While this is definitely true, as someone who also lives in a high tax state and is impacted by this change, it is the policy-wise correct way to do taxation.
Under the old system, state goverments, by enacting an income tax of their own, could essentially steal part of the federal government's tax revenue. There's really no good reason for this. State government's revenue collection shouldn't funge against the federal government's revenue collection.
While I don't like the higher tax burden I think from a federal policy perspective it was the correct move. I'd like to see the states lower their taxes, or switch to a tax scheme other than an income-based one in response, but I wouldn't want to see this change repealed. Unfortunately for my personal finances, it was the right thing to do, even if the motivation on the part of the republicans was as a "fuck you" to blue states.
Funny that it is the red states that tend to get more federal dollars returned/pumped into their states than they contribute. It's ridiculous to say the the blue states are stealing.
>There's really no good reason for this.
Republicans typically talking about being for smaller [Federal] government should like that the [blue] states are trying to solve the problems most important and local to them via their own means.
- Where people retire. Social Security, Medicare, etc is a large part of this cash flow. In the US, many people move to the sunbelt States (often from blue States), which are almost all red. We can't prevent people in New York from retiring to Florida.
- Where military bases are located, which tend to be in rural red States where the land is cheap and environmental impact will be minimal. There used to be many more blue State military bases but many were closed in the 1990s to save taxpayer money. The greater San Francisco region is littered with former military bases. Military base expenditures and employment are another big chunk of the cash flow to red States.
- Where Federal offices are located. Outside of Washington DC, a large percentage of Federal employees are involved in things like agriculture, land management, national forests, national laboratories, border protection, etc which predominantly and often inherently involve red rural States. The Federal government operations are literally tied to geography, the location of these offices are not arbitrary nor charity.
Of these, only the first is welfare by any ordinary definition, and while it is a large portion of the net tax flow I don't think most people are suggesting that we eliminate it or prevent retirees from moving. The military to the extent it exists need to be put somewhere, preferably somewhere cheap and uninteresting. The rest of the Federal spending disparity can be largely eliminated overnight by eliminating all Federal employment related to managing geography but I don't think many people would support that either. It isn't the fault of the red States that many of the most popular national parks and natural resources are within their borders.
And the reason this is true is because states that receive more than they contribute are ones whose citizens make less money. It's like saying we should tax the poor guy a higher rate than the rich guy since the poor guy uses more public services.
> Republicans typically talking about being for smaller [Federal] government should like that the [blue] states are trying to solve the problems most important and local to them via their own means.
One could take that to mean that states ought not to need the SALT deduction subsidy to finance their state-level government.
Are you upset that your money isn't being spent in the way you want it to? Isn't that what taxation is?
Apropos of nothing, this might be a good place to mention how much I love innovative adtech that makes it possible to follow me around the internet and continuously provide me with advertising and special offers relevant to my modern life.
Not the reason. Alaska has one of the highest incomes AND gets a lot of aid.
Isn't that just because there are higher incomes in the blue states, and isn't it a democratic policy to tax higher incomes and transfer wealth to those with lower incomes?
Again democrats say taxes should be higher, and more of the wealthy live in the blue states, so this matches democratic tax proposals.
What exactly are you complaining about?
Here's a bit more detail: https://www.bloomberg.com/opinion/articles/2018-02-05/think-...
Do you want a less progressive tax code? To weaken or remove the social safety net, or turn it back over to the states?
I'm not American so correct me if I got the wrong conclusion from the article, but the changes in this case only lead to higher taxation in wealthy areas that also have high state income taxes, so it's not a redistribution from wealthy to less wealthy regions, which I agree sounds like democratic policy, it is a distribution from rich blue state regions to the on average poorer states.
This seems like a very important difference, because as the article points out, it means that the well off in those poorer states aren't actually affected (hence the motivation to move).
This does not sound like stereotypical democratic policy. It does not seem fair that wealthy people in already high tax environments pay even more taxes for political reasons, than well off people in red states.
This change is a redistribution from people who pay a lot of taxes to people who pay less taxes. Because the US tax system is already progressive (increasing rates with increasing income), this change makes it MORE progressive overall. It could be better targeted at just high-income/high-wealth people, but it generally does pretty well by that measure, because high-income/high wealth people pay most of the taxes.
Low-income, low-asset people will actually get a tax reduction, because of the increased standard deduction, even if they live in a high-tax state. That leaves people with a lot of income and/or a lot of assets - people paying over $10,000/year as STATE income, property, or sales taxes (excluding federal income and payroll taxes!). Various measures show that 88% of that deduction goes to people making over $100,000/year, and only 30-40% of filers even in those rich/expensive states take the deduction today (a much smaller/richer percentage would exceed the $10,000 limit).
If you're really wealthy in any state, you're going to hit that limit in one or more of those areas. You just hit it faster in high-tax states. Take Wyoming for example: "red state", no income tax, low property tax rate, 4% sales tax. Your 2 Bedroom home in Jackson at just shy of $2 million is going to put you over the property tax exclusion. https://www.jacksonholerr.com/PropertyDetails?mls_num=18-305... (there are cheaper 2-br homes in Jackson - and much cheaper homes not far from Jackson)
This also illustrates that the people most hurt by the change will be the "house poor" - moderate income, but own a house in an expensive area, so they have high property taxes. They may also get dinged by the reduced mortgage deduction ($1M debt to $750K debt).
I think part of the issue is that this situation didn't arise in a vacuum.
Some states (generally, "low income" states) pretty explicitly choose to not well-fund communal aspects of society (schools, etc.). Other states (generally, "high income" states) choose to fund communal programs at a higher level. This is where the states are running 50 experiments in the "laboratory of government."
It turns out that after a few generations of the experiment, having better schools (for example) leads to higher incomes and vice versa.
This aspect of the tax bill basically seeks to undo (or at least make more expensive) the strategy that has been shown to correlate with higher incomes.
Some of the architects of this plan would also like to nationalize a healthcare strategy that has been shown in dozens of states to correlate with worse health outcomes.
I'd assert that it's much more the "urban vs rural" difference that accounts for the income disparity, with the network effects of cities providing more economic benefit. This economic advantage existed long before our public school system.
You'd have to have provide pretty powerful evidence to demonstrate that the quality of public schools in the cities is responsible for the economic benefits of cities.
For example, on this list, New York has only average quality schools, and California is well below average.
It's the vice versa, and the vice versa alone. The ranking algorithms have been publicized. Higher incomes lead real estate industry ranking schools better, leads to better education.
That doesn't necessarily need to be true, it just appears to be the case (I have the personal opinion this comes from some sort of religious ideology). A flat percent based tax system does tax the rich more effectively, it's just people seem to think they should take a larger percentage from the rich. This is likely because they have less voting power and thus cannot resist the masses taking their wealth.
Where do you get that idea? Most countries have progressive taxes, i.e. tax bands, because it's an effective way to raise a good amount of government income. With a flat rate, the tax burden on the lowest earners would be very heavy, especially as poor people spend a much higher fraction of their earnings on day-to-day essentials rather than luxuries.
Flat income tax looks somewhat uncommon around the world, judging from Wikipedia: https://en.wikipedia.org/wiki/Flat_tax#Around_the_world
The last 50 years of tax policy disagrees with the assertion that they "cannot resist".
Who gets voted into office isn't important if you're able to buy their ear.
This is probably incorrect - the religious "tithe" (meaning "tenth") is more of a flat tax, and generally voluntary.
Progressive taxes have a long secular history including Romans, Republicans (Lincoln), and Democrats (Wilson). https://en.wikipedia.org/wiki/Progressive_tax
Moreover, by and large it's not like New Yorkers are paying to have roads built in Texas. The biggest federal expenditures are Social Security and Medicare--if a New Yorker retires to Georgia, that reflects a net transfer to Georgia (the person pays federal taxes while working in New York, then collects Social Security and Medicare after moving to Georgia). How does that fit into the maker/taker narrative?
While I 100% agree that red states are the welfare queens of our current system, I don't think it's legitimate to consider that point in this context. The question we have to ask is what is the technocratically correct structure here. If states want to collect tax, that's great, but it shouldn't come at the cost of federal revenue.
There is sort of a reasonable case to be made here, but I think it has major incentive problems. If states were using the revenue they raised to replace federal funds, you might be able to make this case. But as a systemic organizational matter, I don't think i'd want the system to work this way. It's just not a very clean architecture - states are incentivized to levy income taxes more than they otherwise would because it imposes a lower cost on their citizens than other forms of taxes, because of this federal revenue issue. I don't think you want an incentive structure like that.
So (for people in states with income taxes), instead of filing two separate tax returns and sending (say) 10% to your state and 30% to the Feds, you file one return sending 40% to your state and the Feds tax your state for 75% of their revenue (which happens to include 30% of your income).
Not that I think you're wrong, but citation?
I oppose both state/local tax deductions and farm subsidies.
There's no good reason except "because life is being unfair to me otherwise".
The cited extremes are California (blue) and Mississippi (red).
AP reports that California pays $10,510 per capita in federal taxes and receives $0.96 on the dollar. And Mississippi pays $5,740 per capita in federal taxes and receives $2.13 on the dollar.
The figure that's missing is the actual per capita receipt of federal dollars: $10k for CA and $12k for MS.
So states are receiving approximately the same number of federal dollars per person. However, they are not paying the same number of federal taxes per person.
I don't approve. But on the other hand that's exactly what you'd expect from a progressive tax system, which is widely popular.
I think the more interesting bits that are missing is "average income" and "personal vs corporate vs capital gains tax receipts".
Perhaps we should look into what type of federal dollars are flowing to the red states, and then shrink those programs.
It is money given to retirees (Social Security, Medicare, etc) and the location of Federal employees, notably military bases (intentionally located in cheap and rural places) and various agency offices involved in land management and natural resources (inherently distributed in rural, western areas).
Since no one is going to shrink Social Security/Medicare, and military bases need to be put somewhere in flyover country, and no blue State wants to shrink/eliminate the National Parks, forest service, EPA, etc, it starts to become clear why the current flow of Federal spending in rural red States exists.
A huge amount of Federal employment outside of Washington DC is intrinsically tied to extremely rural locales, which tend to be "red". Oftentimes, like with the Department of Interior agencies, the employees aren't even local -- it is an assignment from Washington DC.
So we're cutting safety net programs for the poor and elderly and agricultural subsidies. Call me crazy here but I don't think "fuck the poor and the farmers" is a very solid plan.
Disclaimer: yea, I use it, so of course I’m somewhat biased to think it’s not stupid.
Blue states are getting screwed and really aren't getting adequate federal government representation at the levels their tax dollars and populations would in theory dictate they should have.
Shouldn't states be more responsible for their own well being rather than what we have now a situation where states just offload their responsibility as a state to the federal government? ...and the states are subject to the whims of whomever is in power in the federal government at the time which has higher risk than people are accounting for and as you have already alluded to is being abused even if it ultimately is in theory the right policy?
The tax code doesn't say that blue states have to pay more, it says wealthy people have to pay more. As a result, wealthy states pay in more than they get out.
Taxing the rich to fund social programs to help the poor means money will flow from Silicon Valley and Hollywood to rural West Virginia.
It's the equivalent of failing to adjust for inflation, just spatially instead of across time. As I said though, there's no easy fix that let's you define cost levels in a principled way and adjust for them, so this isn't quite bad policy as much as an unfortunate imperfection in it.
I don't really disagree with that. But you'll need to convince democrats of this to make it happen. They are the ones who want really high taxes for wealthy people.
Note that California is basically neutral on the balance of payments: https://www.bloomberg.com/opinion/articles/2018-02-05/think-....
In a way it seems like double taxation. In some limited instances you may actually be paying twice for the same thing.
If you can deduct state taxes from federal income taxes, then any increase in state tax rates will take some revenue away from the federal government.
If your income is X, why not just have the federal government take Y% and the state take Z%, and have those numbers be independent, so that the total tax you pay is (Y+Z)%?
If you want to have higher state taxes to provide more services to residents of the state, that's perfectly reasonable, but why should it be the federal government's role to soften the blow of a state-level policy decision?
I'm not sure i'd say that they should take priority per se, but they shouldn't funge against each other, and the federal government was there first, in the case of income.
Under the old system, if a state introduced an income tax, that would proportionally decrease the federal government's revenue collection from their tax base. That's not a very good system. If a state wants to tax, they should tax, but that shouldn't then reduce the federal government's ability to collect taxes from those same people.
I don't understand this. Any tax a state levies on its residents will necessarily reduce the federal government's ability to collect taxes from those same people, because it will make those people poorer.
this is such an odd statement. federal and state governments have no entitlement to any type or class of tax, so stealing is an inappropriate description. the federal government can collect taxes in any way congress decides (with implicit citizen support).
with that said, the federal government should really be focused primarily on international relations/defense and mediating inter-state disputes (and certainly not on punitive politics like this). federal taxation should be commensurately limited, with states being the primary taxing authority and facilitator of governmental programs of the citizens' choosing (through state legislators).
There is an argument that SALT deductions distribute the burden of supporting Federal spending - mainly health & welfare  - away from high taxing states towards low-taxing states. Stereotypically, one might believe that this means fiscally conservative Republicans are subsidising fiscally extravagant Democratic states. That would be unfair because the Republicans should enjoy greater personal wealth due to their frugal choices.
The obvious counterargument is that states like California, Illinois and New York are net contributors to the federal budget [1, 2, 3].
Personally, the SALT deduction is clearly a bad idea and the cap is completely appropriate, paying local taxes shouldn't remove a persons responsibility to the Federal system. However (since the overall system may well be biased against wealthy states) the removal of the deduction should have been paired with a commensurate reduction in the tax take so the net tax payed by individuals didn't change.
this discussion did make me think about whether the fed should tax citizens directly rather than via states, since the federal government should be in service of the states, not vice versa, but that also has other incentive/accountability problems.
Don't get lost in semantics. The point is that deductible state income tax incentivizes states to prefer income taxes to other forms of taxation. There is no explicit reason to encourage this, therefore it should not be encouraged.
This deduction also applies to sales taxes, some people do the math... Technology and apps make it easier to do the math.
This deduction also applies to property taxes...
Given the amount of federal spending that is just grant money to states for things (not to mention the history of the US as a loose association of strongly governed states under a weak(er) federal government), I'm not sure I agree with this.
If CA or NY lowered their taxes, they'd end up getting back a significant amount of the difference as increased federal grant money to the state. That's what happens in many lower tax states right now! By removing SALT, you change the calculation in a different way. CA doesn't need the money, so the government can spend it elsewhere. Its a different thing.
What are the negative outcomes of such policies? I'd argue that the outcomes are more self-sufficient state governments with less reliance on federal grant money. The question then is if that's something the federal government should encourage.
I'm pretty sure a fiscal conservative would say yes. As would a states-rights conservative.
Most tax policies are ways to encourage or discourage specific behaviors. Your "weird backdoor" is another person's "explicitly encouraged behavior". You've got to justify why the behavior is bad and should not be encouraged, and I don't think you've done that. You've just (I think) claimed its unfair, but every state works under the same federal government. They could all do the same stuff.
But SALT isn't limited to income taxes, it includes sales taxes (which you can more easily track with credit card purchases [than you could in the past]), property taxes, car registration taxes, etc.
What makes this bad? You say its bad. Why? Like...what's wrong with the government encouraging states to levy income tax?
"able to deduct their state individual income, sales and property taxes..."
I don't see how that encourages a state to use income taxes instead of property taxes, or even sales taxes.
> which they don't.
I provided at least one: self sufficient state governments that don't need federal aid.
That argument is contingent on certain linear utility curves that are probably not empirically borne out.
> I provided at least one: self sufficient state governments that don't need federal aid.
And how are those things related to deducting state tax?
The state can have a higher tax rate without an overwhelmingly high tax rate on its citizens, and can thereby have enough revenue to provide services without federal aid (that the same revenue would have paid for, just indirectly through the federal government first).
>That argument is contingent on certain linear utility curves that are probably not empirically borne out.
Just because price elasticity isn't linear doesn't mean that price changes have no effect on demand.
At an aggregate level, this argument makes some sense. But when you look at individuals who pay lots of tax, there actually is a good reason to allow a deduction from a tax policy perspective.
States like CA and NYC have progressive income tax rates, so the people paying a lot (and whose deductions are being capped) are high-earners. If their incremental tax dollars were being used to essentially fund consumption-like services for high-earners, then it would be proper to deny a federal deduction. The argument would be: well, your state took taxes from rich people in order to fund fancy museums/opera houses, so we shouldn't allow a deduction for this sort of state-intermediated consumption.
But CA and NY's high-earner taxes aren't used for this, for the most part. For example, CA's "millionaire's tax" (Prop 63) is specifically used to fund state-provided mental health services. Presumably none of the rich people who fund this actually receive these services because they already have their own doctors.
Of course, these taxpayers do see an indirect benefit from the provision of social services, insofar as they help keep crime rates lower and such. But in general, the income taxes paid by high earners are not akin to consumption, which would be the tax policy argument that one would make if trying to get rid of the federal deduction.
However, if you look at the fed govt versus the taxpayer, the calculus shifts. What if every rich person who pays the millionaire's tax voted against it and derives no pleasure from it? Why should they be forbidden a deduction from a tax policy perspective? Companies get unlimited SALT deduction, and until this law, people did too. We can even get tax credits for foreign taxes paid. The general rule is that if some govt took your money, you get to deduct it on your federal return. So if there's going to be an exception to this general rule, there should be a good tax policy reason for it.
Yup! The new limits to SALT don't hurt landlords...
It would be great to see renters get to deduct the property tax (up to $10k) that they pay intrinsically as part of their rent, but I doubt it will ever happen.
The Fed is already not losing out when renters pay the property tax through their rent, rent is not deductible, so the Fed is getting all the income tax. The rental income is netted against expenses on the landlord side and any excess is taxed again at the landlords marginal rate.
A dollar can be taxed again and again every time it changes hands. Usually every other time it changes hands there’s an opportunity to net out expenses before being taxed, otherwise taxes would completely swamp the economy.
Company A sells Product A, proceeds of which pays Employee B, who pays rent to Landlord C, who buys Product D from Company D.
In just that short sequence what percentage of the money flow went to taxes? Almost certainly well over 50%, perhaps approaching 70%, mostly borne by Employee B through payroll and income taxes, second by the Landlord C paying high marginal taxes on any rental profit, and lastly by the Employee and Landlord in the form of sales taxes. The Companies in this example do hand some dollars to the IRS and their States, but the dollars all actually come from B and C.
* Paying state taxes to fund public schools: not deductible.
* Paying private school fees: deductible.
So the new tax law incentivizes private schools over public.
* Paying state taxes to help poor people: not deductible.
* Paying church tithes to help poor people: deductible.
So the new tax law incentivizes religious aid to the poor over public aid to the poor.
It's basically using the tax code to push everyone towards "Republican" values.
The federal government is no more footing the bill through deductibility than it is footing the cost of capital acquisition by taxing net gains rather than gross revenue of capital sales; it just isn't taxing the investments state taxpayers make in common facilities which enable their earnings.
Mm which is actually the only reason for the SALT deduction, which still exists. It just now had a nonsensical limit that has no basis besides punishing political revenues and promoting low tax policy regardless of efficiency.
There's a difference. In the case of taxing net gains rather than gross revenue on capital sales, every citizen is represented in this decision. Not to mention, the consequential incentive is to increase investment in businesses that create taxable earnings. In the case of the SALT deduction, the consequential incentive is to increase state and local taxes to fund social programs over which only that state's citizens have representation.
So I'm okay if some federal dollars have to be shaved off so states can take care of themselves. I do not believe there is an endless incentive for states to raise taxes at the expense of the federal government.
If your intent of to artificially promote low tax and spending at the state level, yes; if, OTOH, you want the federal government to be neutral on state policy the correct way is full deductibility.
So, yes, it's “policy-wise correct” for the misconceived policy goals behind it.
> Under the old system, state goverments, by enacting an income tax of their own, could essentially steal part of the federal government's tax revenue.
More accurately, under the old system states could tax as necessary to support the spending policy which create the environment in which people in the state are able to earn income without the federal government artificially disincentivizes policy that produces better net results if it happens to require higher taxes. (And, because it didn't even abandon deductibility but limited it to a fixed dollar amount per taxpayer, artificially discourages policy not just by the level of taxation, but the distribution, on top of artificially punishing states for a high local cost of living, where if they tax the same share of the same real—based on local costs—income as a lower CoL state will see more money taken by the feds.)
This seems like a very odd definition of 'artificial'. The federal government says "we want 30% of your income". Why exactly should the state be able to pre-empt that?
> More accurately, under the old system states could tax as necessary to support the spending policy which create the environment in which people in the state are able to earn income without the federal government artificially disincentivizes policy that produces better net results if it happens to require higher taxes. (And, because it didn't even abandon deductibility but limited it to a fixed dollar amount per taxpayer, artificially discourages policy not just by the level of taxation, but the distribution, on top of artificially punishing states for a high local cost of living, where if they tax the same share of the same real—based on local costs—income as a lower CoL state will see more money taken by the feds.)
You keep using this word 'artificial', but I don't see much justification for it. I also don't see much evidence for "better net results", nor do I think that's even relevant here. If the states want to levy taxes, they should. But I see no serious argument put forward here for why those taxes should come at the expense of federal taxes.
Why wouldn't the states then just collect 100% of income in taxes (and nothing left for the federal taxes), and then redistribute that back to citizens (proportionally with how much taxes each paid)?
Because if they did, the feds would just not exempt payments from that scheme from federal taxes (such an inverse means test wouldn't be exempt based on the current policy exempting need-based cash aid.)
So it would be essentially the equivalent of just not having taxed the amount paid out in benefits, including for federal tax purposes.
Wouldn't that actually incentivize the federal government to take a greater interest in state policy?
If people can deduct all their state taxes, then the federal government will get less from some states than others due to state policies, not simply due to income differences, right? So if we determine that the federal government doesn't want to get less money, wouldn't they be likely to attempt to meddle in state policy to prevent this kind of tax imbalance?
Maybe, but I’m talking about incentives imposed by federal policy on the states, not incentives imposed by federal policy on federal policy.
Full deductibility means the sign of the net benefit of State policy doesn't change due to federal tax policy, no deductibility, or the actual current policy of limited deductibility, loses that effect; this is undesirable if you take a bottom-up federal view preferring local control of policy in general, the way Republicans like to pretend, it's arguably desirable if you prefer a top-down feudal order where the states are more firmly subordinated, the way Republicans tend to like to accuse Democrats of doing.
> If people can deduct all their state taxes, then the federal government will get less from some states than others due to state policies, not simply due to income differences
Which is a lot more meaningful if you think state policies have no impact on economic outcomes.
Once you acknowledge that they can, you have to acknowledge that any policy which limits deductibility necessarily disincentivizes some set of state policies that increase aggregate income of state taxpayers after state taxes, and thereby increase both federal revenue and (given federal marginal tax rates <100%) state taxpayer’s income after all taxes.
> So if we determine that the federal government doesn't want to get less money, wouldn't they be likely to attempt to meddle in state policy to prevent this kind of tax imbalance?
They can't be more likely to than they would be with limited/no deductibility, because they are 100% likely to meddle with limited/no deductibility, because both of those are forms of meddling.
To your first point, yes, I agree, minus the partisanship - I am not a Republican, nor am I a Democrat, but that said the aggressiveness of your response made me much more likely to just take the opposite position, regardless of the merit of your points - that's one of the reasons I waited.
Beyond your first point -
first, you imply that State policies necessarily have a POSITIVE effect on economic outcomes - I think you'd probably agree with me that while some state policies do, it doesn't apply to all state policies.
Second, while I acknowledge the ability of state policies to have an impact on economic performance, I do not HAVE to acknowledge that this effect is positive. Let's assume that it is, for the moment, though; from there, I logically agree with your premise, given of course that there were no alternative policies (federal, or individual) that would result in better returns.
Finally, to your last point - this doesn't actually make sense to me. Are you saying that because federal governments give a deduction of some kind, this means that they 100% involve themselves in state policy?
I agree, if you have a 1/0 idea of involvement. But if you take a more nuanced view (which I recommend) and understand that there is a gradient of involvement, your statement has no real value - could you clarify or expand it?
[by the way - I know you comment and work here a lot and assume based on your writing that you're an intelligent person - I have been drinking so please forgive me, but do you recognize that the way you write invites immediate aggressive responses and is needlessly complex? For example: "Full deductibility means the sign of the net benefit of State policy doesn't change due to federal tax policy" - this doesn't actually mean anything. I feel like you must know this but I have to be sure. I hope this isn't offensive.]
My state taxes go to fund schools and roads. My federal taxes go to fund bombs, warplanes that can't fly in the rain, a failed drug war, and mass surveillance infrastructure.
That is reason alone for the SALT.
We outspend the next seven countries combined. We could fully fund universal higher education with the money we spend on defense and with the remaining dollars still spend more than three times the amount that the next country does.
They still can via payroll taxes. Since payroll taxes are a deduction for the company, not the employee, they're still deductible under the new tax code.
With a state payroll tax, your state income tax would only need to cover non-payroll income (investments etc.) which would probably fall under the 10k limit for most people.
Alice lives in Incometaxifornia, she makes $100,000 and pays 10% income tax ($10,000) to Incometaxifornia. The federal government wants to tax her on $100,000 even though her take home after state taxes is only $90,000.
Bob lives in Payrolltaxifornia. He makes $90,000 and his employer pays payroll taxes of 11.11111...% ($10,000) to Payrolltaxifornia. The federal government only wants to tax him on $90,000, which is also his take home after state taxes.
Payrolltaxifornia gets the same tax money as Incometaxifornia, but its citizens are taxed less by the fed. Clearly Payrolltaxifornia is a better place to live.
and will continue to exist and be perfectly legal unless Congress passes a law against them.
The Games They Will Play: Tax Games, Roadblocks, and Glitches Under the 2017 Tax Legislation
III. STATE GOVERNMENT RESPONSES TO THE SALT DEDUCTION CAP
B. Increased Use of Payroll Taxes
The run-up to the tax cuts proved they didn't really care much about making the cut even close to revenue neutral (not that many tax cuts are, but...) except for folks who don't have favored status in their political philosophy - see also, the attempt to tax PhD tuition waivers.
No, it would reduce federally taxable income by more than 10%, because an income tax will lower income levels in the state. Even after eliminating the deduction for local taxes, the state income tax is lowering federal tax receipts. States can always eat a chunk of the revenue that would otherwise have gone to the federal government, by destroying that revenue.
Are you saying that the economic equilibrium of a higher income tax will be lower pre-tax incomes? That's certainly an interesting theory, though it doesn't comport with any of the empirical data.
Because you can't collect taxes on income that doesn't exist, obviously.
> Are you saying that the economic equilibrium of a higher income tax will be lower pre-tax incomes? That's certainly an interesting theory, though it doesn't comport with any of the empirical data.
Yes, of course that's what I'm saying. This is the same idea as how taxing oil sales will necessarily lower the dollar volume of oil sales. What model are you aware of that doesn't directly imply this?
Is that all the "empirical data" you were thinking of?
The point of income taxes is, that we (the society) consider them fair - the high-income-earners don't only pay more taxes in absolute terms, but also in relative terms, because of progressive taxation (personally, I think that tax rates should be based on wealth, not income, and that capital gains should be taxed equally as income, but I'm clearly in the minority with that opinion).
(Personally I think wealth should be taxed somehow too. What's fair? Another conversation. I too think capital gains should be taxed at the same rate or higher than income.)
Let them crash and burn and serve as an example of the kind of policy you shouldn't enact. There's 50 states and interstate migration is not restricted. At a national level people do very much have the ability to pick one of the 49 other ships if the one they are on is sinking. Sure it would suck for the people who don't see the writing on the wall when their state is going down but I think it would be less damaging in the long term than the status quo.
And under the new system, it would do exactly the same thing, unless your income is over $100,000/yr, because it's simply designed to adversely effect the political calculus for upper-income taxes, both to reduce political pressure for tax progressivity at the state level and to reduce the viability of high-cost-of-living communities.
Lots of people defending the policy here are acting as if it was a principled rejection of the SALT deduction rather than a calculated strategic limitation on its applicability, and are defending a policy that doesn't exist instead of the actual policy.
Of course the GOP supported it because it helped their constituents at the expense of blue states, but on the other hand...why do you think Democrats were so opposed to removing a deduction that benefited the haves over the have-nots?
From a macroeconomic standpoint this is madness. We're taking money away from the people who really drive the economy and giving it to the ones who are already struggling to find a place to stash all of the money that 30 years of supply side economics have burdened them with. A middle class family would have bought goods and services, a billionaire is looking for any investment opportunity that hasn't been completely diluted by the enormous amount of capital floating around and is going to have to stick it in some "financial instrument" that we're only going to learn about when it causes the next financial catastrophe.
Not sure if you're referring to 2018 or 2017, but most mortgage holders won't itemize for 2018.
And yes, that $10k cap is below the standard deduction for most people so it won't make sense to itemize. The problem of course is that even the new (temporarily raised) standard deduction is still less than the itemized deductions from previous years, meaning people who own a home or have dependants or give to charity got reamed in the butthole this year. The tax code is now optimized for selfish assholes, exactly as Ryan wanted.
Your property taxes counts toward SALT 10k.
Your mortgage interest deduction applied to homes < 1mln, 2018, that becomes 750k.
Your charitable donations were not deductible if they were for entertainment (college football tickets)
Anybody with a 300-750k house and young mortgage most certainly should have itemized...
Enter all W2 info that they should already have.
Enter all interest income.
Enter dividends (which are small)
then we move on to deductions
Enter Mortgage Interest (at this point the software tells us that we've maxed out deductions for the year)
Now a note about the interface on this software. In the corner they included a current tally of your tax owed/refund which updates every time you enter a new value.
At this point we start putting in the deductions anyway, because some things aren't counted until later steps, although it had been counted in the past. We note that the value in the corner is not changing despite putting in a significant amount of deductions.
Once we finish with the deductions the software tells us that the cap on deductions ($10k) is less than our standard deduction and suggests we take the standard deduction instead, which we do.
I don't know how we could have gotten it wrong.
You might want to check that you didn't accidentally enter all of your deductions as if they were SALT payments.
All so Trump could give away the tax dollars to extremely-high income earners.
A real transfer of wealth from the middle-class to the ultra-rich.
Personally I tend to be a libertarian and want the government out of most things. However I do except that fact that some form of taxes are a necessary thing in for any country to exist. I would like to see them line up in a more fair way, flat taxes on all income over a given amount, VAT for non-food, non-essential items, etc. Most of the way we tax is broken. A prime example in CA is property taxes. When my family and I moved last, our search for a home was limited to 5 parts of the Bay Area because of schools. If you want your kid to go to a great school, buy in a rich area as the schools are funded by property taxes. Seems to me it would be better to share that money equally across the state. It would help uplift everyone.
this change in the tax code was only done as a punishment by those in power
SALT, mortgage interest etc should all go away. They're subsidies to the wealthiest.
The tax law was good for bringing the corporate tax back to competitive global levels, good for doing what it can to fix distortions, and bad for lowering the top income bracket in an age of $22T debt (though you'd probably be surprised at the amount of high tax EU welfare countries that use a flat tax, and better tax luxury which should be the real goal, not income in the first place)
Maybe if enough blue state workers (of which I am one) start to feel the implications of their voting records, we can start to have the overdue conversation on how and what we spend on.
* also speaking from a generally libertarian angle
1) States have historically taken precedence over the federal government when it comes to taxes. It was explicitly written in the constitution that something like the federal income tax was forbidden, which is why the sixteenth amendment exists. The reason for that is that people were worried about double taxation of the type that now exists. Supporters of the federal income tax were like, "nah, that would be dumb don't worry about it!" and included the SALT deduction which has existed the entire time that federal income taxes have been a thing until now.
2) State and local taxes pay for things that benefit everyone. Maybe where you live there isn't a homeless problem, but it might be because your city has a program to ship people to California. Or maybe you recently ordered something on Amazon that came from overseas. It probably stopped at a port run by a local agency. And it sure would be embarrassing for America if something bad happened at the UN. Thank the NYPD for that.
3) There are multiple layers of government, but in the end to an individual it's just "the government". Philosophically it's weird that the government can end up taxing you more than 100% on a technicality. Rather than the repealing the SALT deduction, they could have just increased the tax rate. Any state that felt like it could have implemented its own income tax, which hopefully they would have used to take some burden off of the federal government anyway.
Of course, that's why Eduardo Saverin renounced his citizenship.
It’s amusing that people move to another state to pay less taxes and then vote to have their taxes raised...
Taxes are the price you pay to have the baseline of civilization around you so you can live your life. If you're an hourly worker, you go to work in the morning, spend a couple hours earning society, spend more hours earning your expenses, spend some time earning savings, and head home for the day. You drive your car home on your taxes, you go to the grocery and pharmacy for things which are safe due to your taxes, you visit your elderly relatives who aren't in abject poverty because of your taxes. If you want low taxes, you can get them! Just move to a place where you're buying less society.
Turns out that people who can afford nice things tend to not want to live in lesser society. After they do the math, they generally decide that the tax hit is worth its cost, and they live in civilization. It's a self-reinforcing cycle.
If you’re paying $55k in SALT then two immediate questions become; 1) Is this extra $18k your “fair share” , and/or 2) why as a matter of policy should the Fed be deducting $18k off your bill because of $55k in SALTs?
And good god that’s a fuck ton of state and local taxes.
Taxes really are the worst, I find it’s much better just not earning or spending any significant money to begin with.
It seems that that law target high-state-tax states instead?
WA and TX seem equally affected, and I'd say one of them is blue, one of them is red.
Assuming the source of income didn't change much compared to 2017, what's important is to look at the effective tax rate change, (i.e 18k on a 60k income would be very different than 18k on a 300k income)
Both Texas and WA state have no state income tax. They have higher than average sales and property tax, these are still state tax which are deductible under SALT.
The point is they have a similar state tax system, but one is a blue state, the other is red. They both have in common a relatively low overall state tax compared to CA/NY.
I think it's more that blue states tend to offer more social welfare and thus higher taxes. Texas for instance has no state income tax, so wouldn't be impacted regardless.
Because the cap is a per capita dollar cap, not a rate cap, it mostly hits states that are wealthy, as aggregate tax rates (share of economy taxed) between states vary less than per capita size of the economy.
Texas is below the national average (at least as of 2015); they are, therefore, less impacted than most states.
30% of California voters voted for Trump. The 2012 presidential election was 37%.
If the purpose of the tax changes was to hurt Democratic states, they certainly hurt a lot of Republicans in the process.
That was fairly overt in Trump's support, but the broader right wing interest is in putting the federal thumb on the scale to discourage state taxes and spending, targeting liberal policy even where liberal politicians remain dominant.
Why should anyone pay less federal tax than a person living across the border just because you pay tax to your state?
If you don’t like it and think the other state is right not to collect income tax and that state is doing better for it, then surely it’s on you and everyone who agrees to set about voting to remove your own state tax. Not to expect the federal government to give you a special deduction that the other person doesn’t get.
States that have low state and local taxes do so because the federal government subsidizes their low taxness.
States with higher local and state taxes are subsidizing the low-tax states. In addition, the higher-tax states are also more productive.
If anything, the argument should be that the federal government should stop providing so much assistance to low-tax states.
There are perverse incentives at work here, however. The Senate provides every state with the same amount of representation. So a state with a small population can choose not to tax itself much and simply rely on federal spending bills to cover a lot of its needs.
The SALT deduction has existed from the very beginning of the federal income tax. Part of its purpose is to incentivize states so that they don't simply stop spending their own money and pushing everything off onto the federal government:
"The Revenue Act of 1913, which introduced the federal income tax, states that 'all national, state, county, school, and municipal taxes paid within the year, not including those assessed against local benefits' can be deducted."
Yes and no. Texas and Nevada are bottom 10 ranked on federal funding per capita. They also have no income tax. Alaska and Wyoming are top 10 ranked in federal funding per capita. So it's not as black and white as you're claiming. Revenue comes from many sources at the state level not just income: licenses, mineral rights, sales, property, etc..
Many states with low or no income taxes have monster property taxes. State, local, and property taxes are all one bucket. You have to make sure you are counting all of these together when you talk about taxes.
I live in Maryland and my property tax is like 1/4th of my parents in Ohio, and there are a lot worse states for property tax than Ohio.
Texas is an outlier, however, due to its history with oil and mineral rights. Alaska is another one. These states didn't earn the natural resources they are exploiting, but they have benefitted from them considerably, and this has allowed them to operate differently than most other low-tax states.
Did NYC "earn" it's first-mover advantage, natural harbor, and particular terrestrial makeup that supports high-rise buildings on the solid granite beneath the feet of every NYC resident?
Did CA "earn" it's fertile central valley, diverse climates great for agriculture and recreation, and miles of gorgeous coastline?
Each wave of residents exploits the resources available to them. No more. No less.
Let's not pretend otherwise. Economics is not a morality tale.
Likewise, California has a great climate for many types of agriculture precisely because it gets so little rain in the Central Valley; farmers can irrigate their crops to the ideal amount water at each point in their lifespan, while farmers elsewhere in the country are subject to the whims of nature. Integral to California's success in agriculture, then, is their investment in irrigation.
Again, I don't mean to dispute your core points, but while it's good to be lucky, investments also compound. California and New York have both historically invested in their economies through massive public works.
Building oil pumps doesn't matter if there is no oil to be pumped. Therefore having the economic viability to build oil pumps is a geographic advantage.
Building a canal doesn't matter if it doesn't let you reach the center of the continent. Therefore the economic viability to build a canal is a geographic advantage.
Building an irrigation system doesn't matter if you cannot control the irrigation.
Therefore the economic viability to build a precise irrigation system is a geographic advantage.
Those investments would be completely worthless without the geographic advantage that is needed to optimally use them. Nails don't hammer themselves but without nails there is nothing to hammer. Yet you seem to be focusing on only one of those and implying that someone else's hammer is not a real hammer, they just found the nails already in place in the furniture.
SALT deductions incentivize states and localities to do this. They're still incentivizing this, since the deductions were only capped and not eliminated. Do you think states were over-incentivized to invest in their own infrastructure previously?
Avoidance of double taxation is not accomplished with a deduction it is done with a tax credit. That is when I pay A% of tax first to the country of primary residence, and then work out I need to pay B% to a country that has secondary claim on it, I can deduct the whole amount of A tax from B tax.
I understand the inequitable spending. Yes richer states subsidize poorer states. But is the right solution to that a complication of the tax system? I don’t think so. I think that’s a spending problem that should be addressed for what it is. And it will never be possible to have equitable spending. There will always be poorer and richer parts of the country. We can’t make the poorer parts richer by giving them less money. Within a state like CA or NY there are also richer and poorer parts that may not get equal spending from the state.
People in CA and NY get a raw deal mostly because they wind up paying as much (if not often more) taxes as countries that offer universal healthcare, or better education, (and which can manage to build a friggen railway). But that again isn’t resolved by an extra federal deduction. It’s resolved by addressing the dysfunctions or poor spending priorities head on.
To which the complaint is usually again that the fault lays with the poor “red states” who prevent that. To which I say, no stop scape goating. Nancy Pelosi is from CA and doesn’t support fixing any of those things. She’s a blue state representative at the highest level of the house. So no, CA and NY politicians are just as much a part of the problem. Stop blaming “red staters”.
The thing you're arguing against is coordination.
The pension bomb is going to be a reckoning.
1) Transportation. Most spending in this area is by the federal government. But dense areas that rely on public transportation have to rely heavily on state and local taxes to support projects, whereas many roads, bridges, and even intersections are built in suburban and rural areas almost entirely with federal dollars. This is part of why our country has so little public transportation versus other countries. The federal government spends disproportionately on roads, which benefits certain areas and segments of the population a lot more than others.
2) Healthcare. Many states began expanding healthcare after the Affordable Care Act brought in Medicaid expansion. This is almost entirely paid for by the federal government. Higher-tax states already had higher levels of healthcare spending through programs to expand coverage. Some states like Massachusetts already had models like the ACA in place. Many higher-tax states have unionized state and local workers who are provided with high-quality healthcare and insurance. In other states where a lot of outsourced, it is a much different picture.
Personally, I think most taxes should be abolished and a return to taxes on sale/trade would be preferred. Then again, I'd also like a bit more sanity in IP as well.
After all, the people do not choose the President, the states do. Each state has a certain number of electors in the electoral college and they can allocate those electors to the candidates as they see fit. In most states that happens to coincide with state's election in which the popular vote of the state determines all the electors (some states split electoral votes) but it doesn't have to be that way (see National Popular Vote Interstate Compact).
Additionally, the Senate does not represent the people, it represents the states. That's why there's huge power imbalances among people in the Senate living in California vs. Wyoming, for example. The supreme court is chosen by the President and confirmed by the Senate. The only branch of federal government chosen by and representing the people is the House.
So if the people are not even directly choosing the major branches of the federal government, they should not be directly paying taxes to it.
While that is how is was originally designed, the 17th Amendment kinda of took that away. Originally the state legislatures elected their state's representatives (Senators) in the federal government.
With the passing of the 17th Amendment, the direct election of Senators has contributed to the ridiculousness of our federal government.
I would bet few state elected Senators (who actually represent their state governments) would ever pass federal laws/mandates that would punish a state and withhold funds if they didn't comply with the federal governments demands such as the National Minimum Drinking Age Act of 1984.
That isn't the case today, but it is well within the realm of possibility if, say, one the Democrats' maximum-tax-rate proposals are enacted (which I broadly support).
The states and the feds historically don't coordinate taxes well, but the SALT deduction was one way of coordinating. It hasn't been replaced by anything, and it needs to be.
If you look at other forms of compound tax rates you'll see the same pattern AFAIK.
You see it in the state in local government programs that were made possible by those you voted for to represent you.
First, the federal tax rates are heavily graduated on the grounds that it's less burdensome to tax people that make more money. But in states with high (also graduated) income taxes, high taxpayers aren't personally making that money (in any meaningful way), nor are they generally getting it back from a proportionally higher amount of government services. States are essentially redistributing income from high-income taxpayers to beneficiaries of social insurance programs and state residents overall.
From that perspective, it might make more sense to tax the increased level of state services as income to those who receive it. With a flat federal tax it would make no difference in total collections, but with the graduated federal income tax this would be a much lower on average tax rate.
Second is much simpler: most of the state government spending is on education, social services etc... things that are in line with tax-deductible charities. So it's not inconsistent to have state taxes be deductible too (of course getting rid of both deductions is also an option).
Because state taxing and spending decisions are part of what creates the opportunity to earn income, and if state taxes aren't deductible than federal taxes distort those decisions and artificially promotes lower tax policy even when the higher tax policy expands the production possibilities curve and yield more income.
The federal thumb should be off that scale and the only way to do that is full deductibility of state and local taxes.
It's a lot like why business expenses are deductible, why you are only taxed on the net proceeds of capital (whether it is used as regular income or long-term gains), or why even hobby expenses are offset against hobby income.
Every example seemed to be about people who were trying to dodge taxes while still actually having the "high tax" state as a de-facto primary residence.
Yes, some of these examples were pretty likely fraud, but some also seem like real moves that the tax auditors weren't happy about.
In some more complicated situations where you technically earn money in the state even though you don't have a home there, I could see how it would feel unfair. (I can't think of such a situation off the top of my head, but I'm sure they exist.. actually the athlete example might be a good one).
Personally, I'd like to see income taxes removed entirely in favor of sales/import/export taxes.
There is a growing consensus that those with vast and rapidly increasing accumulations of wealth should pay more taxes. Not upper-middle income families in expensive metros.
In recent American discourse, the metric is usually the top 1% or a fraction of the top 1% (in terms of wealth and /or income). These aren't our well off neighbors, these are families that are astronomically wealthy. The top 1% of wealthiest households in the US possess more wealth than the bottom 90%.
There are plenty of people with more money then me who are nowhere near that top 1%, but few people are clamoring for them to pay more in taxes.
The fact is the states are relying on that deduction to shift things... this just puts a cap on it.
I’ve spoken with so many people about this and it’s depressing how so many people feel disadvantaged in this country.
Sales are regressive taxes, and import/export are distortive af.
The idea is to only tax land, which is a very progressive tax. The tax can't be evaded, since you can't hide land. It also creates a consequence for land speculators who sit on unused real estate. As a result, it stimulates the economy with the upsurge in business opportunities.
I'm mostly a proponent of a minimalist government, pragmatically speaking. I'm a proponent of laws and systems that increase personal liberty and minimize bureaucracy. I accept that there may be some distortion and it isn't exactly fair. But the deductions in the current system aren't exactly fair either.
Bureaucracy is a cornerstone of American democracy. When you have 2 strong parties and a push for greater and greater political distance, the bureaucracy is what keeps one party from shackling the other with some policy that leads to the end of the Union. Personally I feel it's never been more important.