Penna Dexter

There’s a provision in both the House and the Senate tax reform plans that would eliminate one area of fundamental unfairness in our federal tax system.

Currently, taxpayers who itemize deductions on their federal tax forms are allowed to deduct taxes paid to state and local governments from their taxable income.

Sounds great, but it’s not fair. Right now, Americans from red states and lower-tax blue states are subsidizing other states. The Wall Street Journal pegs the value of the state and local tax deduction at more than $1.25 trillion over ten years. Eliminating that deduction would help offset the cost of tax cuts and increase fairness in the tax code.

The Journal points out that the state and local tax deduction “is a classic example of a tax preference that adds complexity to the code and subsidizes some Americans at the expense of others.”

Take California. To pay for its lavish and liberal programs, California taxes the average resident’s income at 9.3 percent. And California imposes a 13.3 percent income tax on its millionaires. But that millionaire doesn’t actually pay 13.3 percent. According to the Heritage Foundation’s research, after accounting for the federal deduction for state and local taxes, that wealthy Californian actually pays only about 8 percent state tax on income.

As the Daily Signal points out, “It’s Washington, not Sacramento that loses those tax dollars.” California still pockets the money for its liberal programs and can still attract residents with an effective state tax rate that’s not so bad. Meanwhile neighboring Nevada, which has no state income tax, moderates its spending on state programs. So Nevadans live with less, don’t get a state tax deduction and are, with their federal taxes, in essence, subsidizing California’s pie-in-the-sky spending programs

Seven states: Alaska, Nevada, Florida, South Dakota, Texas, Washington, and Wyoming, have no income tax, and many others keep theirs low. Their residents should not have to subsidize blue-state big government. That’s taxation without representation. Tax reformers must address this.