Here’s How the Tax Code Helps Rich Taxpayers in Big Government States Pay Less

By Jarrett Stepman, Reporter for The Daily Signal.

As Congress works on tax reform, it is worth noting how politicians and interest groups use the code for their benefit often at the expense of others.

Some of the worst abusers are the states.

One of the most overlooked issues with federal tax policy is how states exploit federal deductions to underwrite their spending and paper over higher tax rates.

Under current laws, taxpayers have the ability to deduct state and local income and property taxes from their income when filing their federal taxes.

So if a person making $250,000 a year pays $26,000 in state and local taxes and donates $14,000 to charity, he could deduct $40,000 from his salary. This person would pay taxes on only $210,000.

Of course, everyone wants to pay fewer taxes. But under these rules, the wealthy have a much better opportunity to do so than those who are lower on the income scale.

While lower taxes are generally a good thing, deductions just shift the tax burden instead of reducing taxes in total. And they add further complication to the code that must be worked around.

According to Heritage Foundation research, over 70 percent of taxpayers don’t receive benefits from this state and local tax deduction. Yet, over 90 percent of taxpayers making over $200,000 do.

Those who make more can better take advantage of this tax situation, but the greatest beneficiaries are the big, high-spending states. They still reap the financial reward of having higher taxes while the federal government picks up a portion of the tab—and that tab is an estimated $1.7 trillion over the next 10 years, according to The Heritage Foundation’s Center for Data Analysis.

In fact, just seven states receive 53 percent of the value of the state and local tax deduction: California, New York, New Jersey, Illinois, Massachusetts, Maryland, and Connecticut.

On average, taxpayers in those states who itemize deduct 7.6 percent of their income in state and local taxes, compared to 4.2 percent of income among other taxpayers who itemize in all other states.

So, to make this situation even more unfair, the citizens of low-tax states that have controlled their spending have to bear a higher burden for the shortfall in federal taxes.

Ending these types of deductions could make states more accountable and efficient.

Efforts to change this part of the tax code have been around for a while.

President Ronald Reagan tried to repeal these deductions in the 1980s. He said in a 1985 speech that taxes could generally be reduced if they were simplified and we removed the special provisions that “favor some at the expense of others.”

Reagan said, “I don’t believe that we can justify a system that forces taxpayers in low-tax states to subsidize the big-spending policies of a few high-tax states. That really is taxation without representation.”

While Reagan got his tax cuts, he wasn’t able to change this deduction.

But without getting rid of deductions, rates can’t decline by as much. A recent Heritage Foundation analysis estimated that the revenue gained by eliminating state and local deductions would be enough to reduce marginal tax rates by as much as 16 percent.

*To view this piece of The Daily Signal website, click here.


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Congress Needs to Go Right Back to Work on Health Care Reform

By Robert Moffit, Heritage Foundation Senior Fellow in Health Policy Studies Enough is enough. The Senate needs to get back to work and deliver a health care reform bill. Meanwhile, President Donald Trump needs to shut off the flow of illegal health insurance subsidies to members of the House and Senate…

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Congress is Set to Protect Consumers from the CFPB

By Norbert Michel, Director of the Center for Data Analysis at The Heritage Foundation It’s one of the most controversial components of the 2010 Dodd-Frank Act, but it has a nearly perfect political name. What member of Congress could possibly be against the Consumer Financial Protection Bureau (CFPB)? The name is so perfect…

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What Comes After Skinny Repeal?

By Michael A. Needham, Heritage Action for America CEO Republican senators are reportedly working on a so-called “skinny repeal” of Obamacare. While details remain sparse, no one should mistake this last-minute effort for being the culmination of Republicans’ seven-year promise to repeal and ultimately replace Obamacare. The inconclusive nature of the…

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Heritage Action Will Key Vote Health Care Amendments

Washington — This afternoon, the Senate voted to begin debate on the House-passed American Health Care Act (H.R. 1628). That successful procedural vote allows Senate Republicans to begin debate on their seven-year promise to repeal and ultimately replace Obamacare. Heritage Action released the following statement from chief executive officer Michael A.…

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Senators Should Proceed to Health Care Debate

Washington — Tomorrow, Senate Majority Leader Mitch McConnell (R-Ky.) is expected to offer a motion to proceed to the House-passed American Health Care Act (H.R. 1628). That key procedural vote will allow Senate Republicans to begin debate on their seven-year promise to repeal and replace Obamacare. If the vote fails, Senator Lamar Alexander…

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Republicans Just Made Tax Reform More Difficult

By Adam Michel, Heritage Foundation Policy Analyst This week, the House Budget Committee released its long-awaited budget. It makes progress in some areas, and falls short in others. One of the places it falls short is in facilitating tax reform. By all accounts, tax reform will be difficult. True tax reform that simplifies…

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Senate Health Care Bill Could Be Greatest Entitlement Reform in a Generation

By Robert Moffit, Heritage Foundation Senior Fellow in Health Policy Studies The Senate health care bill (the Better Care Reconciliation Act of 2017) would fundamentally reform federal Medicaid payment. As Washington Post columnist George Will has written, the bill’s Medicaid provisions, as crafted by Sen. Pat Toomey, R-Pa., “makes it this…

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This Official Had the Spine to Stand Up to the Powerful CFPB. Congress Should Follow His Le

By Diane Katz, Heritage Foundation Senior Research Fellow in Regulatory Policy Three cheers for Keith Noreika, the acting comptroller of the currency, for having the chutzpah to challenge the regulatory deceit of the Consumer Financial Protection Bureau and its director, Richard Cordray. As reported by The Wall Street Journal, Noreika on Monday…

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7 Years of Promising Obamacare Repeal Leaves Republicans Just 1 Option

By Jarrett Stepman, Editor for The Daily Signal  Obamacare is failing. It has done little to fulfill its original promise of producing more choice and lower costs, and worse, has set off a cascading set of problems that will increasingly hurt the American people. When President Donald Trump was asked Tuesday if…

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9 Key Takeaways From the House Budget Proposal

By Justin Bogie, Heritage Foundation Senior Policy Analyst in Fiscal Affairs After months of delays, the House Budget Committee has released its fiscal year 2018 budget resolution. The plan makes progress in some areas, such as prioritizing national defense, reforming Medicare, implementing mandatory reforms through reconciliation, repealing Obamacare, and beginning to reform the…

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Next Steps on Obamacare Repeal

Washington — Last night, Senate Majority Leader Mitch McConnell (R-KY) announced “the effort to repeal and immediately replace the failure of Obamacare will not be successful.” If the Senate votes to proceed the House-passed bill, McConnell said the first amendment would be “what a majority of the Senate has already supported in 2015…

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CBO Analysis of Trump Budget Shows Need for Entitlement Reform, Pro-Growth Tax Policies

By Justin Bogie, Heritage Foundation Senior Policy Analyst in Fiscal Affairs The Congressional Budget Office released its analysis of President Donald Trump’s budget request last week, and it wasn’t good news. The report paints a stark picture of the proposal compared to the administration’s findings, showing that the president’s budget…

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