering the marginal tax rates. Even more dramatically, removing the deduction could be seen as an attempt to create swing states out of New York and California or at lease aide state GOP politicians in winning more seats in their state legislatures. While it may seem unimaginable for a state like California to vote Republican, not so long ago it was the state of President Ronald Reagan. And in even more recent memory, it was the state of Governor Arnold Schwarzenegger.
My final words on this subject matter are simply this, tax policy is much more complicated than “lower” & “higher” or “progressive” & “regressive”. The collection of money for government spending, wealth redistribution, or policy (ie gasoline tax to deter consumption) and all of the components that follow with it (like the State & Local Income Tax Deduction) are far more complex than we may initially realize. They provide us with insight into ideology, politics, and perhaps even human nature itself.
Sources:
Gleckman, Howard. “Why Repealing The State And Local Tax Deduction Is So Hard.” Forbes. Accessed September 6, 2017. https://www.forbes.com/sites/beltway/2017/05/31/why-repealing-the-state-and-local-tax-deduction-is-so-hard/.
Tierney, John. “Which States Are Givers and Which Are Takers?” The Atlantic, May 5, 2014. https://www.theatlantic.com/business/archive/2014/05/which-states-are-givers-and-which-are-takers/361668/.
Walczak, Jared. “The State and Local Tax Deduction: A Primer.” Tax Foundation, March 15, 2017. https://taxfoundation.org/state-and-local-tax-deduction-primer/.