With the Republican budget narrowly passing in the House, the groundwork is set for the GOP to proceed with tax reform legislation. The rhetoric emanating from GOP leadership describes an idyllic world of lower taxes for all middle class taxpayers regardless of where they live. In reality, there will be very significant winners and losers from their plan with middle to upper middle class taxpayers in predominantly high tax blue states suffering the bulk of the burden.
As the Atlantic has reported, residents of 14 states pay more in federal taxes than they receive in federal aid. Many are states with high state and local taxes such as California, New Jersey, New York, Illinois, and Massachusetts. The implication of this is that residents of these 14 states effectively subsidize the operating costs of the other 36 states, reducing their need to impose higher state and local taxes on their residents. Now Republican legislators want to exacerbate this inequity by eliminating federal tax deductibility of state and local taxes, effectively resulting in double taxation of this income.
Republican legislators distort reality by claiming that low tax states are subsidizing the profligate nature of these largely Democrat controlled states, many of which have comparatively high median incomes and significantly higher cost of living. In New York City, for example, the NYT reports that the average apartment rents for $3,973 per month and the average price of a home was $1.46 million. By their calculations, someone in NYC would have to make $166,000 per year to have a similar lifestyle to someone making $70,000 per year in other parts of the country. This person would already be in a much higher marginal income tax bracket and would likely be struggling to cover the $4000 per month in rent and higher costs of necessities.
If the Republicans truly wanted to help the middle class, they would look more broadly at the array of sacred deductions. Rather than deeming mortgage interest, charitable giving, and child tax credits as sacrosanct, they should just cap all deductions at $100,000 per year. This would effectively limit deductions for the very wealthy while enabling taxpayers across the country to respond to the local circumstances that define their lives.
Ultimately, the GOP must face voters in 2018. They should learn from the mistakes of the Democrats in their haste to ram through the Affordable Care Act (aka Obama Care) and realize that a legislative win on purported tax reform may cost them much more than they think. They should decide if their fragile majorities in the House and the Senate are worth the pound of flesh they seek to extract from the coastal middle class.