The Tax Break for the Rich the Democrats Are Fighting to Keep
The deduction for state and local taxes benefits wealthy Americans in high-rate states like New York and New Jersey the most
For a progressive, few tax breaks should offer a juicer target than the write-off taxpayers can take on the state and local income, sales, and property taxes that they pay.
The tax break costs the federal government a massive amount of money — a projected $1.3 trillion over the next 10 years, according to the non-partisan Tax Policy Center. And it primarily benefits upper-income taxpayers. According to the Tax Foundation, only 28 percent of taxpayers claim the deduction, and the top 1 percent of taxpayers claim a third of the benefit. Households with incomes less than $100,000 get only 10 percent of the deduction.
"Philosophically, it should be close to a no-brainer," said Marc Goldwein, vice president and policy director of the Committee for a Responsible Federal Budget.
Yet leading Democrats in Congress fiercely oppose eliminating this tax break for the wealthy as part of a tax reform package.
Senate Minority Leader Chuck Schumer (D-N.Y.) told The Buffalo News on Monday that eliminating the tax break would be a "non-starter."
House Minority Leader Nancy Pelosi (D-Calif.) tweeted last week: "50% of households that claim State & Local Tax deduction make under $100K — & now @SpeakerRyan wants to throw it away." (She did not mention that 90 percent of the benefits flows to houses with incomes over that threshold.)
Sen. Richard Blumenthal (D-Conn.) provided a clue for the opposition on the Left, complaining Monday on CNN that it would be "particularly impactful on my state of Connecticut, the Northeast, and many other states."
Indeed, Democratic politicians tend to oppose eliminating the deduction because it disproportionately benefits voters in Democratic strongholds — urban areas where property and local taxes are high. The higher the local tax burden, the greater the benefit to higher earners. The Tax Foundation reports that half of the benefits go to taxpayers in just six states — California, New York, New Jersey, Illinois, Texas, and Pennsylvania.
Republicans are eying the tax break as a way to pay for a reduction in federal personal income tax rates across the board. President Donald Trump will promote tax reform Tuesday during a speech at The Heritage Foundation.
Blue States Benefit the Most
Rachel Greszler, a research fellow in economics, budget and entitlements at the conservative think tank, said the benefits of the state and local tax deduction skew even more heavily to blue states when measured as a percentage of income. Residents of New York write off 8.94 percent of adjusted gross income. That is the most of any state. New Jersey (8.53 percent), Connecticut (8.15 percent), California (7.73 percent), and Maryland (7.6 percent) round out the top five.
All of those states are Democratic strongholds with high local taxes and lots of upper-income residents. Meanwhile, the tax break is worth less than 2 percent of income in each of the bottom five states — Alaska, South Dakota, Wyoming, North Dakota and Tennessee. All of those states have modest state and local tax burdens. Greszler said taxpayers in Alaska effectively help foot the bill in New York.
"You're subsidizing the high-tax states," she said. "And it does just benefit the rich."
Grover Norquist, president of Americans for Tax Reform, said Republicans would have to come up with a hefty alternative if they leave the state and local tax deduction alone. Getting rid of the deduction would have the added benefit of making it somewhat harder to raise taxes at the state and local levels, he said.
|State and Local Tax Deductions|
|States benefitting the most|
|States benefitting the least|
|*Percentage of adjusted gross income|
Norquist said Democratic politicians and deep-blue states and big cities can advocate hiking taxes without incurring the wrath of wealthier, politically active constituents by arguing they will be able write off a large chunk of it when they file their federal income taxes.
"This is a particularly pernicious tax deduction," he said. "It incentivizes local governments to raise taxes, and it disincentivizes them from reducing taxes."
Norquist recalled that California Gov. Jerry Brown in 1978 argued against the citizen-led Proposition 13 — which reduced property taxes — by arguing that the federal government would get a portion of the savings.
"This is not just hypothetical," he said.
Goldwein, of the Center for a Responsible Federal Budget, said progressives argue that the tax break is worth keeping in order to maintain higher federal tax rates on the wealthy, while making it easier for local governments to raise taxes.
"I think it's a really weak argument, and a cynical one that assumes the government has to, basically, bribe state governments to raise even more revenue," he said.
The Ironic Opponents of Progressive Taxation
Goldwein said the deduction has the effect of making the federal tax code less progressive. Norquist noted the irony of Democrats' fighting to keep the deduction.
"They're grabbing at one of the progressive elements of the tax cut when the line of the day is what they want to do is stop tax cuts for the rich," he said.
Greszler, the Heritage Foundation analyst, said the state and local tax break — along with a tax deduction available for interest on municipal bonds — cost a combined $127 billion in the fiscal year that ended September 30. Only tax breaks for health care and retirement savings cost the treasury more.
Greszler said the municipal bond tax break also should be included in the tax reform bill.
"Oftentimes, these are for things like sports stadiums and things that should be financed locally," she said.
"Why on earth would you want to direct money away from the private sector to big cities?" he said.
Eliminating the state and local tax deduction is going to be a tough sell politically, since big, high-tax states have a lot of Republicans in their congressional delegations. Rep. Claudia Tenney (R-N.Y.) said Monday on CNN said she would need some other tradeoff to help her constituents.
"It's a problem for me," she said. "We need to see some kind of adjustment coming out of the Ways and Means Committee."
Goldwein said it is possible Congress could compromise — perhaps, by keeping the deduction but putting a cap on how much can be deducted. Greszler said Republicans for high-tax states are against changing the deduction.
"What I don't know is how strongly they're against this," she said.