Blue state chauvinism

Blue state chauvinism

Millionaire’s tax makes federal system more regressive

IN THE PURSUIT of tax equity and fairness, Massachusetts progressives who support the proposed “fair share” amendment could end up placing a larger tax burden on poorer residents in other parts of the country. The amendment would overturn a constitutional prohibition on graduated income taxation in favor of what has been dubbed a millionaire’s tax of an additional 4 percent on incomes over $1 million. A coalition of labor, religious, and Democratic groups are spearheading the drive, which is expected to sail through the Legislature and be put before voters on the 2018 ballot.

Proponents argue the new tax is a matter of fairness. Nobody but the top 1 percent will see their taxes go up and the revenues could provide an additional $2 billion per year for worthwhile investments in transportation and public education. At first glance, it is hard to see how this could be characterized as unfair. But a closer look reveals that the amendment will have the effect of making the federal tax system more regressive.

The reason for this is an important federal tax provision called the state and local tax (SALT) deduction. This provision allows taxpayers to deduct the total amount of state and local taxes, including the proposed millionaire’s tax, paid when calculating their federal tax liability.

Senate minority leader Charles Schumer of New York and others argue the SALT deduction is a matter of fairness to avoid double taxation. Republicans have been more skeptical. House Speaker Paul Ryan of Wisconsin and other House Republicans have proposed eliminating the deduction as part of a broader tax reform agenda. They point out that rich taxpayers in rich states claim the vast majority of the deduction’s benefits. Moreover, the deduction acts as a federal subsidy for high-tax states. As states raise their taxes, federal tax liabilities and revenues decline, partially offsetting the cost for rich taxpayers in those states.

The SALT deduction cost the federal government over $100 billion last year, with rich taxpayers in just three states – California, New York, and New Jersey – claiming over a third of the benefits. Warren Buffet, the leading crusader for making the rich pay their fair share, used the SALT deduction to avoid paying federal taxes on $2 million of his income. In contrast, poor and working class taxpayers (perhaps including Buffet’s famous secretary) do not earn enough to itemize and therefore receive no benefit from the deduction.

What does this have to do with the proposed Massachusetts millionaire tax? The Department of Revenue estimates that $600 million in federal revenue losses will accompany the $2 billion in new state revenues because the SALT deduction will allow Massachusetts millionaires to substantially reduce their federal tax liability. The federal government must make up for that revenue loss by either raising taxes on or cutting spending for families outside of Massachusetts. The amendment means residents of poor states such as Mississippi (ranked 50th in per capita income) will partially subsidize residents of wealthy Massachusetts (ranked third in per capita income). In what sense is it fair to place some of the burden on Mississippi to pay for schools in Wellesley or roads in Andover?

Massachusetts state legislators know this is fundamentally unfair, but defend the SALT deduction because it reduces the political cost of soaking the rich on the state level. This is why the congressional delegations of California, New York, and New Jersey continue to lead efforts to block the elimination of the SALT deduction. The Massachusetts delegation has been silently complicit in these efforts. I call this blue state chauvinism. For far too many, concerns about fairness do not extend beyond the state’s borders to regions of the country far less fortunate than us.

Meet the Author

Josh McCabe

Associate director of Freedom Project, Wellesley College
If proponents of the proposed Massachusetts millionaire’s tax want to advocate for constitutional change under the banner of fairness, then they need to acknowledge and account for the unfair redistribution from relatively poor states to relatively rich Massachusetts that is part and parcel of their proposal. Changes to our state constitution should not be taken lightly. State legislators and the public deserve to know the full implications of this constitutional amendment before they vote on it. Fairness requires it.

Josh McCabe is the associate director of the Freedom Project at Wellesley College.

  • Cannoneo

    This argument strikes me as concern trolling of the highest order. If Massachusetts waited for Washington to do the right thing before it took any progressive step, we would never get anywhere. The national political impact of achieving a more just tax system in a wealthy state will be far more significant than this tiny hit to federal revenues, an accounting blip which would never enter into Washington debates over tax reform.

    • Suburbian

      Also, this article ignores the fact that Massachusetts already pays far more in federal taxes than we receive in federal tax benefits, and Mississippi receives far more in federal benefits than they pay in taxes. See for example this 2013 New York Office of the State Comptroller report:
      https://osc.state.ny.us/reports/budget/2015/fed_budget_fy2013.pdf (page 5 has a telling chart)

      So for the writer to argue that “the deduction acts as a federal subsidy for high-tax states” is disingenuous when Massachusetts and other high tax states are actually subsidizing most of the other states.

  • BruceAHz

    I find the logic behind this piece quite muddled. The idea that we should maintain our essentially regressive (“flat”) tax structure because the Federal tax structure includes regressive features that also favor the rich makes no sense. It is the responsibility of Congress to tend to the Federal Budget and the responsibility of the states’ legislatures to tend to their budgets. Does Dr. McCabe really thing we should increase the Massachusetts tax burden on lower income taxpayers in order to subsidize other state’s lower income taxpayers? Or cut our state’s services to maintain a balanced budget for the same purpose?

    It is quite a twist of logic to suggest that making our state’s tax structure more progressive “means residents of poor states such as Mississippi (ranked 50th in per capita income) will partially subsidize residents of wealthy Massachusetts (ranked third in per capita income). In what sense is it fair to place some of the burden on Mississippi to pay for schools in Wellesley or roads in Andover?” It is important to remember that a state’s income per capita ranking is not what determines which states are subsidizing which; fairness at the Federal level calls for high income taxpayers everywhere to contribute to the support of low income taxpayers everywhere. The Federal budget should be state border agnostic, collecting taxes and distributing benefits based on need. If the IRS tax code and benefit programs are structured on individuals instead of states, then “Mississippi” would not be subsidizing Wellesley, any more than Lowell is.

    The muddled thinking goes further insofar as it has been the federal tax “reform” proposals put forth by the red state representatives and Republican leaders that typically move the federal tax structure to further reduce the progressive nature of the IRS tax code. Of all the regressive or “unfair” aspects of the IRS code, SALT is the one most based on rational policy (not double taxing income). There are many ways the IRS code could be restructured (a verb I prefer to “reformed”) to keep this basic tenant of fairness while making the overall tax impact MORE, not LESS, progressive.