The Simple Reason High-Tax States Are Getting Screwed by the Tax Bill

New-York-New-York-City-Chinatown-Manhattan-Usa-1777986.jpgAs the GOP-led tax bill stumbles its way towards the finish line, a number of House Republicans from New York and a handful of other states have come out against it. There aren’t enough to derail the bill, but the notion of a Republican voting against a tax cut still seems about as likely as a Star Wars fan rating the prequels as the best of the canon.

The reason is simple: the Tax Cuts and Jobs Act is potentially devastating to places like New York, New Jersey and California. By limiting the deductibility of state and local taxes (SALT) and property taxes to $10,000, the bill may actually increase the tax burden on many of these states’ taxpayers. As New York Republican Rep. John Faso put it in announcing his opposition to the final package:

I remain concerned that as a result of the state’s high income and property taxes, the partial elimination of the SALT deduction effective January 1, 2018 impacts New York families more severely than those in other states.  .  . the overall impact of changes to the SALT deduction will accelerate the trend of hardworking individuals and businesses already leaving our state – further eroding New York’s tax base.

It’s easy to think that this treatment of New York and the like is an intentional act of blue-state sabotage by Republicans. In truth, the lower SALT is more likely due to the fact that it raises a lot of revenue, helping to keep the bill under the $1.5 trillion bogey that Republicans had to hit to avoid needing the votes of Senate Democrats. (And if you had to choose between sticking it to middle class voters, or raising the corporate tax rate to 22 percent, well . . . never mind.)

The real reason that high-tax states are being screwed in this bill is much simpler, and it does not bode well for them: They simply don’t have any juice in Congress anymore.

Consider the Senate: In 1986, the last time a major tax reform plan passed, the 10 states* with the (current) highest tax rates were represented collectively by an even proportion of Democrats and Republicans. Today, those ten states send 19 Democrats and only one Republican to the Senate. That’s one of the reasons why, even though Ronald Reagan desperately wanted to eliminate SALT in 1986 (and had a Republican-led Senate), he ultimately gave up on it.

senate

The House, meanwhile, presents a double whammy for these 10 states. First, those states are represented by a higher proportion of Democrats now than in 1986. In ’86, Democrats controlled the House. They don’t today, meaning that those 10 states’ representation in the House majority party has shrunk significantly.

house

Second, those 10 states have lost a net of seven seats due to reapportionment since 1986, giving them even less clout in the House.

caucuses2

The loss of clout among high-tax states has ramifications far beyond the tax bill. Let’s assume that voters in those states demand their state and local governments lower taxes to offset the increase on the federal side, particularly to help them get below the $10,000 cap. (This would be a tall order: some estimates put the average SALT deduction by California taxpayers at $23,000 and by New Yorkers at $26,000.)

Any reduction in revenue at the state and local level will likely be accompanied by spending cuts, particularly in states with balanced budget requirements. Those states will be forced to look to Washington for extra help. But with shrinking power in D.C., that help won’t come. And, as Rep. Faso warned, there is the possibility that the combo of higher taxes and less spending will lead more people to leave these states, further reducing their representation in the House.

From a purely political perspective, this should concern Democrats and cheer Republicans. But disrupting the longstanding fiscal relationship between states and the federal government that has been the cornerstone of tax policy for more than a century should concern everyone.

And, by the way, the White House should keep this in mind: While nine of the 10 “high-tax” states voted for Hillary Clinton in 2016, number four on the list is Wisconsin, the state that was critical to President Trump’s victory. Badger State voters might have second thoughts next time around if their loss of SALT leads to a tax increase.

*New York, Connecticut, New Jersey, Wisconsin, Illinois, California, Maryland, Minnesota, Rhode Island, Oregon

Photo: Max Pixel

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s