Red States, Blue States, and Taxes, Again

by Ramesh Ponnuru

Several correspondents take issue, some of them angrily, with my support for eliminating the deduction for state and local taxes. A pithy example:

Your analysis that low tax states subsidize high tax states is total bull. By every analysis, states with high SALT pay more in to the feds and get less back. Now you want to increase our subsidy of nonproducing low tax states. Raising my federal taxes by 25% is not a tax cut.

That second sentence is right; see here for more. The thing is, though, the federal government doesn’t take more money from (and give less money to) states because their state governments are larger. The deduction, on the other hand, works to the advantage of residents of bigger-government states simply because they have bigger governments.

It is true that via the federal government affluent people in Massachusetts send more money to poor people in Mississippi than affluent Mississippians send to poor Bay Staters. Massachusetts voters seem pretty supportive of such anti-poverty spending, judging from the politicians they elect. But whether transfers to poor people should be smaller, larger, or kept exactly the same, it makes no sense to correct for that policy by encouraging Massachusetts to have higher state taxes.

If a state’s residents receive more federal funds because a lot of retirees have chosen to live there, it’s not obvious that residents of the other states deserve to have extra federal help on that account–let alone that this help should take the form of the deduction for state and local taxes. And if a state’s residents get more federal funds because it has more military bases than other states, that too doesn’t make the deduction an intelligent compensatory policy.

Anyway, the problem with the deduction, from my perspective, isn’t that it transfers funds from one group of states to another; it’s the reward structure it creates. It’s not that it takes money from Mississippi and gives it to Massachusetts, that is, but that it encourages both of them to have bigger, higher-taxing governments than they otherwise would.

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