Anyone living in a state with high income and/or property taxes will likely pay more this year given the $10k cap on deductions for state and local taxes which was previously unlimited before the 2018 tax year...
State and property taxes. Not everyone paying exorbitant property taxes is that high in income. Also, income distribution what it is today, 90%tile income is still middle class!
Top 10% nationwide or state wide? 10k in state tax in California should be hittable with an entry level software engineer job at Google in the Bay area.
Suppose that the state and the federal government each had a 55% tax rate. Then you would make $1 and owe $1.10. You would owe more in taxes than you make, so you would quit your job.
Of course, there is a simple way for the states to fix this -- move the taxes to the business side. Instead of having state income tax, have payroll tax paid by the employer. Then the employer can still deduct them from its federal taxes. This also improves eligibility for people in your state for various need-based federal programs, because nominal wages will be lower by the amount of the tax when determining eligibility for federal assistance. And it gives everyone a de facto raise until wages adjust to the shifted tax burden.
If both the state and federal governments each had a 55% tax rate, you'd be justified in questioning the rates and voting for a different government! Just as I expect people would complain if there was just a single tax authority, but it set a rate of 110%.
Assume for now that we accept the federal government is entitled to raise money for its programs by taxing people's incomes (yes, some people might disagree, but that's a different discussion). Why should a state be allowed to reduce the federal government's take, and therefore shift the burden of paying for federal services to other states, by choosing to increase its own local tax?
At the end of the day I think it matters because high tax states have already been subsidizing red states and one of the pressure release valves was that they weren’t taxed twice on the same income. I.e:
So you remove this pressure valve and skew those numbers to an even wider margin and you have, I would say justifiable, consternation about what we are doing here when the people who have been paying the bills are asked to pay more.
If the deduction is removed, presumably the tax rate could be adjusted downwards to compensate.
Arguably, it would make more sense to allow a deduction on state income tax for federal tax paid. That way the federal tax -- which (in theory, at least) pays for services that benefit all states -- is imposed consistently across all the states. Individual states can then decide how much to tax their citizens to pay for the state's local services, without skewing how the federal tax burden is applied.
> Why should a state be allowed to reduce the federal government's take
Because a state can often do a more effective job of using the money than the federal government.
> and therefore shift the burden of paying for federal services to other states
If you look at the states with high enough income taxes for this to all be relevant, they tend to be "donor" states that pay a lot more to the federal government than they get back.
It might be a good idea to even that all out, but eliminating the local and state tax deduction doesn't help.
> Because a state can often do a more effective job of using the money than the federal government.
That's just a general argument for preferring local taxation and services over federal ones. I don't think it follows that states should be able to undermine federal taxation by increasing their own taxes. If you believe the federal government should be smaller, and state/local governments bigger, then make that case directly and argue for an overall reduction in federal taxation.
Exactly. If not, the states then get to keep a large amount of money while the feds then do a rougly equal split of tax revenue to states. It's a cheaters' way to basically rob other states to fund your own agenda, and I hate it.
While I think you're right in principle (it makes more sense conceptually to deduct fed tax from the state tax) I think the practice is that most of the high state tax states pay in far more to the government than they receive and the other ones are usually moochers.
Yeah, but that's a consequence of having a redistributive progressive tax system.
Rich, high income states will subsidize poor low income states.
Why it so happens that the rich, high income states these days are liberal with high taxes and the poor ones the opposite, is an interesting question without an obvious answer.
“Anyone?” That isn’t accurate because you’re ignoring the doubling of the standard deduction. Higher income people who itemize would be the only ones affected. And with the reduced tax rates offset some of that lack of SALT deductibility. That SALT change only really affected less than 7% of taxpayers (10.9 million filers out of 153 million who filed returns.)
Just putting it out there, 11 million is significantly more than the number of people that lost their insurance in the “if you like your insurance you can keep it” outrage of 2013.
I'm talking specifically about high tax states like CA, NY, NJ. If you isolate taxpayers in those states the change affects a lot more than 7% of residents of those states.
This change was about Trump's desire to hurt residents of blue, high tax coastal states. To minimize this as something that only affects the .1% is rationalizing his terrible tax policy.