Heller’s sales tax deduction bill tackles the right problem with the wrong solution

Nevada’s junior senator, Dean Heller, this week introduced a bill that would make permanent the federal income tax deductions for state and local sales taxes, rather than having Congress renew the deductions practically every year.

Dean Heller

It addresses a very real problem, but with the wrong solution.

In a press release Heller stated:

“Taxpayers in Nevada benefit greatly from this common sense tax relief. Making the state and local sales tax deduction permanent would help ease some of the stress many middle-class families in the Silver State are feeling every day. This bill would also help encourage economic growth by attracting new business, generating jobs, and promoting investment in local economies. The Senate should move swiftly to pass this legislation so Nevadans can benefit from this much-needed tax relief.”

The state and local sales tax deduction for Nevadans amounted to only $449 million, or less than half a billion dollars. (Wall Street Journal graphic)

Nevada is one of nine states with no state income tax, which has been deductible practically from the start of the federal income tax. The other states that would be affected by Heller’s bill are Texas, Florida, Tennessee, Washington, Wyoming, South Dakota, Alaska and New Hampshire.

Heller argued his bill would help level an uneven playing field by ensuring states like Nevada are afforded the same treatment in the federal tax code as states with an income tax.

Surely Nevadans should not be denied a chance to get our snouts in the deduction trough, you say. That’s only fair.

Actually, there is nothing fair about allowing a deduction from federal income tax for state and local taxes, because the level of taxation the various states heap on their citizens varies wildly. The deduction amounts to a subsidy for high-tax states, which, by the way, happen to be mostly Democrat-controlled.

In 2010, according to a Wall Street Journal analysis of IRS data, five liberal states — California, New York, New Jersey, Maryland and Massachusetts — accounted for half of all deductions allowed for state income taxes.

“The inequity is especially stark if we compare this to states without an income tax,” the Journal editorial continues. “The average state and local income-tax deduction claimed per tax return in 2010 was $4,109 in New York and $3,819 in Connecticut. But the average Texan claimed only about $100, and the average Florida deduction was a mere $219. No wonder New York Senator Chuck Schumer opposes tax reform.”

Using the same 2010 data from the IRS, I found Californians who filed for state and local income tax deductions claimed deductions of $10,700 per return, and almost half of those returns reported earnings in excess of $100,000. Nevadans who filed for the state and local sales tax deduction claimed only $1,430 per return. Calculated on a per capita basis, Californians claimed $2,116 in federal income tax deductions for each and every man, woman, child and illegal immigrant in the state when all state and local tax deductions are included, while Nevadans claimed only $166 each for sales tax deductions.

Heller should introduce a bill eliminating the deduction for all state and local taxes while lowering the income tax rate a commensurate point or two for everyone, including those who don’t qualify for itemized deductions. That would be fair. Perhaps, next to impossible to pass, but fair. It can be argued that the rest of the country is subsidizing that recent huge state income tax hike on “the rich” in California, because many there will simply deduct it from their federal income taxes, leaving those in other states to pick up the slack in federal spending eventually.

Allowing federal income taxpayers to deduct local taxes must be a terrible idea, because The New York Times is for it. The paper said in an editorial in December:

“The theory behind the deduction was that the amount paid to states in taxes is not really part of an individual’s disposable income, because it is obligatory and, therefore, should not be taxed twice. Over time, the deduction has become the equivalent of a subsidy from the federal government to states that believe in a strong and active government. That may infuriate conservatives in low-tax states like Texas, who hate subsidizing states with different views of government’s role, but it’s actually a good thing for the country.

“The deduction is Washington’s way of supporting states that support their most vulnerable citizens and neediest cities. The seven states that account for 90 percent of state and local tax deductions (including sales and property taxes) — New York, New Jersey, California, Pennsylvania, Maryland, Illinois and Massachusetts — generally do a better job of providing for the health and welfare of their citizens, and are more willing to pay for institutions that are good for society as a whole.”

What a bogus argument. It is, as they admitted, a subsidy. It also means the residents of certain states are carrying less than their fair share of the federal tax burden. Also in December a Wall Street Journal editorial explained the problem:

“The state and local tax loophole helps disperse and disguise the real cost of big government. As Mr. Obama likes to say, this is reverse Robin Hood.

“All of which helps to explain what appears to be the ebbing liberal support for a tax reform that reduces rates in return for fewer deductions. Democrats in Congress once supported that kind of reform. But these days they tend to represent states with ever-higher tax rates that prop up state and local governments dominated by public unions that demand ever-higher pay and benefits. The resulting state tax burden would be intolerable if much of it weren’t passed off on Uncle Sam.”

If you want a level playing field, Sen. Heller, file a bill eliminating the deductions for all state and local taxes — income, sales, property, etc. Federal taxes should burden individuals equally, not give a break to those who live in spendthrift states like California and New York.

This sales tax deduction bill provides little more than crumbs while other states are gorging on a five-course meal.

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9 comments on “Heller’s sales tax deduction bill tackles the right problem with the wrong solution

  1. Nyp says:

    Thanks to the filibuster, this can never happen.

  2. That’s right, Petey, you live in New York, right?

  3. And, frankly, I believe I said it will not happen, just that it should.

  4. By the way, there have no reports of this bill in the local press that I can find.

  5. Steve says:

    http://www.lvrj.com/news/heller-s-no-budget-no-pay-idea-spreads-188127091.html

    Only one I could find. If I had not read it I would not have found it from the headline.

  6. Steve says:

    Oops different issue. And yes, nothing in the local press.

  7. […] data from the IRS, you find Californians who filed for state and local income tax deductions claimed deductions of $10,700 per return. Nevadans who filed for the state and local sales tax deduction claimed only […]

  8. […] most recent available, you find Californians who filed for state and local income tax deductions claimed deductions of $10,700 per return. Nevadans who filed for the state and local sales tax deduction claimed only […]

  9. […] data from the IRS, you find Californians who filed for state and local income tax deductions claimed deductions of $10,700 per return. Nevadans who filed for the state and local sales tax deduction claimed only […]

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