With tax reform finally on its way to President Trump’s desk, it’s safe to say that the Left is unlikely to let up on its misleading attacks on the nature of the plan and those who advocated it. The mischaracterizations are numerous. They amount mostly to a “fake narrative” that the bill benefits the wealthy and big business at the expense of the “middle class.”
Of course, there is a hue and cry from Democrats about the limitations placed upon deducting state and local taxes. Democrats know that particular provision is going to expose the blue state/high state tax model to an uncomfortable political squeeze. It’s less easy for voters to favor leftism when they actually have to pay for it. So Democrats mischaracterize this as a tax increase, when it is in fact the greatest addition to progressive tax “fairness” in recent memory.
Let’s start with the nature of taxation in the United States. Our republic was founded upon the principle that taxation was only legitimate when it was supported by and with the consent of the governed through their direct representatives. This is why the House of Representatives has the sole power of new taxation, and also why a federal income tax was considered unconstitutional until a little over a century ago with the passage of the 16th Amendment. America’s Founders did not envision the federal government as the primary tax collector; that was always expected to be the role of state governments and centered around state priorities.
Federal taxes, whatever they were to be, had a simple requirement from the Constitution. They had to be the same for everyone, regardless of state of residency. Article I, Section 8 of the Constitution grants Congress the power to tax, but with the limitation that, “all duties, imposts, and excises shall be uniform throughout the United States.” In Article 1, Section 9, among the list of denied powers of Congress is: “No capitation, or other direct tax shall be laid, unless in proportion to the census or enumeration herein to be taken.”
The simple fact is that allowing taxpayers to deduct their state and local taxes from their federal income taxes creates an inequality in the rate of taxation throughout the United States. Here’s why.
First, if one lives in a state with high income and property taxes, such as California, New York, or Illinois, under the old tax code you would be entitled to write off large sums of money from your federal tax bill that people in more reasonably taxed states were unable to deduct.
In other words, you were actually paying a lower percentage of your income to the IRS than a person with the same level of income in a low-tax state such as Florida, Delaware, or Utah. In essence, taxpayers in the low-tax states are subsidizing the state governments of places in which they do not live or have right to vote, by paying a higher rate of their income to the IRS.
Giving a tax break to those in the higher taxed states isn’t just a tax cut; it is at the same time a tax increase. Taxes need to be high enough to fund massive federal spending, so the rates are higher than they really need to be to account for the state tax deductions.
Tax deductions are not necessarily a bad thing. They can provide incentives for charitable giving, retirement savings, and even investments to expand our economy and promote the general prosperity and welfare of all. All these things (and others) provide benefits for the nation as a whole, and are thus reasonable and constitutional.
Trouble is, breaks to the taxpayers of California are not necessarily of benefit to taxpayers in North Carolina or Wyoming. Voters in those states should not be expected to accept them. If Californians want to create and fund an elaborate welfare state and system of public works, it is of course proper for them to do so. But it is also proper for them to pay for it with the consent and money of their own citizens. It is not proper to expect those without a vote in California to subsidize them.
If the prospect of a higher federal tax bill disturbs taxpayers in California, New York, or any other high-tax state, they have the means to stop it. With their franchise as a voter in their state elections, they can demand lower taxation. If they do not want to pay for all that their government finds worthy of their hard-earned wages, they can elect state representatives who will reflect their wishes. And if they wish to continue to have a generous state government, they can continue to vote for those who created it. And foot the bill.
The truth is, Democrats like obscuring this expense because it maintains their hold on power. Let’s see how long it lasts when voters in blue states actually have to start paying for these expensive schemes themselves.