The tax plan that cheats California

MOST AMERICANS think tax reform should be about fairness and simplification. But for the right-wing ideologues who dominate tax policy decisions in the Bush administration, the goals are different. They want to shift the tax burden from the wealthy to the middle class and put pressure on states such as California and New York to shrink critical public services. The recommendations by President Bush’s Advisory Panel on Federal Tax Reform to eliminate the federal income tax deduction for state and local taxes, and to cap the deduction for home mortgage interest, are a big step in that direction.

The right has long targeted the deduction for state and local taxes. “Eliminating [it] would ... help control wasteful spending and high tax rates at the state and local levels,” writes Daniel J. Mitchell, of the Heritage Foundation, who points out that large urban states such as California, New York and New Jersey get significant benefits from the provision. The idea, according to conservative tax expert Bruce Bartlett, “is to change governmental behavior by encouraging state tax cuts, contracting out and privatizing state services, and shrinking of the public sector.”

However, eliminating the deduction would be a radical break with tradition, common sense and fairness.

Ever since the modern federal income tax was put in place in 1913, taxpayers have been able to deduct all or some of their state and local taxes on their federal returns. The deduction supports a core principle of federalism: States and their local governments must have stable and independent tax bases to carry out their duties. In addition, Congress has always honored the reality that paying state and local taxes -- which go to support healthcare, public safety and schools -- reduces the income available for paying federal taxes.

The Bush tax panel’s proposal would be especially hard on California and New York. Currently, one in every four Californians filing a federal tax return deducts their state income tax and property tax, as do an even greater percentage of New Yorkers. Eliminating the deduction would add an average of $2,200 to each of those Californian’s federal tax bills and $2,774 to each New Yorker’s tax bills. This amounts to more than $23 billion in new federal taxes that would leave California and New York and end up in Washington.

Doing away with the deduction for state and local taxes amounts to double taxation, and it is a federal attack on citizens’ decisions to pay taxes to support public services in their states and communities. It would pile additional financial burdens on average citizens at a time when the primary services that state and local governments provide -- education and healthcare -- are more vital than ever.

The Bush tax panel has also taken aim at states such as New York and California with its proposal to cap the deduction for mortgage interest. The $411,704 cap is well below California’s median price, $568,890, for a single-family home. Around New York City, the cap would also be well below housing costs for middle-class families. But Texans purchasing a median-priced house would still be able to deduct all their mortgage interest. That’s unfair.

These tax proposals from the Bush tax panel are a double-barreled blast aimed squarely at the middle class, especially in California and New York, which are powerhouses of the U.S. economy. The citizens and elected leaders of California and New York, including the states’ governors, must quickly and strongly oppose the tax panel’s ill-conceived proposals.