For many upper-middle-class residents of high-tax states, Monday will be the last time we can file to receive a full tax deduction for our state and local income and property taxes. Many Democratic voters in high-tax states cried foul when the Tax Cuts and Jobs Act capped these deductions at $10,000 from 2018 onward, and some are trying to fight back. “We’re attempting to come up with ways to negate and blunt the harsh and unfair Republican tax policy,” Kevin de León, the Democratic leader of the California Senate, told CNBC. Several states are devising schemes to allow residents to pay some of their state tax liability as a gift to a charitable fund rather than directly to the state government, restoring its deductibility.
Such efforts are misguided. The overall tax bill may be a disaster, but nixing those deductions was the progressive thing to do. Liberals should train their ire elsewhere.
Simply put: If I choose to live in a high-tax state, why should that reduce my obligation to a poor family in Arkansas or a veteran in Nebraska? Local taxes pay for amenities like good schools, clean streets and social services that make my community better for me and my kids. They are the most self-serving of all the taxes I pay. And deducting them means sending dollars back to my community that wouldn’t be available for anyone else. The old deduction says: I look after my own and leave others to fend for themselves.
This me-first approach to taxation is particularly true when it comes to property taxes, which are the main basis for public school funding in affluent communities. While overall, the federal government provides only about 9.3 percent of funding for public schools, with the rest pretty much split between state and local sources, this obscures sizable variation across states and localities. South Dakota, for example, receives about 15 percent of its public school funding from the U.S. government, while school budgets in New Jersey and Connecticut (two of the five richest states) rely on 4.1 percent federal funding. The mix of state and local dollars varies significantly as well. Illinois schools, for example, rest on local funding for 65 percent of their budget (and the state for 26 percent), while Hawaii is at the other extreme, with 84 percent state funding and only 2.5 percent local.
The rule of thumb is: The higher the state and local share of school dollars, the greater the inequality between places, since federal funding is fairly even while state and local funding varies wildly. For example, New Jersey spent $19,000 per student in the 2013-14 school year while Utah, where federal dollars make up more than 12 percent of school funding, shelled out only $6,600. Such disparities operate within states as well. In Illinois, according to the New America Foundation, New Trier Township High School District spent almost $20,000 per pupil in 2008-09 while Farmington Central Community Unit School District spent just $6,500.
Why should the residents of New Trier have to pay less tax to the federal government as a reward for taxing themselves at a higher rate to give their own kids a leg up in a competitive knowledge-based economy? In fact, high-tax areas get a double discount on their federal taxes, since quality schools drive up property values, and high property values usually mean bigger mortgages (another deduction that was capped by the Tax Cut and Jobs Act).
Of course, the Republican authors of the bill had other, less progressive intentions. In the past, they would have been in favor of state and local tax (SALT) deductions, since they supposedly support devolving political power to states and localities. But this time they were eager to punish wealthy Democratic voters in blue states, which happen to be the highest-tax states; in 2016, Democrat Hillary Clinton won 16 of the top 20 SALT-deducting states. Indeed, the hardest-hit state is my own: New York, where the average deduction was $22,619 in 2015 — with Connecticut coming in second at $19,665. By 2027, residents of California, Maryland, New Jersey and New York will pay nearly $17 billion more in federal income taxes, while Florida and Texas, which voted for Trump, will pay more than $31 billion less.
The GOP is using the additional revenue gained by capping the SALT deduction to lower taxes for its constituencies (i.e. corporations and those with large estates to pass on) while keeping the total revenue lost below the $1.5 trillion limit that Republicans set. They may also be playing a long game of what anti-tax crusader Grover Norquist calls “starving the beast” — albeit at the local level. That is, Republicans may be hoping that without the break on federal taxes I was getting for my high property, city and state taxes, I may vote to reduce taxes — and thus spending — at all levels of government.
But in the long run, yoking the fates of rich states and poor states is better for uniting our extremely divided nation, since the more I pay to educate (or defend or cure) fellow Americans far away from me, the more I may feel invested in the body politic as a whole. And the more I may demand a say in what is taught in Texas classrooms or whether a California military base is converted to a national monument. Ending the SALT deduction, then, represents an important step toward inventing a new national politics.