The Sneaky, Dirty, Truth about Those State and Local Taxes

New Jersey State Senate President Steve Sweeney complained to Neil Cavuto in a recent interview that “this new [federal] tax bill is going to hurt New Jersey in a big way.” Acknowledging that “one percent of New Jersey residents pay 42% of the taxes,” he warned, “We have to push the pause button on the millionaires tax” to keep millionaire residents from fleeing the state—and taking their wealth with them. He was referring specifically to the elimination of state and local taxes as a deduction from federal income taxes.

It’s about time they figured this out, because the jig is up.

The sneaky, dirty little truth about the deductibility of state and local taxes is this: High-taxing, high-spending states such as New Jersey, Minnesota, Oregon, New York, and California have been fleecing taxpayers in other states for years. How? By taking the federal taxes paid by Nevadans, Texans, Floridians, etc., and using it to refund their own state and local taxes. They could get away with their high tax rates (as high as 13%!) in part because taxes were deductible. In essence, federal taxes have been funneled into the state and local coffers of high-tax states for years.

Let’s look at a simplified, hypothetical example. Let’s suppose Floridian John Smith has an income of $2,000,000 and is in the 39% federal tax bracket, with an effective rate of about 34%. (We’re talking about the 1% here, the ones who pay 42% of the taxes, according to Sweeney.) He owes the IRS about $672,000.  (Ugh! That’s a huge amount of money!) His cousin, Jane Doe, lives in California and earns exactly the same amount of money. But she pays 13.3% income tax to California, and the real estate taxes on her modest $7 million California home are $25,000 higher than John’s property taxes. Until now, she has been able to deduct those state and local taxes from her net income, reducing her taxable income to $1,709,000. Her bill to the IRS is $615,000, or $57,000 less than John’s. In essence, taxpayers in low-tax-rate states have been carrying the big spenders in the high-tax states for way too long.

For Steve Sweeney, Jerry Brown, and legislators in other high-tax states, the game is over. New Jersey’s newly elected Governor Phil Murphy campaigned heavily to reinstate the “millionaires’ surtax” imposed on the wealthiest citizens—a tax that former Governor Chris Christie had lifted. Now Senate President Sweeney is aghast to realize that the Golden Geese can move to friendlier waters if too many of their eggs are going to be confiscated. “We can’t afford to lose thousands of people who make up a large piece of our tax base,” he admitted to Cavuto. “We have to rethink this millionaire’s tax, because they can leave.”

What a novel realization—people have choices! They can move! They can take their money with them! The besmirched 1% are finally being recognized as valuable. They run businesses, hire employees, buy homes, and pay taxes. Lots of taxes. Even Jerry Brown has suggested that California might have to rethink its budget and pull back on spending because of the new tax bill.

Most Americans are unhappy about losing the deductibility of state, local, and property taxes. At first glance, I was one of them. Why should we pay income taxes on the money we already paid in taxes? Is it “income” if you never even see it in your paycheck? But legislators of high-tax states have bilked the residents of more budget-conscious states long enough. Their sneaky, dirty little secret is out. Losing the deductibility of state and local taxes is putting pressure on legislators to be more frugal and use tax revenues more effectively. Until we can eliminate income taxes completely, that’s a step in the right direction.

Jo Ann Skousen is the founding director of the Anthem Libertarian Film Festival and the co-producer of FreedomFest, “the world’s largest gathering of free minds.” We’ll be talking about tax policy at FreedomFest this July at the Paris Resort, Las Vegas. For information go to www.freedomfest.com or call 1855-850-3733 ext 202.

 

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