Reagan’s Tax Proposals
The President’s promotion of his tax plan demonstrates how language can shape perceptions. For example, the President claims that low-tax states are “subsidizing” the high-tax states and that only a minority of people benefit from these deductions. People are arguing if this minority should receive this loophole without challenging the concepts he presents.
First, the word subsidizing is misleading. People with the same net income will pay the same federal tax regardless of which state they live in. The people in Oklahoma would not pay more taxes if New York raised state taxes or less taxes if New Yorkers couldn’t deduct state taxes and therefore cannot be credited with subsidizing New York or any other state. The question of subsidy depends on how much a state receives back from the government in relation to the amount it contributed and not on how an individual calculates his net income.
The implication of subsidy is that everyone is not paying their fair share. That certainly is a common theme lately. But is disallowing state and local taxes going to promote equity? Consider two people earning $30,000. One lives in a high-tax state and the other lives in a low-tax state. For the sake of argument, one pays $5,000 and the other $1,000 in state taxes. The one who lives in the low-tax state has had the use of $4,000 more than the other person, so why shouldn’t he pay more taxes? Why should people who are heavily taxed receive an even heavier tax burden? How is that fair?
Let’s take the example one step further and look at the actual taxes of these two fictional people using the tax table for 1984. The person in the low-tax state with a family of four would pay a tax of $4,571 on his $29,000. The person in the high-tax state with a family of four would pay $3,571 or exactly $1,000 less. Since he had already paid $4,000 more in state taxes, his net is $3,000 less than the other person. If they couldn’t deduct state taxes, they would both pay taxes of $4,825 on a gross income of $30,000. That means that the person in the high-tax state would have $5,000 less to spend than the person in the low-tax state--a $2,000 loss. Is this going to end subsidies or just further handicap those who are paying too much?
We should also consider the President’s statement that only a minority of people benefit from deducting state and local taxes. His evidence for this is that only one-third of the people filing taxes used the long form. His conclusion is only completely true if 100% of the people who could itemize did itemize. I suspect that the low percentage of itemizers is more an indictment of the difficulty of itemization than it is an measure of the number of people who benefit from itemization. I would guess that another 10% to 15% of the taxpayers would or should itemize but don’t because of fear or doubt or frustration. If true, then the percentage of people who should benefit from deducting state taxes is very close to 50% and not a selfish minority.
I agree that we desprately need tax code changes, but taking away state and local tax deductions will not make the system more fair. And while I realize that one should always present one’s proposals in the best light, the inflammatory, ambiguous words describing the proposal to end the deduction of state taxes looks more like trick lighting and and special effects than sound fiscal policy.
NELSON E. CHAMBERLAIN