New York Democratic senators Hillary Clinton and Charles Schumer and representative Charles Rangel have attacked an idea likely to be part of President Bush’s yet-to-be-released reform plan to make the federal tax code flatter, fairer, and more efficient: the elimination of the federal tax deduction for state and local taxes. These three very partisan politicians bash Bush for, as the song goes, every move he makes, every step he takes, so that may explain why nobody in the press pointed out the total hypocrisy of their latest criticism of the president. The gang of three has condemned all of the president’s tax policies for favoring the “rich,” and the press obviously felt that the trio’s hostility to this reform was no exception.
Thus nobody asked New York’s leading Washington representatives: who benefits from the federal deduction for state and local taxes? Answer: the exact same folks who benefited from the Bush tax cuts—those higher earners who pay the most taxes. In New York, 80 percent of the deduction accrues to the top 20 percent of income earners. All of the deduction goes to the top 40 percent of income earners.
Rangel’s comments were particularly shameless. “We will fight this to the death,” Rangel thundered. “In New York, this is about our financial life blood.” Rangel, then, is arguing that the deduction, which reduces taxes on upper-income people, is essential for the New York economy. Yet isn’t that the very same argument President Bush made about his federal tax cuts? As President Kennedy observed when he cut federal taxes, “A rising tide lifts all boats.”
The real reason that Clinton and Co. oppose getting rid of the state and local deduction isn’t that they’ve suddenly embraced lower taxes, however. They know that New York finances its giant welfare state by imposing the nation’s highest state and local income taxes on upper-income residents, who put up with that burden only because they can deduct it on their federal tax forms. If the deduction disappears, upper-income residents will have a sharp incentive to disapear too—right out of New York—unless state and local taxes plummet sharply. And then the “lifeblood” that sustains these Democratic politicians’ base of public sector workers and private social-services outfits will truly dry up.
Instead of hypocritically attacking the president, New York’s congressional gang of three should ask themselves: What benefits have New Yorkers received from our vast welfare empire, in place for some 40 years now? New York’s Medicaid expenditure is the highest in the nation. Is there any evidence that the poor are receiving better health care here? Has New York’s vast array of social welfare programs solved any social problems?
If the benefits of our welfare state are hard to find, the ill effects are obvious. The job-killing high taxes needed to support it have already helped drive residents from the state, for starters. In 1950, New York was the most populous state in the union. Now, we’re the third, and after the 2010 census we will likely slip to fourth. Since 1960, due to population decline, we have lost one-third of our congressional delegation. Many upstate cities have shrunk, and some verge on extinction. Large swathes of upstate New York, mired in recession for a quarter-century now, have undergone a huge outward migration of educated young people.
Taxes have harmed New York City’s economy too. Renowned in 1960 for its diversity across many sectors, the city’s economy has become dangerously dependent on two highly cyclical industries: financial services and tourism. Worse, financial service companies have slowly been slipping out of the city—a trend technological advances could accelerate.
Sadly, New York’s economic stability, such as it is, hangs by a thread from a gimmick in the Federal tax code. That’s why the gang of three are willing to make such hypocrites of themselves over the federal deduction. Hopefully, the president will listen to voices from Radio Free New York and not those of New York pols. Ending the deduction would be painful for New York in the short term, but it would force the state and city to reform their taxing and spending ways. Over time, that would make New York more economically competitive and begin to reverse its long decline.