Congressional members from states with high income taxes claim that the House and Senate tax reform bills are unfair to their states. Their argument is based on the convoluted argument that “we send more money to Washington than is sends back to us.”
Quoting Bill Clinton’s line, “that dog won’t hunt.”
These members make it sound as if states are sending taxes to Washington? How can that be since states don’t generate taxable income, people do. Those people, like the rest of us, pay taxes on the basis of their taxable income. Being able to deduct state taxes has several perverse effects.
First, it reduces their adjustable gross income so that they pay less taxes than someone from a low tax state with the same adjustable gross income. Federal taxes are what we pay to fund the operations of our government. Simple fairness would demand equity rather than giving discounts to some because the states where they live have higher tax rates. The two should be separate under the principles of federalism.
The second effect is that deductibility makes it easier for high tax states to get away with higher taxes because deductibility means that the net taxes of their citizens are lower.
Funding federal and state governments should be two separate activities and the proposed tax reform makes that separation clearer. If taxpayers in states like New York and California become unhappy if the proposed tax reform takes place, they should direct their unhappiness to the members of their General Assemblies who are the ones that control expenditures and taxes and can lower their tax rates.
Finally, there is the strange viewpoint that these states send more to Washington than they get back. The federal income tax is not some sort of financial swap game. The tax dollars that are returned to states are in the form of military spending and Social Security, Medicare and Medicaid payments. Those are not entitlements to states. They are national security expenditures that benefit all of us or payments related to social programs.
The Gucci Gulch crowd, including pandering lawmakers, are working overtime to gain or keep special tax provisions for their clients. This is all the more reason for reform that takes the tax code back to its intended purpose, fund government services. A simpler, fairer and more transparent tax code will serve all Americans. Gaming the tax code is what has made it the complex mess that it is today.