Rich State Write-Off

I love statistics that tell a story especially when the story is close to home.  The weekend Wall Street Journal editorial piece about Federal tax policy and poorer states subsidizing richer states had a great stat.  The basic idea is that because of the Federal tax deduction that is allowed for state and local taxes one also pays, the states with lower tax rates and/or poorer people are subsidizing the rich states.  Here are the top five counties in the country by average amount of state and local deduction (for 2014):

New York (i.e. Manhattan)        $24,898

Marin County                            $16,956

San Mateo County                       $15,405

Westchester County (NY)            $14,784

Fairfield County (CT)                $14,262

There is apparently some move afoot to eliminate the deduction for state and local taxes paid, but the Journal hopefully writes that it might "spur reform in states that are long overdue for a better tax climate." -- like California.  Don't hold your breath on that.

Comments

[csddept]

nice observation

[The economy and natural beauty are nice, but...]

There is a local income tax in NYC, unlike Marin and San Mateo Counties (do any of the cities in these counties have local income tax?), so we're really #1, and #2 in the US for state and local deduction.

[BillyGBob]

So, San Mateo and Marin are "subsidizing" other counties even though they paid the 8th and 5th highest per-capita Federal income taxes (2007 - 2011 data) among all 3,007 US counties?

[BillyGBob]

Shoot....missed an edit: San Mateo and Marin are "subsidized" by other counties even though they paid the 8th and 5th highest per-capita Federal income taxes (2007 - 2011 data) among all 3,007 US counties?

[Joe]

Yep, those who want to eliminate the deduction want even more from us.

I guess I should appreciate the spam from csddept for getting people to actually read a month old post!

[Joe]

Now that details of the tax reform proposal are coming to light, there appears to be a good deal of sound and fury over the State and Local Tax (SALT) deduction limits in the proposal. The Chronicle and the Mercury News both have angst-loaded front page articles today! Funny, neither article gets around to talking about "fairness". Every other tax article from these two and especially the SacBee always go on ad nauseam about "fairness" but not here.....so is it "fair" for lower-cost of living areas to subsidize the higher-cost ones? Dear Chron, Merc and SacBeen editorial boards, I can't hear you.
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California’s high taxes, costly housing mean trouble under GOP tax plan

People who live in high-tax states with high housing prices would fare worst under the tax bill released by House Republicans Thursday.

The impact on individuals “will be very idiosyncratic. It depends on where you live, the makeup of your family, how you make your money,” Gleckman said.

A large family in a high-tax area with expensive housing would likely pay higher taxes than they do now. A working-class household in Peoria, Ill., depending on the family size, “may do pretty well,” Gleckman said.

The bill would almost double the standard deduction to $24,000 for married couples and $12,000 for single filers, which means far fewer people would itemize deductions. However, large families could fare worse because it also would eliminate the personal exemption ($4,050) they can deduct for each member of the household, including college kids and adult dependents. Instead, it would increase the child tax credit to $1,600 from $1,000 for each child 16 and younger. It also would create a new “family credit,” equal to $300 for each parent and adult dependent, but this would expire after five years.

People in high-tax states could pay more. Today, if they itemize, they can deduct either state and local income or sales tax. California has the nation’s highest income tax rate at 13.3 percent.

People who itemize their deductions could still deduct their property taxes under the bill, but only up to $10,000 per year. Today there is no limit. If you bought a new California home for roughly $900,000 today, your state and local property taxes would be about $10,000 a year.

However, under current law, people who are subject to Alternative Minimum Tax get no benefit from the state and local income and property tax deductions. The bill would eliminate the AMT, taking the sting out of the loss of those deductions for those people.

The proposal would cap the mortgage interest deduction on new home loans. Today, homeowners can deduct interest on up to $1 million in mortgage debt used to buy, build or improve a first and second home, plus up to $100,000 in other mortgage debt (such as a home-equity loan used to buy a car). For existing mortgages, those rules would not change. But starting Nov. 2, if you took out a new loan, you could only deduct interest on up to $500,000 in mortgage debt on a principal residence and no interest on new home-equity debt.

http://www.sfchronicle.com/business/networth/article/California-s-high-taxes-costly-housing-mean-12327807.php

[Christopher Cooke]

California and New York pay more in taxes to the federal government than they receive, because the two states have the highest incomes. This is just a reflection of midwestern and southern bias that controls the Republican Party. We are getting screwed to fund the states with opioid attics

[Cassandra]

Happens in basements, too.

[Steve Kassel]

And NY, CT, MD, Massachusetts, CA bias controls the Demorats.

[Steve Kassel]

Oh, did I forget a C?

[Ian]

Joe - your question above ("so is it 'fair' for lower-cost of living areas to subsidize the higher-cost ones?") is based on an obviously inaccurate premise - as Chris points out, the WSJ Ed Page (i.e. the pseudo-respectable version of Faux News) is simply incorrect to suggest that CA and NY are "subsidized by" the states with lower state taxes - in fact, the latter tend to be most dependent on federal spending.

If you're curious about the actual numbers, check out this analysis:
https://wallethub.com/edu/states-most-least-dependent-on-the-federal-government/2700/

[Bobby]

The issue of which states subsidize other states through the SALT deduction is not relevant and moot.

The question folks in high tax states like ours need to ask, is why are our state taxes so high to begin with? The SALT deduction obfuscated this issue, and allowed high tax states to add tax upon tax, without much transparency or dialogue ("don't worry, you can deduct CA tax increases in your federal return")

Sacramento, Albany and other high tax state capitols will have to answer to the constituents now, if SALT gets removed.

[Ian]

It seems a pretty common trope (especially now that it's on the chopping block) to say that the deductibility allows states to increase their taxes, but is there an example anywhere of a prominent California politician actually making the "don't worry, you can deduct CA tax increases in your federal return" argument in real life?

A few years ago there was a CA tax increase on the ballot, but I don't recall that particular argument having been made (at least not prominently) in favor of passage. Genuinely curious to know if this actually happened...

[Joe]

Ah Ian. If the WSJ editorial page is Faux News then the Bee, Merc and Comicle are faux TP. The Big Three in NorCal generally avoid any statistics like the plague; preferring ad hominem attacks on anyone to their right.

The Wallethub site is moderately interesting, but itself misses some aspects of federal assistance (like military payroll) and somehow conflates federal contracts awarded to federal assistance. Last I checked a contract was a purchase of goods and services--not "assistance". That is sort of a Leftist point of confusion.

But the big problem with their analysis is it is off-point to our discussion. If SALT is done away with, we will pay even more. Whether it's "fair" or not depends on who the umpire is. If the assertion is that each state should just get back what they pay, then why collect federal taxes at all? That is an equally stupid idea.

Lastly, just because no Sacramento pol has explicitly stated the "common trope" doesn't mean that people don't feel it every day in their pocket book and behave accordingly. It's another Leftist fantasy that people will behave the same regardless of how much the government taxes them.

[Ian]

Joe - I think you were the one claiming that lower-tax states are subsidizing higher-tax states. The data I provided simply demonstrate that the premise isn't accurate. It just seems odd to argue that the states which are the main source of federal revenues are being "subsidized" by the states which are economically dependent on federal spending.

The WalletHub data don't appear to assert that all federal spending is necessarily something called "assistance" - just measuring where the dollars are going. Whether they're spending the money in direct payments to a state or by steering contracts to companies located in the state, that state's economy still reaps the benefit.

Regarding the SALT deduction, I'm not in favor of getting rid of it. That's why I'm pointing out that your argument (or maybe the WSJ's?) in favor of doing so is based on the false "subsidy" premise.

Lastly, I didn't claim anything about the impact of removing the deduction - just asked for any evidence to support Bobby's assertion that it "allowed high tax states to add tax upon tax, without much transparency or dialogue ("don't worry, you can deduct CA tax increases in your federal return")" - if your response is that you just want to believe it in the absence of evidence, because not doing so would constitute a "Leftist fantasy", then perhaps you shouldn't have started the thread by saying how much you "love statistics".

[[email protected]]

Only in Burlingame, CA. can the Most Important Social Issues effecting every person living in the United States be sidelined, and ignored in favor of benefits for Multi-Millionaires' complaining about paying to much in Taxes.
IE:
-Health Care
-Equal Education for students(No matter what County)
-Illegal's

Sorry about being Buzz Kill.

However, the Fact that Millionaires in Burlingame, complaining about a $50-100.00 increase in yearly taxes is absolutely shameful.
If Burlingame Millionaires are concerned about their "Staff,"- House Cleaners, and Lawn Maintenance Employees. Start filing 1099's.
It would be nice to pay for their Heath Benefits too.
How do you pay your "Staff" Joe?

[[email protected]]

I do not mean to "Call you Out" Joe.
However, you represent the Burlingame Voice.
I know you do not care about other peoples Posts.
You are an Editor.
A Great Editor too.
Thank you Joe for the work you put into this site.

[Joe]

Ian, you are mixing "revenue" (government euphemism for taxes) and expenses or monies returned to the states. If a state's citizens are getting larger SALT deductions than other states, then the subsidy comes in the form of foregone federal taxes. No one can argue that.

What happens after that on education, health care, welfare, national laboratory contracts, Air Force bases, etc is interesting, but moot in terms of the "revenue" collected or foregone or subsidized.

I'm not decided on pro or con for removing the SALT deduction. It's not a question one can answer in a vacuum of the rest of the reform bill. What happens to marginal rates, other credits, etc is all part of the picture.

Lastly, you might go here and scroll down to the "Arguments" section for more detail on the seven aspects of the deductability:

https://www.aicpastore.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2008/Tax/goodbye.jsp

Nothing has changes since 2008.

[Joe]

This is a better place to put the pertinent comment about the "common trope" described above--from the WSJ of last week:

The Republican tax reform must still pass the Senate, but already it’s having a political impact in at least one high-tax, ill-governed state. Democrat Steve Sweeney, president of the New Jersey Senate, said last week that the GOP decision to eliminate the state and local tax deduction could throw a new tax increase on millionaires into doubt.

The surcharge on millionaires is a hardy perennial in Trenton, and Governor Chris Christie vetoed it multiple times. But Governor-elect Phil Murphy, who is already rich from his Goldman Sachs days, campaigned on a special tax rate of 10.75% above the state’s already high top income-tax rate of 8.97%.

“I’ve voted for it seven times. I’ve said it’s a top priority,” Mr. Sweeney said, according to the Observer Online. “But I’m actually getting very, very nervous now with what’s happening in Washington.”

Excellent news. Making politicians in Trenton, Albany, Sacramento and Springfield nervous about raising taxes is one desirable outcome of tax reform. These politicians have been passing the burden of their tax-and-spend policies onto taxpayers in other states via the state and local deduction. If that goes away, Democrats will have to rethink their policies lest they drive from their states the affluent taxpayers who finance most of state government.
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Vote for it seven times but now has to think twice. Might even work in Sac!

[Pulin Forca]

California Voted Worst State for Quality of Life. You guys keep voting for the same people.

https://www.washingtontimes.com/news/2018/mar/1/california-has-worst-quality-life-us-study-says/