Pitch­ing Trump’s tax plan The Fact Checker’s guide to what of­fi­cials mean by fair­ness.

The Washington Post Sunday - - FRONT PAGE - GLENN KESSLER glenn.kessler@wash­post.com

“We want to get the fed­eral gov­ern­ment out of the busi­ness of sub­si­diz­ing the states.”

— Trea­sury Sec­re­tary Steven Mnuchin, in­ter­view on ABC’s “This Week,” Oct. 1 “Is it fair that other states sub­si­dize states that have high state taxes?”

— House Ma­jor­ity Leader Kevin Mc­Carthy (R-Calif,), in­ter­view on Fox Busi­ness Net­work, Sept. 29

“Here’s the sim­ple pitch. If you and I make the ex­act same amount of money, we live in the ex­act same value of house, we have the same kind of car, our kids go to the same kind of schools, shouldn’t we pay the same fed­eral in­come tax? The an­swer is yes, but the real world is no. If I live in a high­tax state and you live in a low­tax state, you ac­tu­ally pay more to­wards the fed­eral gov­ern­ment than I do. And that’s just not fair. It’s not right.”

— White House bud­get di­rec­tor Mick Mul­vaney, in­ter­view on Fox Busi­ness Net­work, Sept. 29

Tax pol­icy is of­ten com­pli­cated. In pitch­ing the Trump ad­min­is­tra­tion’s plan for elim­i­nat­ing the de­ductibil­ity of state and lo­cal in­come taxes, of­fi­cials have gone on tele­vi­sion with a few sim­ple mes­sages about en­sur­ing fair­ness in the tax code — across states and among tax­pay­ers.

For many peo­ple, these talk­ing points might be con­fus­ing. So here is a guide to what they mean — and what’s miss­ing in the pitch.

Why can state and lo­cal in­come taxes be de­ducted?

This has been a fea­ture of the U.S. tax code from the be­gin­ning. A Civil War in­come tax bill passed in 1862 in­cluded this pro­vi­sion, and then it be­came part of the code more than a cen­tury ago, af­ter the Con­sti­tu­tion was amended to al­low for an in­come tax. Over the decades, var­i­ous pres­i­dents or law­mak­ers have at­tempted to do away with it — most no­tably Ron­ald Rea­gan as part of the 1986 over­haul — but the ef­forts have al­ways failed.

Amus­ingly, among tax wonks, this is known as the SALT de­duc­tion. Who ben­e­fits from it? Gen­er­ally, wealth­ier Amer­i­cans.

Ev­ery tax­payer has a choice of tak­ing ei­ther a stan­dard de­duc­tion or to item­ize de­duc­tions, which in ad­di­tion to state and lo­cal taxes can in­clude mort­gage pay­ments, char­i­ta­ble con­tri­bu­tions and med­i­cal ex­penses above a cer­tain thresh­old. For most peo­ple, es­pe­cially those who do not own their homes, the stan­dard de­duc­tion is larger than item­ized de­duc­tions — and the Trump ad­min­is­tra­tion pro­poses to boost the stan­dard de­duc­tion. About 30 per­cent of tax fil­ers opt for the item­ized de­duc­tion — and vir­tu­ally all take the SALT de­duc­tion, ac­cord­ing to the Tax Pol­icy Cen­ter. Among tax­pay­ers mak­ing more than $100,000, 81 per­cent claimed the SALT de­duc­tion.

With item­ized de­duc­tions, the value in­creases as you move into a higher tax bracket. Ev­ery $100 in taxes is re­duced to $75 if you are in a 25 per­cent tax bracket, but it’s re­duced to al­most $60 if you are in a 39.6 per­cent tax bracket.

The al­ter­na­tive min­i­mum tax (which Trump also pro­poses to elim­i­nate) takes away this de­duc­tion from many wealthy tax­pay­ers. (The AMT also takes away the per­sonal and de­pen­dent ex­emp­tion — some­thing else Trump has pledged to elim­i­nate). If the SALT de­duc­tion and the de­pen­dent ex­emp­tion were elim­i­nated from the AMT, the num­ber of tax fil­ers fac­ing the AMT would drop by 95 per­cent, ac­cord­ing to the Joint Com­mit­tee of Tax­a­tion.

Still, most tax­pay­ers who are hit with the AMT ben­e­fit from the de­duc­tion. The Tax Pol­icy Cen­ter “found that 75 per­cent of AMT tax­pay­ers na­tion­wide would pay higher tax un­der cur­rent law if both the SALT de­duc­tion and the AMT were re­pealed,” said Frank Sam­martino, an Ur­ban In­sti­tute se­nior fel­low who is an ex­pert on the SALT de­duc­tion.

What’s the ar­gu­ment for the SALT de­duc­tion?

Pro­po­nents say that with­out the de­duc­tion, tax­pay­ers face dou­ble tax­a­tion. That’s be­cause with­out the SALT de­duc­tion, tax­pay­ers are pay­ing taxes on in­come that has al­ready been given to the state or lo­cal gov­ern­ments in the form of taxes. The in­come tax rate in Cal­i­for­nia is as high as 13.3 per­cent, and 8.82 per­cent in New York. If you live in New York City, there’s an ad­di­tional in­come tax rate as high as 3.876 per­cent, for a to­tal of nearly 12.7 per­cent.

In fact, when in­di­vid­ual tax rates were as high as 92 per­cent (in the 1950s and 1960s, be­fore the tax cuts pro­posed by John F. Kennedy), in the­ory a per­son would have faced the prospect of taxes higher than 100 per­cent if there had been no SALT de­duc­tion.

Why does Mnuchin say the fed­eral gov­ern­ment is sub­si­diz­ing states?

In 2017, the SALT de­duc­tion is es­ti­mated to re­duce rev­enue to the fed­eral gov­ern­ment by nearly $60 bil­lion. (De­duct­ing prop­erty taxes, which Trump also wants to kill, re­duces rev­enue by an ad­di­tional $36 bil­lion.) So he’s say­ing that a high-tax state ben­e­fits more from this pro­vi­sion than a low-tax state, and in ef­fect gets more back from the fed­eral gov­ern­ment than low-tax states.

Mc­Carthy put it an­other way — that the low-tax states are sub­si­diz­ing the high-tax states be­cause the tax­pay­ers in those states can’t deduct as much from their taxes. In­deed six states — Cal­i­for­nia, New York, New Jersey, Illi­nois, Texas and Penn­syl­va­nia — claim more than half of the value of all state and lo­cal tax de­duc­tions na­tion­wide, ac­cord­ing to IRS data. (Texas has no state in­come tax.)

As it hap­pens, the high-tax states also tend to be the wealth­i­est states — and also blue states in pres­i­den­tial elec­tions. Un­der this par­tic­u­lar pro­vi­sion, one could per­haps make the case that they are be­ing sub­si­dized by low-tax states. But when you step back and look at the to­tal rev­enue and spend­ing pic­ture, blue states could make the case that they are sub­si­diz­ing other states, as var­i­ous re­ports show they re­ceive far less in fed­eral spend­ing than they pay in fed­eral taxes.

A re­port re­leased Tues­day by the New York State Comp­trol­ler said that New York gen­er­ated 9.4 per­cent of the fed­eral gov­ern­ment’s in­come-tax re­ceipts, even though it rep­re­sented 6.1 per­cent of the U.S. pop­u­la­tion. It re­ceived 5.9 per­cent of fed­eral spend­ing al­lo­cated to the states. Ac­cord­ing to the re­port, New York con­trib­uted $12,914 per capita in tax rev­enue to the fed­eral bud­get — but re­ceived $10,844 in per capita fed­eral spend­ing. The prob­lem has only got­ten worse in the three years since the re­port was last pro­duced, state of­fi­cials said.

“In New York state, the idea that we are be­ing sub­si­dized by other states holds no wa­ter,” Deputy New York Comp­trol­ler Robert Ward said in an in­ter­view.

Yet an­other cal­cu­la­tion was done by the fi­nan­cial web­site Wal­letHub, which shared its cal­cu­la­tions of the mis­match be­tween fed­eral taxes con­trib­uted by states and the fed­eral spend­ing re­ceived. Again, the wealth­ier, bluer states tended to fare worse on their re­turn on taxes paid.

New York gets 56 cents back for ev­ery dol­lar, and Cal­i­for­nia gets 64 cents. But states such as North Dakota, South Carolina, Alabama, Ken­tucky, West Vir­ginia and In­di­ana get more than two dol­lars back in fed­eral spend­ing for ev­ery dol­lar in taxes. (There are some out­liers: New Mex­ico, which votes for Democrats, gets nearly $2.50 back for ev­ery dol­lar, while Ne­braska and Ohio, both Repub­li­can, get back only about a half-dol­lar.)

Should peo­ple in the same value of house in dif­fer­ent states be treated the same?

Mul­vaney, in his TV ap­pear­ance, of­fered this ex­am­ple: “We live in the ex­act same value of house, we have the same kind of car, our kids go to the same kind of schools, shouldn’t we pay the same fed­eral in­come tax?” This would be a more com­pelling ar­gu­ment if the ad­min­is­tra­tion had not ex­empted the mort­gage-in­ter­est de­duc­tion from its drive to make the tax code sim­pler. Note that Mul­vaney care­fully said the “ex­act same value” house — even though such houses would vary greatly from state to state, as does the cost of mort­gages.

The mort­gage-in­ter­est de­duc­tion is es­ti­mated to re­duce fed­eral tax rev­enue by $64 bil­lion in 2017.


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