These days the Republicans in Congress and the White House are adept at doing stuff that irritates my sense of fairness. But usually it doesn't directly affect me. Or at least, not much.
For example, attempts to repeal the Affordable Care Act upset me because of the horrendous impact this would have on millions of people who have insurance through Obamacare. Yet since I'm on Medicare, repeal wouldn't have meant much to me personally.
The tax reform efforts that are making their way through the House and Senate committees are different, though. One thing that grabs my attention is the proposal to do away with deductions for state income taxes and local property taxes.
I live in Oregon. Oregon doesn't have a sales tax.
So to keep state government going we have a high income tax: for couples the rate is 5% up to an income of $6,700, then 7% up to an income of $16,800, and 9% on income between $16,800 and $250,000 -- after which the rate is 9.9%. Obviously Oregon's income tax is quite regressive, since a rate in the 9% range hits every couple with an income between $16,800 and a gazillion dollars.
Our property taxes also are high.
They are restricted, capped, or something I don't really understand owing to several citizen initiatives that passed many years ago. Regardless, property taxes obviously are particularly high in cities like Portland that approve lots of bond measures.
My wife and I live in a rural area, so our property taxes are lower. Still, we're paying over $500 more a year now after voters approved a school bond in the May 2017 election.
Now, I'm no tax expert. But I just spent about twenty minutes Googling the question of state and local tax deductibility, so I know more than I did before researching this topic.
What I found doesn't change my sense of unfairness at the efforts in Congress to either markedly scale back the deduction for state income and property taxes, or eliminate it entirely.
A CNN Money piece irked me the most, "There's a loophole in GOP's plan to kill the state and local tax deduction." It says that while individuals won't be able to claim these deductions, most pass-through businesses would.
But tax experts have spotted what appears to be a big exception to the repeal: The owners, shareholders and investors in so-called pass-through businesses would still be allowed to deduct their state and local taxes in full.
The provision allows the deduction if the state and local taxes are "paid or accrued in carrying on a trade or a business ... [or on expenses related to] production of income."
As for everyone else who currently takes the SALT deduction? Sorry, Charlie, no can do.
Pass-throughs make up the majority of U.S. businesses. They take the form of sole proprietorships, LLCs or S corps. And those with an ownership stake in them pay taxes on the entity's profits on their individual returns.
So for them, under the House bill, state and local taxes could be treated as a business expense on their personal return. That would include President Trump, who typically structures his businesses as pass-throughs.
But ordinary employees of such businesses would still be barred from taking the deduction against their wages.
This is ridiculous. Some people would get to deduct state and local taxes as a business expense, while ordinary employees and retired folks like us wouldn't.
There's a good argument to be made that not allowing the deductibility of state and local taxes, SALT, is double taxation. Sure, a piece by the Tax Foundation argues otherwise. But if those arguments are valid (and I don't think they are), then the deduction for state and local taxes should be eliminated for everybody, businesses as well as individuals.
The Tax Policy Center has good information on this subject, noting that while 29% of federal returns overall claim the SALT deduction, higher income households are much more likely to claim a deduction for state and local taxes. So politically, the suburban voters who just gave Democrats big wins in yesterday's elections would be hit the hardest by a tax reform bill that axes this deduction.
Lastly, an opinion piece by a tax expert, "The GOP gets a big part of its tax plan backward," makes some good points about the relative wisdom of allowing deductions for state versus local taxes.
The House Republican tax plan proposes repealing much of the state and local tax deduction, allowing individuals to deduct up to $10,000 of local property taxes but eliminating the rest of the deduction. This gets sound tax policy precisely backward. Smart tax reform would allow taxpayers to deduct what they pay to states — and would end the deduction for local taxes.
...Understanding that the state and local deduction is in fact two deductions is important because states and localities fund very different things.
Local taxes typically benefit those within relatively homogeneous localities in a way that is similar to a purchase of private goods. When residents pay local taxes, those taxes fund local schools, parks and recreation, police and fire agencies, and so on, that provide a relatively direct benefit to those paying the taxes. Wealthy individuals benefit from their local taxes in much the same way they benefit from purchasing a membership to a private club. No one seriously argues that a membership to a private club should be deductible, yet in effect that is what the deduction for local taxes allows.
State taxes, on the other hand, are less like private purchases because states spend a significantly higher percentage of their revenue on redistributive programs, such as state welfare programs, funding for poor school districts and health care for low-income residents. When wealthy individuals, who gain the most benefit from deductibility because they pay higher marginal tax rates, pay state taxes, that cost looks more like a charitable contribution than a membership in a private club, and so a deduction is more justified.
Therefore, smart tax policy would allow taxpayers to deduct the cost of state income taxes while eliminating the deduction for local property taxes. As it happens, because local taxes account for approximately half the overall deduction, this change would raise approximately $500 billion over the next decade.
Instead, House Republicans propose doing just the opposite. By retaining deductibility for local property taxes, their approach would continue to disproportionately subsidize wealthy, country-club-like localities, albeit to a smaller degree for the wealthiest towns and cities because of the $10,000 cap. And by eliminating deductibility for state taxes, the tax plan would end the federal government’s subsidy for state governments, which spend a significant percentage of their revenue on redistributive programs.
So at least maintain the deduction for state taxes, Congress.
However, I'd be even happier if the whole tax reform effort failed, because it's mainly a giveaway to corporations that are already doing just fine, while screwing over many middle class people with either a minuscule tax reduction or even a tax increase.