(Thomas Mitchell, 4TH ST8) – So President Trump has finally decided to take our advice.
More than a year ago, this newspaper noted in an editorial that then presidential candidates Ted Cruz, Marco Rubio, Chris Christie, Jeb Bush, John Kasich and Ben Carson all had proposed repealing the IRS deduction for state and local taxes, but Trump was still vague on the matter.
Nevada is one of only nine states with no state income tax to deduct. Since the creation of the federal income tax in 1913, the residents of states with income taxes have been allowed to deduct those taxes from their federal obligation. Only in recent years have Nevadans been permitted to deduct sales taxes, but this is subject to the whims of Congress because it must be renewed every year.
This past week Trump’s one-page tax reform plan called for eliminating all deductions except for home mortgage interest and charitable contributions.
Predictably, the high-tax states are whining.
Nevadans — along with residents of New Hampshire, Florida, Wyoming, Texas, South Dakota and Alaska — get to deduct about 1 percent or less of our adjusted gross income, while those who live in New York, Maryland, D.C. and California deduct more than 5 percent. The federal government is effectively subsidizing the big spending in those states at the expense of the lower tax states.
As we pointed out a year ago, using 2010 statistical data from the IRS, the most recent available, you find Californians who filed for state and local income tax deductions claimed deductions of $10,700 per return. Nevadans who filed for the state and local sales tax deduction claimed only $1,430 in deductions per return.
Calculated on a per capita basis, Californians claimed $2,116 in federal income tax deductions, while Nevadans claimed only $166 per person for sales tax deductions.
Heritage Foundation researchers Rachel Greszler and Kevin D. Dayaratna have concluded that the state income tax deductions subject federal tax revenues to the whims of state lawmakers and largely benefit wealthy taxpayers and those in high-tax states.
“The rationale for it is that since state and local taxes reduce individuals’ after-tax income, the income used to pay those taxes should be excluded from federal taxation. …” the researchers wrote. “In practice, however, the deduction allows states to raise taxes higher than they otherwise would and has significant perverse distributional impacts, redistributing income from the poor to the rich and from people in low-tax states to people in high-tax states. Despite some efforts to eliminate it, the deduction for state and local taxes remains one of the largest deductions in the federal tax code.”
Pro-state-and-local-tax-deduction groups have been quoted as saying, “Any alterations to the deduction would upset the carefully balanced fiscal federalism that has existed since the permanent creation of the federal income tax over 100 years ago.”
It is long past time to upset this century-old unfair tax break for some and tax burden for others. Where do we go to get a rebate for being overtaxed all those years?
Mr. Mitchell publishes the 4TH ST8 Blog.
Column originally published at 4TH ST8.