Federal tax debate tied to questions of fairness

ONE of the fascinating aspects of the debate over tax reform in Washington is the discussion over whether to repeal the federal deduction for state and local taxes. While Democrats normally portray themselves as friends of the working class, in this debate they’re arguing families in Oklahoma and similar locales should effectively subsidize some of the nation’s wealthiest individuals who live in liberal enclaves.

Currently, taxpayers who itemize on their federal returns are allowed to deduct from their taxable income certain nonbusiness tax payments to state and local governments. Most who itemize use this deduction, but the benefit is greatest for wealthy individuals living in high-tax states. As a result, two individuals with the same income living in different states may pay different amounts in federal tax with much of the difference due to the deduction.

Critics argue the deduction therefore forces people in lower-tax states to effectively subsidize profligate taxing and spending policies in other states. This problem has long been noted, with a U.S. Treasury report citing the deduction’s “distributionally perverse pattern of subsidies” as far back as 1984. The discrepancy can be quite dramatic.

The Tax Foundation took the total of all of the deductions for state and local taxes, and then divided that figure by number of returns filed, to determine the average deduction amount taken per return for every county in the United States.

In Oklahoma County, the average deduction was $2,328. In Marin County, California, the average was $16,960.

The Tax Foundation found that the state and local tax deduction in New York and California represents 9.1 and 7.9 percent of adjusted gross income respectively, compared with a national median of 4.5 percent. In Oklahoma, the deduction represented just 3.2 percent of adjusted gross income, which ranked 36th nationally.

President Trump has called for ending the deduction in exchange for lowering overall rates, particularly for federal corporate taxes, which are among the highest in the industrialized world.

Democrats are balking because many of their constituents benefit from the deduction and because elimination of the deduction might lead voters even in liberal states to become more resistant to high levels of state taxes and spending.

The issue is problematic for some Republicans in Congress who represent districts from the highesttax states, such as New Jersey and New York. Instead of supporting a full repeal of the deduction, these Republicans have argued for repealing the tax break for upper-income filers while preserving it for middle-income families.

Time will tell how the debate ends. But it’s difficult to defend having someone earning $200,000 in California pay less in federal tax to support the government than someone earning $200,000 in Kansas solely because of this one tax break.

It’s true the Californian will pay more in local taxes than residents in other states, but the California resident chooses to live there (this is especially true of upper-income earners) and should therefore pay the full price of that decision. If citizens believe local taxes are too much a burden to bear, a better remedy would be to elect new state political leaders who will chart a different course, rather than try to game the federal tax system.