Subsidizing for What?

The late Jack Kemp, before he was the Republican candidate for vice president in 1996, and after he was an NFL quarterback, was in Congress and a fiscal hawk.  Among his famous statements in the area of governmental finance was this, which may be an original Kempism but it really doesn't matter:

"If you tax something you get less of it.  If you subsidize something you get more of it,"

He went on to note that we taxed investment, work, property ownership and the like, while we subsidized unemployment, reproduction and the like.  His message was clear -- there are unintended consequences to tax policy, and his subtle message was that they might not have been so unintended as Democrats would have you believe.

We think of that as the Republican 2017 tax plan has now been rolled out for consideration by the House, and one particular element of it appears to have gotten a lot of attention.

That would be the deduction for state and local income taxes, which under the proposed plan would be severely limited.  Under current tax law, such taxes are deductible if you itemize your expenses on the old 1040.

Now, let's consider the impact of any deduction.  If you start with a set of rates -- first X dollars are free of tax, the next Y dollars are at one rate, the next Z dollars at a higher rate and so forth, then no matter who you are, you will pay the same tax if you make the same amount.  What deductions do are to say that we will tax you as if you earned (say) $1,000 less, if you spend that $1,000 on things that we in Congress, in our infinite wisdom, decide are appropriate to be granted the deduction.

In the popular example, homeowners with a mortgage get a deduction for mortgage interest, while tenants who pay the same for their home but pay it in rent, well, they do not get the deduction.  Congress is saying quite clearly, "Go buy a home and mortgage it."  They're not subsidizing home ownership; they're actually subsidizing home financing.  Either way, they're subsidizing something.

When it comes to state and local income taxes, the principle is the same.  Texas, Florida and some other states have no income tax.  New York, New Jersey, California, well, those states have very high state income taxes.  In California, you can be paying more than half your income in Federal, state and local income taxes.

Those taxes are all deductible under current law.  It is common for a Texan to pay zero state income tax on an income that a Californian would pay $10,000 in state taxes.  So -- regardless of what the Democrats would say is the intent of the program, the consequences of such taxes being Federally deductible are that wage-earners in Texas pay higher Federal taxes than those in California.

Moreover, the legislature in California, being subsidized by taxpayer dollars from the other 49 states, can blithely raise state taxes to absurd rates, knowing that through its deductibility, the state rate can be hiked as high as they feel.  And they can take that money and spend it on whatever they feel like, that state whose government is trying to be a "sanctuary state", to refuse to cooperate with the Federal authorities who are subsidizing them through others' tax dollars because their state tax rates are so high.

I'm not a fan.  Those taxpayers subsidizing the profligacy of the legislature of the State of California include nurses in Dallas, farmers in Iowa, store clerks in Tennessee and retirees living off their now-taxable 401(k) plans in Florida and Arizona.  And, by the way, independent proposal writers in North Carolina.  None of us is happy about it, and most people would be considerably less happy if they truly understood the impact of the tax code.

All I want is to pay less.  But I sure don't want to pay more just because California has a stupidly high income tax.

Copyright 2017 by Robert Sutton
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