President Donald Trump’s tax plan, a broad and general plan that would make supply-siders such as Ronald Reagan and Jack Kemp very happy, could be held up by a number of details that are making some Republicans nervous.
One is the elimination of an income-tax deduction for high-tax states such as New York and California.
“We’re subsidizing Jerry Brown and Andrew Cuomo.”
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Former President Ronald Reagan targeted that deduction in the 1980s — the last time significant tax reform was passed — but a number of influential big-state Republicans helped kill the idea. Tax reform passed anyway, first with the Kemp-Roth tax-cut package, in 1981, and then the Tax Reform Act, in 1986.
They were massive reforms, and no major fix for the broken U.S. tax code has been offered in three decades. But from time to time, officials have tinkered with the rates.
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Over time, the top corporate tax rate has risen to as high as 39.6 percent, the highest in major industrialized nations. Also in that time, high-tax states have taken encouragement from the IRS code, which allows a deduction for state income taxes.
Republican giants such as Sen. Al D’Amato (R-N.Y.) successfully defended that deduction in the 1980s, according to the Washington Examiner.
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The deduction will no longer have strong support from those high-tax states, at least in the Senate. New York, California, and Illinois now have two Democratic senators and, therefore, less clout in the GOP-led Congress.
As for House Republicans, they might believe eliminating the deduction would help pay for other, more pro-growth parts of Trump’s tax plan, such as bringing down the top corporate tax rate and getting rid of the death tax.
Other long-desired goodies in Trump’s general tax plan include reducing the individual income-tax brackets from seven to three: 10, 25 and 35 percent.
There is no plan that lays out how to balance the Trump plan with new revenue, to keep the legislation “revenue neutral,” which means the deficit isn’t affected. One method would be to cut rates and finance that by getting rid of out-of-favor deductions such as the state income-tax deduction.
The state income-tax deduction goes unused in no-income-tax, Republican-leaning states such as Florida. It gets used with gusto in high-tax states such as California and New York. Conservative and libertarian economists believe the deduction subsidizes high-tax states and gives them no incentive to control their budgets.
“I want to get rid of all the deductions,” said Arthur Laffer, a former budget and economic adviser to Presidents Nixon and Reagan who also advised the Trump campaign, speaking to LifeZette. “But this one, I really want to get rid of this one.”
Laffer himself lived in California until 2006, when he decided the state’s taxes were too high. He set his sights on Nashville, Tennessee, where his son worked. Laffer moved his business there and has been in the state ever since. Tennessee has no state income tax.
Laffer has long contended that high state taxes drive Americans to other lower-tax states. This provides an incentive for states such as Florida and Tennessee to keep their income-tax rates at zero percent. It also forces states such as New York and California to try to compete.
But what bothers Laffer is the income-tax deduction. In effect, taxpayers in low-tax states such as Tennessee still help fund the state governments of California and New York.
“We’re subsidizing Jerry Brown and Andrew Cuomo,” said Laffer, referring to the Democratic governors of California and New York, respectively.
When asked about the deduction at Monday’s briefing by LifeZette, press secretary Sean Spicer would only say that Trump is still meeting with lawmakers to hammer out the details. Tax legislation is expected at the end of the year — not August, as originally hoped — because of the delay of health care reform.
“We continue to meet with stakeholders and members of Capitol Hill, but that conversation continues,” Spicer said. “As I said at the outset, they’re continuing to meet with individuals and those are part of those talks.”
Laffer has publicly declared that “revenue neutrality” should not be the main goal. Trump’s aggressive tax plan was reportedly proposed days after he read a new plea from his advisers — Laffer, Stephen Moore, Steve Forbes, and Larry Kudlow — in an April 19 New York Times op-ed.
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In that op-ed, the four longtime economic gurus on the Right said accomplishing big tax reform should take a back seat to getting the rates cut, so that the economy can grow.
“As for fixing the maddeningly complex individual income-tax system — lowering tax rates and ending needless deductions — we are all for it, but that should wait until 2018,” the four men wrote. “Jobs and the economy are the top priority to voters.”
Trump apparently heard the plea. But whether Trump decides to go after some of the unfairness in the tax code remains to be seen. No doubt, Cuomo and Brown are watching closely.
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