Spike the State-Local Tax Deduction

Average state and local tax deduction by congressional district. Source: Bloomberg

A provision in the proposed tax reform package working through Congress would eliminate the deduction for state and local taxes, hitting high-income earners in high-tax states most of all. According to the calculations of Bloomberg Politics (as seen in the maps above and below) residents of congressional districts in Central and Northern Virginia would be among those most impacted.

It amuses me to see how foes of tax reform highlight this negative impact without looking at the larger context. The tax reform package that hurts higher-income households by eliminating the state-local tax deduction more than offsets that loss by lowering tax rates for higher-income households. Unfortunately, Bloomberg doesn’t publish a map showing how it all nets out.

The architects of tax reform maintain logical consistency. They favor measures that reduce loopholes, broaden the tax base, and lower tax rates for everyone. The critics’ arguments are incoherent. They favor preserving the state-local tax deduction, which favors the rich, and oppose the lower tax rates, which favor the rich. They don’t reveal the real reason for their opposition, that the state-local tax deduction will hurt high-tax states and localities.

The state-local tax loophole is worth about $1.3 trillion over 10 years, according to Bloomberg. That’s a massive subsidy for high-tax states and the Blue State tax-and-spend governance model, and it insulates those states from the consequences of their policies. Eliminating the subsidy will accelerate the flight of high-income households from high-tax states (mostly blue states) to low-tax states (mostly red states), thereby undermining blue-state tax bases and accelerating their rush to fiscal ruin.

Insofar as Virginia is a purple state trending blue, eliminating the loophole will impact our state more than most. On the other hand, if Virginians had to absorb the full cost of our tax-and-spend habits, we might be more parsimonious with our public dollars. And that is a thing that many devoutly wish for.

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6 responses to “Spike the State-Local Tax Deduction”

  1. djrippert Avatar

    Our state legislature has given away $12.5B per year in industry and company specific tax breaks. These tax breaks never end and are never examined for their efficacy. In many cases they seem to be designed to help political donors and crony capitalists.

    I hope the federal tax reform bill eliminates the local and state tax deductions. While I’ll pay more in taxes on that count I think it will sharpen the focus on why we have such high tax rates for a largely un-urbanized state. I think out high personal tax rates have two causes:

    1. Localities subsidizing developers by refusing to make the developers fund the infrastructure requirements for their developments.

    2. The state legislature handing out never-ending tax breaks to friends and family like lollipops.

    In both cases, the cockroach politicians who infest the state house and county government centers of Virginia are siphoning money from their constituents to subsidize their corporate friends. Perhaps the loss of tax deductibility will help focus the voters of Virginia on the long running scams our politicians have been running.

    1. Steve Haner Avatar
      Steve Haner

      I’m calling you out on that one, Don. The report above identifies $8.3 billion in total tax preferences, individual and business. Most benefit individuals.

      The lists of state “tax preferences” I’ve seen include mainly general tax policy provisions, not company specific. Some are industry specific. One of the biggest is the sales tax exemption for manufacturing inputs. That exemption is allowed I bet by every state with a sales and use tax – because the tax is supposed to be imposed on the final sale, not on the various inputs and stages along the way. That would be a value added tax, which is fine but that’s not a sales tax and not what VA does.

      Another big one that gets the total up is the sales tax exemption on non profits and services – should we impose the sales tax on hospitals and doctors, Don? I mean, that is a policy decision VA could take, but not imposing sales tax on doctor bills or Rx now is hardly some nefarious corporate scheme….And who benefits from the exemption? The customer/patient. Individuals.

      Having been hired to work on creating new tax provisions I can tell you getting a lollipop from a legislator is a whole lot easier. And the tax collectors always read the law in a way favorable to them, not the taxpayer. About half the bills each year are just attempts to reinforce the old policy because some creative local officer found a loophole. Yes, America, tax COLLECTORS also love loopholes if they get mo’ money for their bosses.

      There are some debatable provisions. One that comes up deals with buying and using Virginia coal in power plants. You can imagine the short list of companies claiming that, but its impact measures in the tens of millions. Not billions.

      You need better facts to back up your prejudices and diatribes.

  2. The deep purple in NoVA contradicts that taxes are low in Virginia. Maybe that’s a better way to look at taxes. MD manages to get almost the whole state in deep purple. Not sure what’s going on in Pittsburgh area.

    Does this include the local property taxes?

  3. TooManyTaxes Avatar

    A fair way to address this deduction would be to have different limits that recognize differences in cost of living. Notice I wrote “cost of living” and not tax levels. A person living the Greater NYC area should have a higher cap than on person living in South Dakota. The trick is to find a way to do this correctly. The same type of cap ought to apply to the residential interest deduction.

    But once again, Congress has failed to address big wealth. There should be no deduction for contributions to, and no tax status for, private foundations. Why can Henry Ford and Bill Gates create big tax-exempt entities that last forever? Why can the Peter P. Petersen Foundation run adds for deficit reduction and keep its tax-exempt status. Any non-profit that pays for advocacy, either by employees or paid agents, should not be tax exempt.

    Following up on DJR’s comment. I would like to see a study of development impact fees/proffers; public expenditures on infrastructure; housing and raw land prices between Virginia and North Carolina. My gut tells me taxpayers pay more in Virginia than in N.C. and seemingly have less infrastructure to show for it. And building, both residential and commercial, seems to be gong great guns in Raleigh, Durham, Chapel Hill.

  4. LarrytheG Avatar

    An interesting thing …. that those who do claim those deductions – are, in fact, the ones who are helping to fund the services provided by the State to people in areas that are less economically prosperous.

    In other words, who funds education – K-12 and Higher Ed.. and Medicaid in Virginia ? Isn’t those who live in the urban areas and earn higher salaries?

    So.. the GOP … has determined that it is these folks who should pay more in Federal taxes to provide lower taxes for those more wealthy than themselves?

    Holy Moly!

  5. S. E. Warwick Avatar
    S. E. Warwick

    Proffers can mitigate the impact of development. In 2016, however, the GA kneecapped the process with legislation so vague it defies interpretation. Now, localities and developers must engage in porcupine mating dance maneuvers over every residential rezoning application. With all the new delegates taking office in 2018, it is unlikely that this issue will be addressed any time soon.

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