The tax-reform “framework” issued last week by President Trump and congressional Republicans has the laudable aims of reducing corporate and individual income-tax rates, simplifying the code and broadening the base.
The plan is still missing lots of key details, but this much is clear: it hinges on the roughly $1.3 trillion that would be raised over 10 years by repealing the state and local income-tax (SALT) deduction, which disproportionately benefits a handful of high-tax states, including New York.
Gov. Cuomo was quick to denounce this idea as “the height of hypocrisy” and “double taxation” — although New York state has been selectively double-taxing its residents for many years. (For example, the state personal-income tax disallows itemized deductions for New York City income taxes.)
Hypocrisy aside, Cuomo’s strident opposition to repeal of the SALT deduction is understandable. Even with a larger standard deduction, the outlined plan might not deliver a big tax cut for middle-class New Yorkers. House Republicans reportedly might compromise by capping rather than repealing the deduction.
But for the highest-earning 1 percent of New York taxpayers, who now generate 42 percent of the state’s income tax, even a deduction cap could result in a net increase in combined federal, state and local taxes — making lower-taxed states even more attractive. That would quickly spell trouble for the state’s finances.
Purely as a matter of economic efficiency, critics of the SALT deduction are right: It effectively subsidizes higher taxes in states that choose to impose them.
But that’s taking too narrow a view. In fact, without implying any endorsement of New York’s excessive taxes, a case can be made for retaining the deduction on solidly conservative, federalist grounds.
For one thing, it’s been around a very long time — since the enactment of the first federal income tax, during the Civil War.
If anything, conservatives should be Washington’s prime promoters of subsidiarity — the notion that more power (and, implicitly, revenue-raising options) should be pushed down to levels of government closest to the people most affected by government policies.
House Speaker Paul Ryan has equated subsidiarity with federalism in his effort to devolve more power to the states while turning federal entitlement programs such as Medicaid into state-controlled block grants.
Even after seasoning with SALT, the tax code’s progressivity ensures that the wealthiest New Yorkers pay high effective tax rates.
In 2015, for example, the 893,000 tax filers living in the borough of Manhattan generated $2.8 billion more in income taxes than all 5.6 million taxpayers in Ohio, even though Buckeye State residents reported 1.7 times as much in adjusted gross income that year.
Of course, Manhattan’s an outlier, home to some of the wealthiest people in the world. But here’s another example: The 1.5 million income-tax filers of suburban Long Island — most of them solidly middle class by regional standards — paid more federal income tax in 2015 than all 3 million tax filers in Tennessee, who reported 20 percent more in total income.
For decades, despite the SALT deduction, New York has been sending more money to Washington than it gets back — nearly $41 billion more in 2016, according to a report issued by state Comptroller Thomas DiNapoli.
This “balance of payments deficit” was an obsession of the late US Sen. Daniel P. Moynihan, who issued a series of annual reports on the subject. His methodology was open to dispute, but his conclusion was hardly controversial: A progressive income tax married to a redistributionist budget will always create fiscal winners and losers.
Taking stock of the issue not long before he left office in 2000, Moynihan proposed a “grand compromise.”
“It is time to trade,” he wrote. “Less activism in Washington in return for more revenue at home, for whatever active measures recommend themselves to the state or municipality in question. Conservatives can then bring about or watch being brought about a genuine shrinkage in the size of the national government.”
Now there’s an idea.
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