Right, Wrong, Tax, Tax, Tax

Interesting little bit of news today, as Congress kicks around its next budget.  One of the items on the floor is to extend the current law regarding how taxpayers in states without income taxes treat their sales tax payments.

Apparently (I didn't know this, as I live in a state ... OK, commonwealth -- that taxes income), if you live in Texas, Florida or one of those states without income taxes, the Feds allow you to deduct sales taxes that you pay, in some form and with some kind of guidelines or restrictions.  That one struck me as a bit odd, and I got to thinking.  I'm intentionally not looking at the law itself; I want to concentrate on the principle of deductibility as it applies in this case.

Remember -- I am a devoted flat-taxer, so in my view, the topic should be moot.  But we have to deal with the world as we live in it, not the ideal that makes, you know, actual sense.

As I see it, the principle involved in deducting state income taxes is this.  You earn wages, you pay Federal tax on them.  State income taxes are looked at as a cost of earning your living, and are as a result classed in with job-hunting, transportation, work expenses and the like as being deductible.  At least I have to assume that's the logic.  Logic and tax code are often on different planets.

Whoever decided to allow state sales taxes to be deductible had a different reasoning.  Since states can decide how to raise their revenue -- there are many available taxable activities (income, sales, property, inheritance, business, etc.) across which to raise the cost of state government, the taxpayer shouldn't be punished by the state's decision to raise revenue through a sales tax rather than income taxes.  Or so the thought goes.

OK, I get the sympathy -- but the logic fails.  Either state sales taxes are philosophically deductible or they're not.  And that is based on principle.  Expenses that are deductible, are deductible because of tax policy (e.g., the "cost of earning" policy I noted earlier), i.e., either they should be deductible or they should not -- regardless of what state you live in.

That's why I would oppose letting state sales taxes be deductible only in states without income taxes.  Deductibility is not about fairness, because tax policy should not be about fairness in the first place (yes, you read that right).  Tax policy should be about generating the revenue needed to run government with the least intrusive methods available to raise the most money.  Fairness is an impediment to that goal.

I'm sure that if I lived in a state with no income tax I would feel the same way.  It's not about me and my tax bill; it's about right and wrong.  There's enough in the tax code already that makes no rational sense; adding more to it -- or, in this case, continuing with a provision that makes no rational sense -- just exacerbates the spaghetti-code that is the income tax law in the USA.

And, of course, reason #455,213 to dump the code and start all over.

Copyright 2015 by Robert Sutton
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