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Deduct This

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Deduct This

Losing state and local tax deductibility might wake up Blue state residents to their excessive spending. May 4, 2017
Economy, finance, and budgets

New Yorkers who itemize their income-tax deductions stand to get a kick in the head from President Trump’s proposed tax reforms—specifically, his call to do away with credit for state and local taxes on federal returns. This has U.S. Senate Minority Leader Chuck Schumer worried.  “Taking away or even reducing the state and local tax deductions would be brutally unfair and hit New York homeowners right between the eyes,” he says. 

While it would upset New York homeowners, it’s arguable whether repeal of deductibility would be unfair. Voters in all heavy-tax, high-spending states have no one to blame for their situation save themselves. At a minimum, it seems clear that deductibility—by softening the impact of federal taxation—encourages outsize state and local spending. States that take advantage of deductibility—mostly in the Northeast and on the West Coast—are in effect subsidized by states that have kept tighter control on their spending. The more responsible states tend to resent the burden—and doubtless would be happy to be rid of it. The Trump deductibility proposal thus sets the table for more Red state/Blue state combat.

Meanwhile, nobody has a sharper eye for trouble—that is to say, for potential political opportunity—than New York governor Andrew Cuomo. No sooner does a snow cloud appear on the horizon than Cuomo is on Twitter counseling New Yorkers to stock up on bread and milk. So far, he’s been silent, but the odds that he can resist the urge to make hay on deductibility are vanishingly small. (Deductibility was Governor Mario Cuomo’s signature issue the last time it was on the table in Washington, in the 1980s; and if ever there was a like-father/like-son act in American politics, it’s Mario and Andrew Cuomo.) But whether Schumer leads the way, or Cuomo, or the entire New York congressional delegation, opponents of the president’s deductibility proposal are looking at a heavy political lift. The issue is equity, real or perceived.

If deductibility ends up on the table as part of the Trump tax-reform debate, people likely will begin paying attention. And what they’ll see won’t make it any easier for New York’s political class to defend the status quo. In virtually every significant spending category, the Empire State tops the charts. Except for Alaska, New York far and away leads in per-capita state and local spending—topping the national average by more than 50 percent. It is easily the national leader in school spending. Its Medicaid program, on a per capita basis, is America’s costliest, with spending running some 55 percent above the national average. And its residents carry the country’s heaviest bonded-debt load—on a per-capita basis, some two-thirds above the national average.

So it follows that New York’s top-of-the-charts spending puts the state at the pinnacle when it comes to taxes. The state’s total state and local tax burden was exceeded only by Washington, D.C.’s in 2012, according to the Tax Foundation—with New Yorkers paying a national high of 12.7 percent of income in state and local levies. Local property taxes in New York are astronomical and not coming down any time soon.

Deductibility has been around at least as long as there has been a federal income tax. President Ronald Reagan proposed its elimination as part of his own tax-reform program, and—as noted—Mario Cuomo was one of the staunchest defenders of the practice. Deductibility survived that debate unscathed. Inertia is always difficult to overcome, and deductibility has powerful friends—among them the public-employee unions and health-care industry interests that drive big spending in blue states and enjoy hugely disproportionate influence in Washington.

As a public-policy matter, though, New York and the nation would benefit if deductibility was jettisoned. Doing so not only would be fairer to lower-spending Red states; it also would end the incentive for the tax-and-spend practices that have been so economically corrosive to big-spending Blue states. Subsidies will go only so far—as the hollowed-out shell of once-prosperous upstate New York so dramatically demonstrates.

So far, Andrew Cuomo’s efforts at upstate renewal have been high-profile but largely ineffective, earning him only a series of federal investigations and the indictment on corruption charges of key associates and others. An equally high-profile campaign to keep deductibility might well distract attention from the governor’s woes, but it would do nothing to correct their deeper causes—among them big spending, high taxes, and deductibility itself.

Photo by Tim Boyle/Getty Images

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