Republicans claim allegiance to two conservative principles supposedly at the heart of their key legislative initiatives. One is opposition to double taxation, the core of their case to repeal the estate tax. The other is that state and local governments are more effective than the federal government, the idea behind their failed effort to repeal Obamacare.
Yet as Republicans rush this week to pass a huge tax-cut bill that chiefly benefits the affluent and corporations, their main way to pay for it is to eliminate the federal deduction for state and local income taxes. That would amount to clear-cut double taxation. And it would hurt many state and local governments.
This is pure partisan hypocrisy with two motives: to punish Democratic strongholds like California, New York and New Jersey, where state and local taxes are high; and to raise more than $1 trillion over 10 years to finance big cuts in the corporate tax rate and special breaks for wealthy individuals.
The additional revenue from taxpayers in blue states would also help pay for the House and Senate plans to repeal or sharply cut the estate tax, or “death tax” as Republicans like to call it for political effect, which is levied on less than 1 percent of the wealthiest estates.
“The death tax is double taxation,” charges Texas Senator Ted Cruz. Actually, most estate assets, such as unrealized capital gains, aren’t usually taxed unless the estate tax kicks in. Let’s see if Cruz applies the same objection to collecting federal taxes on income that’s already been taxed by states and localities.
Likewise, Republican Sens. Lindsey Graham of South Carolina and Bill Cassidy of Louisiana, in their futile effort to substitute limited block grants to states for open-ended health-care financing under the Medicaid expansion in the Affordable Care Act, extolled the virtues of government closest to the people. Will they feel the same way about state and local tax deductibility?
Republicans argue that eliminating the deduction for state and local taxes will discourage excessive taxation and wasteful spending. But if they really cared about the prerogatives of local governments, they’d just let voters in high-tax states decide whether or not to keep tax-and-spend politicians in office.
Republicans correctly note that most of the benefits of state and local tax deductibility go to upper-income taxpayers, with 7 in 10 dollars going to the wealthiest 10 percent.
Jason Furman, chairman of the Council of Economic Advisers under President Barack Obama, counters that this argument might be more persuasive if the current congressional tax cut plans envisioned using more of the proceeds to help middle class families instead of the well-to-do.
“This elimination of the state and local tax deduction would not increase the progressivity in the code,” says Furman, noting that it would, however, increase marginal tax rates for some higher-income Americans.
If the tax cuts were more fairly distributed, focusing on middle- and working-class Americans, a case could be made for limiting the state and local tax deduction. But fairness is irrelevant to these tax cuts.
Hunt is a Bloomberg View columnist. He was the executive editor of Bloomberg News, before which he was a reporter, bureau chief and executive Washington editor at the Wall Street Journal.