Just as surely as night follows the sunset, Democratic leaders such as Senate Minority Leader Chuck Schumer D-New York and House Minority Leader Nancy Pelosi, D-California roundly condemned the current tax reform proposal rolled out by President Donald Trump as “tax cuts for the rich.” The trope has been used by Democrats since President Reagan cut tax rates, thus setting up the economic boom of the 1980s. However, a real reason exists for Schumer’s and Pelosi’s ire and, ironically, it’s because the Trump plan could represent a hefty tax increase for the wealthy.
The elimination of the state and local income tax deduction
The Trump proposal, now being refined by Republican lawmakers, has a lot of excellent features. It doubles the standard deduction. It decreases business income taxes. However, the feature that has Schumer and Pelosi really irate is the elimination of the state and local income tax deduction, a measure that would fall heaviest on New York and California.
The state and Local Income Tax deduction benefits well to do people in high tax states by allowing them to write off their taxes. According to the Tax Policy Center, 81 percent of taxpayers with incomes of over $100,000 a year tax took the deduction (including property taxes) as opposed to 10 percent of those making less than $50,000.
The average deduction claim for the more affluent group was $12,300.
A big problem for New York and California
New York, where Schumer comes from, and California, where Pelosi is from, rely on high state and local income taxes to keep their various programs funded. Even with the deduction, an exodus of people from those states to lower tax parts of the country such as Texas and Florida is occurring.
Without the deduction, the exodus will become a panicky flood of economic refugees. High tax states will have some hard decisions to make. Do they maintain their current regime and risk collapse? Or do they start to practice fiscal discipline? Either way, the elimination of the deduction is a knife directed at the heart of the blue state model of governance.
Will tax reform pass?
The short answer to the question as to whether tax reform should pass is that it had bl**dy well better. Congressional Republicans have not exactly covered themselves with glory where Obamacare repeal and replace was concerned. If they fumbled tax reform as well, people would start to wonder what the point of electing Republicans is. Passing tax reform will go a long way toward redeeming the GOP, something it desperately needs in the run-up to the midterm elections.
