November 21, 2012

GIVE ‘EM THE TAX INCREASES THEY DESERVE: Blue States Fear Losing Tax Loophole:

What’s the least defensible special break in the U.S. tax code? With so many distortions to choose from, it’s hard to name just one. If forced to pick, I might say the deduction for state and local taxes, which cost $67 billion in fiscal 2011, according to the congressional Joint Committee on Taxation.

This one overwhelmingly benefits upper-income households in a handful of upper-income states, while rendering the entire nation’s finances less transparent. It’s also a potential source of friction in the “fiscal cliff” negotiations between President Obama and the Republicans (but we’ll get to that in a moment). . . .

What the deduction does is enable higher-income states and localities to tax — and spend — more than they otherwise would, while shifting some of the cost to other states. It also encourages them to collect revenue in forms that are easier to deduct on federal returns.

Two states, California and New York, reaped almost 30 percent of the deduction’s value in 2009, the latest year for which I could find Internal Revenue Service data. Other states that benefit disproportionately include Connecticut, New Jersey, Illinois, Massachusetts and Maryland.

In 2009, 73 percent of the deduction’s benefits went to taxpayers with annual incomes above $100,000, according to the Congressional Budget Office; fully 20 percent of the benefits went to taxpayers with annual incomes above $1 million.

Starting to notice a pattern? Basically, what we have is a significant federal tax subsidy for “blue” state governments. These also happen to be the states having the most difficulty living within their means. . . . Perhaps it’s just coincidence, but I have noticed that those most skeptical of the loophole-closing approach include Sen. Charles Schumer (D-N.Y.) and House Minority Leader Nancy Pelosi (D-Calif.).

Get rid of the deduction. Introduce ‘em to realville. (Via NewsAlert).

UPDATE: Reader George Apostolicas writes:

Eliminate deductions for state taxes for “the rich”, i.e. Above $ 250,000 in AGI, AND eliminate tax exempt interest income above $ 50,000 a year ( also only affecting the “rich ).

These changes only affect the rich.

Watch them squeal and see the hypocrisy ooze.

There’s lots of fun to be had here, if the House Republicans are smart enough to have it.

Heh.