The Sneaky, Dirty Truth About State and Local Taxes

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New Jersey State Senate President Steve Sweeney complained to Neil Cavuto in a recent interview that “this new [federal] tax bill is going to hurt New Jersey in a big way.” Acknowledging that “one percent of New Jersey residents pay 42% of the taxes,” he warned, “We have to push the pause button on the millionaires tax” to keep millionaire residents from fleeing the state — and taking their wealth with them.

It’s about time they figured this out, because the jig is up.

The sneaky, dirty little truth is about the deductibility of state and local taxes. High-taxing, high-spending states such as New Jersey, Minnesota, Oregon, New York, and California have been fleecing taxpayers in other states for years. How? By taking the federal taxes paid by Nevadans, Texans, Floridians, etc., and using it to refund their own state and local taxes. They could get away with their high tax rates (as high as 13%!) in part because taxes were deductible. In essence, federal taxes have been funneled into the state and local coffers of high-tax states for years.

Taxpayers in low-tax-rate states have been carrying the big spenders in the high-tax states for way too long.

Let’s look at a simplified, hypothetical example. Let’s suppose Floridian John Smith has an income of $2,000,000 and is in the 39% federal tax bracket. (We’re talking about the 1% here, the ones who pay 42% of the taxes, according to Sweeney.) He owes the IRS about $672,000. (Ugh! That’s a huge amount of money!) His cousin, Jane Doe, lives in California and earns exactly the same amount of money. But she pays 13.3% income tax to California, and the real estate taxes on her modest $7 million California home are $25,000 higher than John’s property taxes. Until now, she has been able to deduct those state and local taxes from her net income, reducing her taxable income to $1,709,000. Her bill to the IRS is $615,000, or $57,000 less than John’s. In essence, taxpayers in low-tax-rate states have been carrying the big spenders in the high-tax states for way too long.

For Steve Sweeney, Jerry Brown, and legislators in other high-tax states, the game is over. New Jersey’s newly elected Governor Phil Murphy campaigned heavily to reinstate the “millionaires’ surtax” imposed on the wealthiest citizens that former Governor Chris Christie had lifted. Now Senate President Sweeney is aghast to realize that the Golden Geese can move to friendlier waters if all their eggs are confiscated. “We can’t afford to lose thousands of people who make up a large piece of our tax base,” he admitted to Cavuto. “We have to rethink this millionaire’s tax because they can leave.”

What a novel realization — people have choices! They can move! They can take their money with them! The besmirched 1% are finally being recognized as valuable. They run businesses, hire employees, buy homes, and pay taxes. Lots of taxes. Even Jerry Brown has suggested that California might have to rethink its budget and pull back on spending because of the new tax bill.

What a novel realization — people have choices! They can move!

Most Americans are unhappy about losing the deductibility of state, local, and property taxes. At first glance, I was one of them. Why should we pay income taxes on the money we already paid in taxes? Is it “income” if you never even see it in your paycheck? But legislators of high-tax states have bilked the residents of more budget-conscious states long enough. Their sneaky, dirty little secret is out. Losing the deductibility of state and local taxes is putting pressure on legislators to be more frugal and use tax revenues more effectively. Until we can eliminate income taxes completely, that’s a step in the right direction.




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Comments

Jim Tom Polk

Your point is sharp, but I think that the wrong state is being skewered.

From everything I can research online New Jersey specifically is one of the states that actually pays out more in federal taxes than it receives, and Texas and Florida also pay out more but not in the same category. New Jersey receives less and pays more like California, Illinois, Minnesota, and Delaware.

The top freeloaders are states like New Mexico, Kentucky, Mississippi, Alabama, and West Virginia, but note that those states are poor.

Notes: got the numbers from Wallet Hub (wallethub.com) but they accord with other numbers dating back to the mid 2000s. Also, I live in Texas and the new tax law helps me and esp. most of my kinfolk a LOT.

Geezer

Andrew B. Wilson discusses SALT deductions here.

Johnimo

I love it when liberals suggest that States such as Wyoming get more money (per capita) from the feds than do States such as New York. I have to laboriously point out that it has to do with the high number of miles of interstate highways relative to the sparse population. And then ... there's the Indian Reservations and the the two big National Parks (Yellowstone & Grand Teton). Your article points to another piece of the puzzle, a complicated jigsaw-taxation puzzle indeed.

Luther Jett

Isn't it the taxpayers with moderate incomes, such as you and me, who are going to feel the cap on deductions more directly? I stand to lose several thousand dollars a year. On my income, that is proportionately a far more significant a loss than it might be for someone who can afford a seven million dollar mansion.

Why is this okay?

A tax on a tax is still a tax, and therefore inherently unjust. Why should you or I be happy about a measure that only compounds the injustice? I know I might be accused of letting the perfect become the enemy of the good, but this entire tax "reform" rankles and I can find no good in it.

Jo Ann

You're right Luther--these taxes are painful. But deductibility made us care a little less. So why should we be happy about a measure that seems to compound the injustice? My point is that deductibility has been camouflaging a greater injustice: the residents of Florida and Texas have been funding the big spending habits of California and Minnesota. Pain has a purpose: it makes us aware that something is wrong. Without deductibility, residents of high-tax states are likely to start complaining with their votes--or their feet-- and tax rates will come down, just as Steve Sweeney is suggesting in New Jersey. But I agree with you that it's unfair and destabilizing
when Congress changes the rules in the middle of the game.

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