The blue states’ tax break

In the negotiations to avoid falling off the “fiscal cliff,” Republicans are proposing cutting out tax deductions in exchange for lower tax rates.  I worry about the fate of charitable giving deductions and the impact eliminating them might have on  churches.  (One option being discussed is to just cap them for the wealthy, but many non-profit organizations–museums, colleges, and just about any entity running a capital campaign–depend heavily on big donors.)  Another potential casualty is the home-mortgage deduction, doing away with which may deal yet another blow to the housing market.

These may all make economic sense and, if rates are lowered, individuals may not take a tax hit.  But they will still have consequences.  Charles Lane looks at another IRS deduction that most of us appreciate, that for state and local taxes.  He shows, though, how the most liberal states have been using this provision to soften the blow of raising state taxes, forcing the rest of the country to subsidize their profligate spending:

Taxpayers have been allowed to deduct state and local income and property taxes since the federal income tax began in 1913. (Sales taxes have at times been deductible, too, but that’ s a relatively minor issue.) The theory is it’s unfair to make people pay twice for the public services they receive. That’s doubtful, though, since, despite some overlap, federal taxes support different services than state and local.

What the deduction does is enable higher-income states and localities to tax — and spend — more than they otherwise would, while shifting some of the cost to other states. It also encourages them to collect revenue in forms that are easier to deduct on federal returns.

Two states, California and New York, reaped almost 30 percent of the deduction’s value in 2009, the latest year for which I could find Internal Revenue Service data. Other states that benefit disproportionately include Connecticut, New Jersey, Illinois, Massachusetts and Maryland.

In 2009, 73 percent of the deduction’s benefits went to taxpayers with annual incomes above $100,000, according to the Congressional Budget Office; fully 20 percent of the benefits went to taxpayers with annual incomes above $1 million.

Starting to notice a pattern? Basically, what we have is a significant federal tax subsidy for “blue” state governments. These also happen to be the states having the most difficulty living within their means, what with their expensive urban school systems, bloated pension liabilities and all. Yet they have an incentive to close their budget gaps by raising income taxes rather than reining in spending, because the deduction helps them pass the tab to other states, most of them red.

California Gov. Jerry Brown addressed his budget woes through a referendum this year to boost the top income tax rate, just as Illinois Gov. Pat Quinn pushed an income tax rate increase through his legislature last year.

Now you’re beginning to understand how this seemingly innocuous tax break distorts financial flows within and among the 50 states, as well as between the states on the one hand and Washington on the other.

As for negotiations over a “grand bargain” between President Obama and the Republican House, the state and local tax deduction complicates that process, too.

The main bone of contention is the federal income tax rate on top earners, currently 35 percent. Obama says it is going to be hard to raise enough revenue without returning that rate to 39.6 percent, the level during Bill Clinton’s presidency.

Republicans insist that eliminating deductions and tax breaks could bring in more revenue without raising rates — while getting most of the money from the wealthy, just as the president wants to do.

In fact, the Tax Policy Center, a nonpartisan Washington think tank, has shown that eliminating all itemized deductions while leaving tax rates where they are now would raise $2.2 trillion over 10 years. That’s $600 billion more than President Obama is seeking from Congress.

Of course, not even the Republicans are proposing such a sweeping reform, which would certainly make the tax code more efficient — but also wipe out breaks for charitable giving and mortgage interest that enjoy wide red-state support, too. And the president himself has suggested limiting deductions in combination with rate increases, perhaps by capping the rate at which deductions may be claimed.

But because its impact is so heavily concentrated in blue states, the state and local deduction creates an asymmetry: Democrats have an extra reason to insist on raising rates, and Republicans have an extra incentive to demand loophole-cutting. Perhaps it’s just coincidence, but I have noticed that those most skeptical of the loophole-closing approach include Sen. Charles Schumer (D-N.Y.) and House Minority Leader Nancy Pelosi (D-Calif.).

So let’s all say a pre-Thanksgiving prayer for a successful negotiation — and remember that even a very grand bargain would still leave our state and federal tax and budget systems in need of major reform.

via Charles Lane: The best deduction to chop – The Washington Post.

The fiscal cliff-divers

On December 31, the Bush tax cuts will all expire and, by the terms of the last government-shutdown compromise, spending cuts (especially to the military) will go into effect automatically.  Such a double-whammy in the middle of an economic downturn would have dire effects, according to most experts, who are warning about the danger of this “fiscal cliff.”   But some people are saying that we should just jump off that cliff:

The very notion of a “fiscal cliff” suggests that the country is approaching a calamitous drop-off at the end of the year — and it would be tantamount to suicide to jump off.

But a contingent of policy wonks and Democrats insist that letting the Dec. 31 deadline come and go — thus triggering automatic tax increases and spending cuts — could produce the best outcome for the country. Once the tax hikes have kicked in, the reasoning goes, Republicans would be hard-pressed to roll them all back and would have to accept a deal on taming the deficit that contains more new tax revenue than GOP lawmakers want.

So some policy analysts and legislators say they are willing to go over the brink—and some are even gunning for Congress to do it.

Call them the cliff-divers. [Read more…]

Those lazy, shiftless, non-productive rich people

When countries (and, as we have seen, states) raise taxes on “the rich,” the rich have been escaping to jurisdictions with lower taxes.  Thus, ever since Maryland has increased taxes on its wealthiest citizens, those citizens have been moving to lower-tax Virginia.  The co-founder of Facebook has renounced his American citizenship and is now a citizen of Singapore.  This is happening in other countries as well.

So our Secretary of State Hillary Clinton is calling on all countries to raise taxes on the rich so as to give them no place to hide.  From The Motley Fool‘s Rich Smith:

A rich guy can always decide to “pull a Facebook” — follow in the footsteps of Facebook (FB) co-founder Eduardo Saverin, renounce U.S. citizenship, and fly away to someplace with a more lenient tax code. (It’s not just U.S. citizens going this route, either. Last month, Bernard Arnault, France’s richest man and the CEO of luxury-goods maker LVMH, responded to French plans to hike taxes on the rich by emigrating and seeking Belgian citizenship.)

Enter Secretary Clinton, with a novel solution to the problem: Tax everyone, everywhere, and especially the rich.

Clinton first floated her proposal at the Clinton Global Initiative conclave in New York last month: “It is a fact that the elites in every country are making money. There are rich people everywhere, and yet they do not contribute to the growth of their own countries.”

So far, mainstream commentary on the speech has painted it as a simple expression of the American-centric worldview: We think raising taxes on our richest 1% is a pretty keen idea, and you other countries should, too.

But there may be something more subtle afoot. The real purpose behind Clinton’s salvo could be to send a shot across the bow of would-be Saverin and Arnault imitators: If you think you can avoid higher taxes by simply switching citizenship, think again.

via Hillary Clinton Wants to Tax the Rich — Here, There and Everywhere – DailyFinance.

I don’t understand this part:  “There are rich people everywhere, and yet they do not contribute to the growth of their own countries.”  Really, Hillary?  Rich people do not contribute to the growth of their countries?  You think the only way countries can grow is for the government to rake in more taxes?  You don’t think economic growth has anything to do with people having money?  But if you do believe the rich are such shiftless, lazy freeloaders why should any country want them to stay around?  (Notice how some liberals look at the rich the same way some conservatives look at the poor!)

The Obamacare tax increases

There are some twenty new taxes or tax increases that click in with Obamacare.  Here are the most notable:

The Obamacare Medical Device Tax – a $20 billion tax increase: Medical device manufacturers employ 409,000 people in 12,000 plants across the country. Obamacare imposes a new 2.3 percent excise tax on gross sales – even if the company does not earn a profit in a given year. In addition to killing small business jobs and impacting research and development budgets, this will increase the cost of your health care – making everything from pacemakers to prosthetics more expensive.

The Obamacare “Special Needs Kids Tax” – a $13 billion tax increase: The 30-35 million Americans who use a Flexible Spending Account (FSA) at work to pay for their family’s basic medical needs will face a new government cap of $2,500 (currently the accounts are unlimited under federal law, though employers are allowed to set a cap).

There is one group of FSA owners for whom this new cap will be particularly cruel and onerous: parents of special needs children. There are several million families with special needs children in the United States, and many of them use FSAs to pay for special needs education. Tuition rates at one leading school that teaches special needs children in Washington, D.C. (National Child Research Center) can easily exceed $14,000 per year. Under tax rules, FSA dollars can be used to pay for this type of special needs education. This Obamacare tax provision will limit the options available to these families.

The Obamacare Surtax on Investment Income – a $123 billion tax increase: This is a new, 3.8 percentage point surtax on investment income earned in households making at least $250,000 ($200,000 single). . . .

The Obamacare “Haircut” for Medical Itemized Deductions – a $15.2 billion tax increase: Currently, those Americans facing high medical expenses are allowed a deduction to the extent that those expenses exceed 7.5 percent of adjusted gross income (AGI). This tax increase imposes a threshold of 10 percent of AGI. By limiting this deduction, Obamacare widens the net of taxable income for the sickest Americans. This tax provision will most harm near retirees and those with modest incomes but high medical bills.

The Obamacare Medicare Payroll Tax Hike — an $86.8 billion tax increase: The Medicare payroll tax is currently 2.9 percent on all wages and self-employment profits. Under this tax hike, wages and profits exceeding $200,000 ($250,000 in the case of married couples) will face a 3.8 percent rate instead.

via Americans for Tax Reform : Top Five Worst Obamacare Taxes Coming in 2013.

 

Republicans will raise taxes if Obama wins

Republicans have used their majority in the House of Representatives to foil President Obama’s attempts to raise taxes.  But don’t expect them to keep doing that if Obama is re-elected.  Republicans are saying they will interpret his re-election as a “referendum on taxes”–a sign that voters are willing to pay more–which will trigger a change in strategy that would trade tax increases for other Republican causes:

Senior Republicans say they will be forced to retreat on taxes if President Obama wins a second term in November, clearing the biggest obstacle to a deal with Democrats to defuse a year-end budget bomb that threatens to rock the U.S. economy.

Republicans have long resisted tax increases of any kind. But taxes are a major battleground in the campaign between Obama and Republican Mitt Romney, Capitol Hill veterans say, and the victor will be able to claim a mandate for his policies.

“This is a referendum on taxes,” said Rep. Tom Cole (R-Okla.), a senior member of the House Budget Committee. “If the president wins reelection, taxes are going up” for the nation’s wealthiest households, and “there’s not a lot we can do about that.”

With Election Day still more than six weeks away and the president holding a thin lead in national polls, Republicans say they are not conceding that an Obama victory is the likely outcome. But they are beginning to plan for that possibility.

Lawmakers expect to leave town Friday and will not return until mid-November, when they will have little time to head off $500 billion in automatic tax increases and spending cuts set to take effect Jan. 2.

If Romney wins the White House, Republicans say, their strategy is clear: They would push to maintain current tax rates through 2013, giving the new president time to draft a blueprint for overhauling the tax code and taming the $16 trillion national debt.

But if Obama wins, the GOP would have no leverage — political or procedural — to force him to abandon his pledge to raise taxes on family income over $250,000, according to senior Republicans in the House and the Senate.

So they are beginning to contemplate a compromise that would let taxes go up in exchange for Democratic concessions on GOP priorities.

via GOP retreat on taxes likely if Obama wins – The Washington Post.

Romney’s taxes

Democrats have been accusing Romney of not paying any income taxes or of hiding something in his finances.  So the Republican presidential nominee has released his 2011 returns.  It turns out, he paid 14.1% of his income to the government.  And he paid 30% to charity.   He didn’t even claim all of the charitable deductions he could have!

He also submitted a letter from his tax accountants, PriceCooperWaterhouse, saying that between 1990 and 2009, his average taxrate was 20.2% and that he never paid less than 13.66%.

So much for the Democrats’ tactic of trying to demonize the guy over his taxes, though the Washington Post article giving the details takes a strangely negative tone (saying how his taxes “would have been” only 10% if he took all of his deductions, that he could amend his return at any time, that we still don’t know the flow of his investment income, and other irrelevant attempts to put the worst construction on facts that are all to Romney’s credit).

via Mitt Romney releases tax return for 2011, showing he paid 14.1 percent tax rate – The Washington Post.