It looks like a tax reform proposal that could have resulted in lower income tax rates for Nevadans is swirling down the drain.
The Los Angeles Times is reporting that congressional Republicans are considering jettisoning a part of President Trump’s proposal that would eliminate IRS deductions for state and local taxes. Dropping the deduction would generate $1.3 trillion in additional federal revenue, thus allowing lower rates for the 70 percent of Americans who do not itemize and take the standard deduction.
While Democrats insist tax reform should in no way benefit the wealthy, the retention of the state and local tax deduction does precisely that for the wealthy who live in Democrat-controlled high tax states, such as New York and California.
The Times conceded that Californians benefit more from the state and local tax deduction than taxpayers in any other state. In fact Californians managed to dodge $101 billion in taxes in 2014 — New York, New Jersey and Illinois were next on the list of top tax dodgers. Of the top 10 states for the deduction, Trump carried only three.
The New York Times also is reporting that some Republican spines are weakening, noting that elimination of the deduction has Republicans in high-tax states worried about backlash from voters whose tax bills might rise.
The newspaper said that Rep. Chris Collins, a New York Republican, said in an interview that party leaders had assured him “there’s not going to be full repeal” of the state and local tax deduction. The paper also quoted Gary Cohn, the director of the National Economic Council, as saying the deduction was not a “red line.”
Using 2010 statistical data from the IRS, 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 $1,430 per return. Calculated on a per capita basis, Californians claimed $2,116 in federal income tax deductions, while Nevadans claimed only $166 per person for sales tax deductions.
Nevadans — along with residents of New Hampshire, Florida, Wyoming, Texas, South Dakota and Alaska — get to deduct about 1 percent or less of their adjusted gross income, while those who live in New York, Maryland, D.C. and California deduct more than 5 percent.
“Republicans have said the deduction largely affects the wealthy and is unfair to residents in lower-tax states,” the Los Angeles newspaper reported. “Eliminating the break would help simplify the tax code and make it more equitable, White House officials said.”
In 1985 Ronald Reagan argued for eliminating the state and local tax deduction. He said in a speech: “We’re reducing tax rates by simplifying the complex system of special provisions that favor some at the expense of others. Restoring confidence in our tax system means restoring and respecting the principle of fairness for all. This means curtailing some business deductions now being written off; it means ending several personal deductions, including the state and local tax deduction, which actually provides a special subsidy for high-income individuals, especially in a few high-tax states. Two-thirds of Americans don’t even itemize, so they receive no benefit from the state and local tax deduction. But they’re being forced to subsidize the high-tax policies of a handful of states. This is truly taxation without representation.”
Reagan failed, primarily because there were too many Republican lawmakers from New York and California, just as there are today. California has 14 Republicans in the House and New York has nine.
If Congress caves in to the few who want to keep their lucrative state and local tax deductions, it is unlikely the 70 percent of Americans who currently do not itemize can be afforded a doubling of the standard deduction as is currently being contemplated.
The tax code should be fair and equitable for all and not carve out breaks for some.
A version of this editorial appeared this week in some of the Battle Born Media newspapers — The Ely Times, the Mesquite Local News, the Mineral County Independent-News, the Eureka Sentinel, Sparks Tribune and the Lincoln County Record.