Wampum

If CA, NY, MA are paying less in Federal taxes to fund state programs, then residents in the other 47 states have to pay more Federal taxes.

Why should the other 47 states subsidize these 3 states? I cannot think of any good reason, no matter how worthy the state programs may be.

George,

You want to take up the question of whether the Federal government should even allow States to collect taxes?

We see this in State vs Tribe tax jurisdictional conflicts, and you seem to be in the exterminationist camp.

Think it through. What is the probable outcome if the Union Congress does not recognize (budget in the net effect of) States tax jurisdictions? For Foreign tax jurisdictions?

Or is this just a personal income tax anomolie in tax jurisdiction, not affecting the tax liabilities of "natural persons" (corporations)?

The politics of destroying strong state governments (colored blue today) to promote weak federal government theory (colored red today) is as obvious as it is funny.

Cheers.

I did not argue that states shouldn't be allowed to collect taxes. We are arguing about whether or not state taxes should be deductible on your federal tax return.

There are many reasons why they should not be deductible. 1) Citizens of states that rely heavily on sales tax do not get to deduct their state tax burden. 2) Citizens that do not itemize in effect pay the full state tax rate, while folks that do itemize have their state tax bill, in essence, subsidized by a fedearal tax reduction. 3) As I argued in my previous post, citizens in low tax states shouldn't subsidize high tax states by shouldering more of the federal tax burden.

If a state, be it red or blue, wants to have a 50% income tax then more power to them. I don't think the residents in the remaining 49 states should make up for the reduction in federal taxes collected under present tax laws.

To make your case, you should show that CA, NY and MA are being subsidized by your pick of low state (income only) tax states.

Please do so.

I thought I'd done so already. I'll try again using an extremely simplified scenario with two identical families earning $50,000 in the 10% tax bracket. One in Texas pays $5,000 in federal taxes. One in NY first pays 8% state income tax leaving only $46,000 for the feds to tax under present rules, raising $4,600 for the federal government. In our simplified example, the federal budget is $9,600. Notice that the Texas family is paying $200 more than the "national" average, and the NY family is paying $200 less than the national average. In effect a subsidy from the low income tax state to the high income tax state.

The federal governement needs X dollars to operate. If you take less from one person or group, the remainder have to pay more.

In this way, any deduction or credit in the tax code can be viewed as a subsidy. The home mortgage deduction transfers wealth from renters to homeowners. The hybrid car tax credit transfers money from standard car owners to hybrid car owners. The current extra low dividend tax rate transfers money from wage earners to stockholders.

If this still isn't clear. Imagine Texas enacted an 8% income tax to launch a statewide school program, "Just say no to homosexuality". The Texas family would now pay the same $4,600 in federal taxes as the NY family. The feds now experience a $400 deficit and have to raise the tax rate such that both families pay $4,800. So the NY family is now paying $200 more in taxes to fund an anti-homosexual program. I do not think they would be pleased.

I must not have been clear. Please use a real source of real data, not hypotheticals.

CA, NY and MA are donor states. If cutting their state income tax deduction would change that, you might find the voters in those states keen to agree with you. Until then, probably not.

Your turn.

We can discuss tax policy alternatives in the abstract. I believe it is better policy to have state residents pay for their own state programs. It gives them that much more incentive to choose programs wisely and run them as efficiently as possible.

I don't want to get too far afield discussing completely independent issues. But briefly here are two paragraphs regarding donor state status.

The fact that CA, NY, and MA are donor states is greatly influenced by spending decisions. I concur they are getting "screwed" as you put it. I would solve that problem with more equitable spending - a good first step would be to take a big whack at huge agriculture subsidies. Of course, when it comes to spending alternatives, we can debate the merits of endless proposals. Yes, politics plays way too much a role in spending decisions. Both sides do this. Always have, always will. Instead of building our highways to nowhere in West Virginia we now build them in Alaska. Both are a revolting waste of money. With the Democrats out of power, the blue states will be screwed on many spending decisions. I am not in any way defending lousy spending decsions that may be contributing to each state's donor status.

Secondly, CA, NY, MA are among the wealthiest states. The progrssive nature of the tax code automatically makes it more likely these states will be donor states. Surely as a Democrat you are not proposing that the tax code be less progressive because such a change would help the blue states more than the red states.

Getting back to the original point. I've stated several reasons why I think it is better tax policy to do away state income tax deductibilty. So far your arguments for keeping the deduction is "it helps blue state residents more than red state residents". I'm willing to listen to your rationale for keeping the deduction.

At least please admit that the tax commission *MIGHT* have made the recommendation on the merits rather than as a crass political swipe at blue state residents.

P.S. As an amusing aside, is this backwards or what? The Republican arguing for a tax increase, and the Democrat arguing against it! And the tax increase only affects the middle class and wealthy!!