It will never happen precisely because of who it targets, but perhaps it should

Glenn Reynolds links to a proposal to eliminate the property tax deduction.

What’s the least defensible special break in the U.S. tax code? With so many distortions to choose from, it’s hard to name just one. If forced to pick, I might say the deduction for state and local taxes, which cost $67 billion in fiscal 2011, according to the congressional Joint Committee on Taxation.

This one overwhelmingly benefits upper-income households in a handful of upper-income states, while rendering the entire nation’s finances less transparent. It’s also a potential source of friction in the “fiscal cliff” negotiations between President Obama and the Republicans (but we’ll get to that in a moment). . . .

What the deduction does is enable higher-income states and localities to tax — and spend — more than they otherwise would, while shifting some of the cost to other states. It also encourages them to collect revenue in forms that are easier to deduct on federal returns.

Two states, California and New York, reaped almost 30 percent of the deduction’s value in 2009, the latest year for which I could find Internal Revenue Service data. Other states that benefit disproportionately include Connecticut, New Jersey, Illinois, Massachusetts and Maryland.

In 2009, 73 percent of the deduction’s benefits went to taxpayers with annual incomes above $100,000, according to the Congressional Budget Office; fully 20 percent of the benefits went to taxpayers with annual incomes above $1 million.

Starting to notice a pattern? Basically, what we have is a significant federal tax subsidy for “blue” state governments. These also happen to be the states having the most difficulty living within their means. . . . Perhaps it’s just coincidence, but I have noticed that those most skeptical of the loophole-closing approach include Sen. Charles Schumer (D-N.Y.) and House Minority Leader Nancy Pelosi (D-Calif.).

An Instapundit reader suggests eliminating the property tax deduction only for those with an AGI greater than $250,000 and tax-free interest income above $50,000. Again, it will never happen, but it sure would be fun to watch the Republicans propose it as part of the “soak the rich” platform advocated by Obama and his mob.

10 Comments

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10 responses to “It will never happen precisely because of who it targets, but perhaps it should

  1. Cos Cobber

    This is getting a lot of talk in my office by all the dems. Love watching them get wound up about it. I think its time to phase out real estate and State Income tax deductions to those over 250k at the federal level. Its a subsidy to high tax states and its sure to finally wake up blue state residents.

    Personally this phase out would really hurt, but I’ll take the pain because I’m going to really enjoy watching others squirm.

  2. xyzzy

    You can’t phase things out for people who make over 250,000 or any other random threshold. As soon as you do that people will do everything they can to stay under the number and hide/delay going over that number.

    When making 250,000 makes you pay a lot more taxes than 249,999. Everyone will do everything to make 249,999 and put the extra compensation into things that aren’t taxed.

  3. Cos Cobber, I’m not sure there’ll be anything, ever, to wake up blue state Obama voters.

    Maybe another 6 years of recession/depression, but perhaps Obama will then simply take (another) lesson out of Roosevelt’s playbook.

  4. armonk

    Lower the rates for all and eliminate all deductions. No tax for anyone with income under $20,000. Tax dividends and capital gains at the same rate as other income. Max rate 28% kicks in above 250M, scale below that. No more AMT. No depreciation on real estate, but hard dollar expenses and interest can offset rental income to derive a net figure.

  5. Anonymous

    More than 50 employees, not 30. And almost all businesses with 25 or fewer employees will be eligible for tax credits for 50% of the cost of their health insurance. Not exactly Leninism. And, of course, the availability of affordable individual coverage in the exchanges could have a salutary effect for firm formation (currently, good luck trying to get health insurance for your employees if you’re a new small firm employing anyone with less than perfect health or health history).

  6. Westchesterer

    A 50% income tax means that every other day you’re a slave. 25% means every fourth day you’re a slave. Get rid of income tax completely.

  7. Fred2

    I’m with Westy, tax – SALES tax – visible & added at the check out and on everything for everyone: Cars, houses, Books, gas , groceries, everything…the same, no weird distortions.

    No one who spends money escapes. People who save and invest pay nothing.

    Also no company paid health insurance. Finally Unions and professional organizations could do something useful for their dues.

    One further potential refinement: Sales tax is not paid at checkout so as to not molest sellers, it’s paid as one lump on Nov Third. Take declared revenue, subtract contributions to savings or investments, pay X% on the difference.

  8. Hey

    Instead of deductibility for state & local taxes, make them 100% surtaxes. Eliminate mortgage interest deduction, make it 100% surtax on mortgages north of $500k (encouraging prudence donchaknow). Put surtaxes on charitable donations north of $50k (100% again). Tax foundation value at 10% annually. Cap non-profit salaries at $50k (oh hi Harvard!)

    Add special earthquake and terrorist target insurance charges (i.e. CA, NY, DC) of an extra 20% of marginal income.

    Two can play populist games and screw the other team!