By Kyle Sammin
Monday, January 15, 2018
Democrats have been running around with their hair on
fire since the Tax Cuts and Jobs Act of 2017 was enacted last month, but some
of the latest ravings in high-tax states show the damage may be penetrating to
their brains.
In Democratic-majority states across the nation, state
legislators are flailing blindly to find a way around the reduced federal tax
deduction for state and local taxes, a tax code provision that previously
masked the effects of the high taxes those same legislators have enacted.
They have mulled all manner of half-clever workarounds,
schemes that look, maybe, if you squint, like a way to make a tax not a tax,
but still something that everyone has to pay to the state government. State
legislators often do not represent the highest strata of intelligence in a
society, but some of these so-called fixes are so absurd that even the dimmest
bulb in the state house could not have offered them with a straight face. What
these fake solutions are, instead, is a sad attempt for state legislators to
dodge accountability for having made their state’s taxes so high.
Give to Charity—Or
Else!
The most ridiculous idea along these lines comes out of
Sacramento, where a Democratic supermajority controls California’s legislature.
That state, which has some of the highest taxes in the country, will find its
residents particularly aggrieved once they have to pay all of them without a
federal deduction. The solution, according to State Senate leader Kevin de
León, is to pretend a tax isn’t a tax. Instead, it’s a charitable donation to
the state government. Problem solved!
De León, who hopes to bring ideas like this to the U.S.
Senate in 2019, proclaimed in a recent statement that “our hard-earned tax
dollars should not be subject to double-taxation, especially not to line the
pockets of the Trump family, hedge fund managers and private jet owners.” You
might think he was proposing that one of the two income taxes (federal or
state) be repealed. You would be wrong.
Instead, he wants only to restore the deduction from one
tax for the amount levied by the other. Your dollars would still be taxed
twice, but some people would reduce the federal tax they pay by a fraction of
the amount paid to the state. (To actually avoid paying taxes on income used to
pay state taxes, you would need a credit, not a deduction. The deduction only
saves the marginal rate on the income devoted to state taxes—the fraction of
the fraction.)
Although he chooses to hide it, de León probably knows
the difference between a credit and a deduction. He also probably knows that
pretending a tax is a charitable donation will not fool anyone. But no one ever
got far in politics by telling people hard truths, even when math is involved.
Instead, we get magical thinking and willful blindness.
In the proposed law, California lawmakers would create a
tax credit of 100 percent for charitable contributions to the state, thereby
allowing people to replace their entire tax bill with a donation they would
freely give to the state. If they choose not to make this “donation,” the state
would still require them to pay taxes. See the trick? Just give the money, and
the state won’t take it. With a wink and a nod, de León and his Democratic
majority think they can create some fake deductions and keep the people happy.
Any tax lawyer who proposed such a scheme to his clients
would need to make sure his malpractice insurance was paid up, but malpractice
in politics a sadly so common as to be uninsurable, even if it could be
defined. The Internal Revenue Service and the courts are not nearly as dumb as
de León thinks they are. If the government is forcing you to give them
money—which is what taxation is—then whether you hand it over as a donation or
as a payment makes no difference. In the end, you have to pay. That makes it a tax.
For de León’s argument to be sound, we would have to
believe that people who voluntarily hand over money to the state are not paying
a tax, but simply offering the state their money out of the kindness of their
hearts. If that is true, then we have almost all been doing exactly that for
our entire working lives.
After all, if you let the government take taxes out of
your check, or paid them at the end of the tax year without being hauled into
court, you gave if freely, right? Similarly, if a mugger demands your wallet
and you give it to him without making him stab you, it must be a gift!
The logical hole in the scheme is big enough to throw the
tax code through. “Give it to me or I’ll take it” is not the plea of a
charitable fundraiser. The IRS and the courts have dealt with far cleverer
schemes to avoid taxes in the past, and they win most of the time. California
can try all the lexicological legerdemain it wants, but a tax by any other name
is still a tax.
New Jersey, New
York, and Others Scramble
California is not the only home to would-be tax-dodgers.
Democratic governor-elect Phil Murphy of New Jersey told CNBC that his state
plans a legal challenge to the law in federal court. Murphy, who ran on a
platform of raising taxes, was thin on the details of the suit, failing to
explain how choosing to limit a deduction would violate the Constitution.
He did offer the less-than-reassuring statement that he’s
“not a constitutional attorney,” and added that the bill may fail to hold up
because when last-minute amendments were added before passage, “a lot of them
[were] handwritten.” Nobody tell him how they wrote the Constitution!
Schemes being proposed in the New York legislature are
more realistic, but still will not achieve the results legislators there are
hoping to see. New York, like many high-tax states, recently allowed residents
to pre-pay their 2018 property taxes in 2017, the last year in which amounts
over $10,000 will be deductible. That may work, but only if the taxes have
actually been assessed already—estimated prepayments of notional taxes are not
likely to qualify. But even if it works, it is a one-year fix, putting off the
inevitable.
More permanent ideas are also on offer. As The New York Times reported last week,
legislators in the Empire State are also considering shifting the tax burden
from individuals to corporations. By taxing employers on their employees’ wages,
the incidence of the tax would shift to the corporation, which could deduct it,
while leaving the actual amount of tax collected unchanged.
This idea has some merit. It is legally sound, unlike the
California proposal. Also, New York’s corporate taxes are surprisingly low
now—the Tax Foundation named New York the seventh-best state for corporate
taxes (it ranks 49th-best in individual taxation). So there is room to grow,
and the shift may be equitable. But there are also unintended consequences to raising
taxes on corporations that state legislators seem desperate to ignore.
We have already seen that corporations shift
manufacturing overseas when federal taxes and regulations become too onerous.
How much easier would it be to shift to a low-tax neighbor of New York, like
Pennsylvania? Workers have to live where the jobs are, but companies can move
where they please, and the people will follow. The New York tax shift may be
revenue-neutral, but it switches the tax to the party best able to avoid it by moving.
There Must Be One
Weird Trick!
There is another, simpler way to fix the problem that
even the Times was obliged to point
out: cut taxes. As the article notes: “‘I suppose the rational response for us
is to lower our taxes,’ said Benjamin Barnes, who heads the Connecticut Office
of Policy and Management, ‘but we have a public that has shown again and again
that they expect high levels of service.’”
Barnes is right: people want everything without having to
pay for any of it. At some level, it is a natural human response. Who doesn’t
love a bargain? But thinking taxpayers must admit that the party had to end
sometime.
Shifting the pain of state taxes to the federal
government only added to the federal deficit, and made the whole country
responsible for the spendthrift habits of a few rich states. The federal
government, unlike the states, can legally run deficits. But the laws of
economics carry even greater force: someday, the debt must be paid.
State governments must face up to the reality that they
are living beyond their citizens’ means. Now that the people are becoming aware
of just how much government is taking from them, they have to pony up the cash
or act like adults and recognize that there is no such thing as a free lunch.
For now, their legislators are doing their best to keep endless buffet going,
but sooner or later, the bill will come due.
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