In November, Washington Examiner senior editorial writer Philip Klein wrote how the elimination of the deductibility of state and local taxes would be the “one deduction worth breaking” Grover Norquist’s tax pledge over.Why? The Congressional Budget Office estimates that it would raise $862 billion over a 10-year span. And Republicans fearing a primary challenge because they raised taxes could point to its disproportionate effect on big blue states like New York and California. These are states with the highest state and local taxes, so the elimination of the deduction would hit them the most, encouraging voters to either move, or force those states to shrink their governments.
Klein also wrote that lawmakers in these blue states would preemptively come out against the thought of eliminating state and local tax deductions. Today provided the first big example: New York City Mayor Michael Bloomberg.
Eliminating taxpayers’ ability to deduct state and local taxes from their federal tax returns — as some in Washington are discussing — would leave New York City residents holding much of the bill. Many in the rest of the country pay very little.
State and local income taxes are used to support services that the federal government does not adequately fund. New York, New Jersey, Pennsylvania California, Illinois, Maryland, Massachusetts and other states all use such taxes to pay for everything from schools and health care to public safety and transportation.
It is for good reason that those tax payments are not now subject to federal taxes.
Bloomberg estimates that the plan would cost New York City residents some $3 billion. For what it’s worth, supports increasing revenues by letting the Bush tax cuts expire on all incomes, which he says would be the fairest option.
The National Review’s Jim Geraghty also proposed eliminating local and state deductions as part of a “tax Blue America plan.” Geraghty cites the Tax Policy centre, which says that taxpayers in California and New York alone account for 20 per cent of the populace claiming the deductions. In four blue states — California, New York, New Jersey and Connecticut — residents claim more than $12,000 in deductions, on average.
But Bloomberg writes that it would be a disaster spreading beyond the local economy of New York City:
Consider that about 18,000 city residents — a half of 1% of all taxpayers — pay 40% of our city tax revenue. If some of these individuals move out of the city as a result of losing the deduction, or if they start to spend 183 nights in Westchester or Connecticut, our tax base would be decimated. We would have billions of dollars less for our schools, parks, police, social services, transportation and cultural institutions.
That would do real damage not only to our local economy but also to the national economy, because New York City is the nation’s largest economic engine.
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