The class warfare that surrounds tax reform is bothersome. It’s not constructive and most of the information is false. The reason some tax cuts appear to benefit the rich is that the rich pay 80 percent of the taxes. They are the ones who need tax breaks. However, there is one tax break that generally impacts the rich that may disappear if the tax code is truly reformed.
Yesterday The Daily Signal posted an article about the elimination of the deduction for state and local taxes. The article explains how this deduction impacts the residents of California:
Yes, California has high state income taxes. For instance, the rate for millionaires is 13.3 percent. It’s not insanely lower for the middle class, either: A married couple making $103,000 or more would pay a 9.3 percent rate, and while $103,000 might go far in plenty of areas in the United States, California’s outrageously high housing prices ensure that such a couple wouldn’t have an easy time paying all the bills.
But those Hollywood liberals raking in the big bucks and paying the 13.3 percent rate? Well, they’re not actually paying the 13.3 percent rate, thanks to our current U.S. tax code, which allows deduction for state and local taxes.
Let me explain. Currently, if anyone files taxes with itemized deductions, he can deduct his state and local taxes. In other words, if Joe Random makes $250,000 a year, and pays $26,000 in state and local taxes, and then donates an additional $14,000 to charity annually, he could deduct $40,000 from his salary—and pay federal taxes on only $210,000.
This deduction has big benefits for wealthy Californians. According to The Heritage Foundation’s research, that deduction means the effective tax rate for rich lefties in the Golden State is 8 percent, not 13.3 percent.
Essentially the rest of the country is subsidizing California’s high tax burden.
The article further reports:
Furthermore, for individuals pulling in over $200,000 a year, the average benefit of the state and local tax deduction is $6,296, according to Heritage research. For those making in the range of $40,000 to $50,000, that benefit shrinks to $134.
And it’s not just California whose blue-state government is currently raking in the perks thanks to the tax code.
“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,” write Rachel Greszler, Kevin D. Dayaratna, and Michael Sargent in their upcoming report for The Heritage Foundation.
Why should Americans from red states and lower-tax blue states be subsidizing other states? If states like California want to embrace big government, that’s fine—but they should also have to finance it themselves, not ask for a handout from the rest of the country.
Ending the deduction for state taxes would help make the income tax more equitable for everyone. There will be loud cries from the states it will impact, but it still needs to be done. Hopefully the Republicans will have the courage to do it.