Why cut the state tax deduction?

If you begin with the wrong assumptions, you come to the wrong conclusions.

Here are excerpts from an article in Bloomberg, where the author mistakenly assumes that federal taxes pay for federal spending. 

Image result for burning dollars
Your federal tax dollars are destroyed upon receipt.

While state and local taxes do fund state and local spending, federal taxes do not fund federal spending. Your federal tax dollars are destroyed upon receipt.

Not understanding the difference between federal and state finances, (the federal government uniquely is Monetarily Sovereign), the author offers wrong conclusions:

Get Rid of the State-Tax Deduction Altogether
High-income taxpayers in high-tax states don’t deserve special treatment.By Michael R. Strain, February 28, 2019

(Michael R. Strain is a Bloomberg Opinion columnist. He is director of economic policy studies and resident scholar at the American Enterprise Institute. He is the editor of “The U.S. Labor Market: Questions and Challenges for Public Policy.)

The 2017 tax law capped at $10,000 the amount of state and local tax payments a household can deduct from its federal income taxes. Previously, people could deduct the entire amount they paid in state and local property taxes, and either the state individual income tax or state sales tax.

According to a Treasury Department estimate released Tuesday, this cap will stop 10.9 million tax filers from writing off these payments from their federal income taxes, with the largest bite felt in high-tax states like New York, New Jersey and California.

Though politicians from these states are howling — New York Governor Andrew Cuomo recently met with President Donald Trump to discuss his concerns — limiting this deduction was the right thing to do.

Congress should go all the way and repeal what remains of it.

Importantly, just because 11 million people may lose this popular tax break — which has been in the federal code since the income tax was created a century ago — does not mean that all of them will be paying a larger share of their income in federal taxes.

An analysis by the Tax Policy Center in December 2017 found that 80 percent of households would receive a tax cut in 2018, while only 5 percent will face a tax increase. (As temporary provisions of the 2017 law expire, more households will face a tax increase in future years.)

An initially appealing argument in favor of this deduction is that it reduces an individual’s marginal income tax.

That’s only part of the story. By shrinking the federal income tax base relative to what it would be without the deduction, raising any given amount of revenue requires higher tax rates.

This likely offsets the deduction’s marginal rate reduction.

Mr. Strain reveals his belief that our Monetarily Sovereign government, which creates dollars by spending dollars, and never can run short of dollars,  needs to increase taxes when spending increases. He is wrong.

The federal debt itself demonstrates that federal taxes don’t fund federal spending.

Let me remind you of what two experts in the field have said:

Alan Greenspan: “A government cannot become insolvent with respect to obligations in its own currency.”

Ben Bernanke:The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”

Could anything be clearer? Nothing “requires higher taxes.”  In fact, nothing requires federal taxes at all.

So why does a government, having the unlimited ability to create its own sovereign currency, levy taxes?

The primary reason is economic control. Things they wish to encourage (i.e. charity, business investment, etc.)  are tax deductible. Things they wish to discourage (i.e. smoking, alcohol, gambling, etc.) are heavily taxed.

And most importantly, the people the politicians wish to reward (i.e. rich donors) are given the lowest tax rates on what matters: Asset growth, long-term capital gains, dividends, and delayed taxes on various sorts of income.

The state and local deduction also encourages taxpayers to itemize their deductions rather than take the standard deduction.

This leads people to use other deductions more as well, amplifying the harm done from much less defensible tax breaks, like the one for mortgage interest payments.

The government made mortgage interest deductible in order to encourage home ownership.

There is no “harm done” by this deduction. On the contrary, the “harm done” is the taxing of mortgage payments. Tax dollars are taken from the private sector and given to the federal government, where they are destroyed.

Again, the U.S. Treasury destroys your hard-earned tax dollars upon receipt, and creates brand new dollars by spending. That is the government’s method for “printing” dollars.

The destruction of dollars impoverishes the economy, just as all federal taxes do.

For the reasons I mentioned above, we should want a broader base and lower rates, not a smaller base and higher rates.

The above sentence makes no economic sense. The federal government could get along quite nicely, thank you, if it collected, and then destroyed, zero taxes.

Meanwhile, the economy, i.e. the private sector, would flourish by the additional money that remained in consumers and businesses pockets.

In addition, the state and local deduction is a subsidy to states with large numbers of high-income individuals.

Because they face higher marginal income tax rates, deductions are relatively more valuable to this group of taxpayers.

The above sentences are mathematically correct but in practice, wrong.

The state and local tax deductions benefit residents, not the state governments, which receive no direct dollars from that tax deduction.

And it is not the rich who benefit most The rich pay for their homes via business expenses and other tax avoidance schemes. It is the middle and upper-middle classes in these states, that pay the penalty.

These are the people who have homes in higher-tax locations, and perhaps summer homes as well, but are not in the hundreds-of-millions or billions category.

Bottom line, everyone, rich and poor in America, is punished when the private sector must send dollars to the federal government. 

Residents of lower-tax states should not be on the hook for spending decisions of governments in higher-tax states.

Of course, higher-income households (many of which are located in higher-income states) do pay relatively more income tax, which is used to finance federal spending programs and transfer payments, some of which benefit citizens in other, lower-income states.

Again, Mr. Strain demonstrates ignorance of federal financial reality.

Residents of one state never are “on the hook” for spending in other states, neither with regard to federal taxes or to taxes in the other states. Residents of a state are “on the hook” for taxes in that state.

And federal income tax is not used to “finance federal spending programs and transfer payments.” The federal government destroys tax dollars, and creates new dollars to finance all spending.

State and local spending finances some public goods, like education. And there is a role for government to subsidize education, because the benefits of an educated citizenry extend beyond the individuals enrolled in school.

It would be better to directly subsidize education than to use a roundabout state and local deduction to achieve that goal.

I agree that the federal government should finance education. See: Ten Steps to Prosperity: Step 4: Free education for everyone and Ten Steps to Prosperity: Step 5: Salary for attending school.

But this has nothing to do with the useless, indeed harmful, tax on mortgage payments and other state taxes.

Importantly, the $10,000 cap mitigates some of these concerns. For example, the cap and the larger standard deduction — another feature of the 2017 tax law — will lead many fewer households to itemize.

It doesn’t eliminate them, however. And the remaining deduction is significant. According to the Joint Committee on Taxation, 16.6 million tax filers will still claim the state and local tax deduction in 2018.

Because of this subsidy, the federal government is estimated to have lost $20 billion in revenue last year.

” . . . will lead many fewer households to itemize, but allow the richest to continue itemizing charitable and business-related deductions.

And read carefully what Mr. Strain is saying.  He thinks of not taking your tax dollars from your pocket as a “subsidy,” as though the government were giving you something rather than you not giving the government something.

Next time you fail to give your neighbor a gift, Mr. Strain suggests you thank them for the “subsidy.”

Congress should get rid of the deduction entirely. To minimize disruption, the deduction should be set on a gradual glide path toward zero over a number of years.

Doing so might mean that high-income people leave high-tax states, although the benefits to them of living in major urban centers makes me suspect that relatively few will do so.

Even if this does happen to a significant degree, it would not be something to bemoan. Households should decide where to live based on their preferences, not on tax policy.

Oh really, Mr. Strain? Is that what households “should” do? I have news for you. Not all of the population increase in Florida is due to the weather. Much of it is due to Florida’s low taxes.

Many thousands of people live in Florida at least six months out of the year, just to take advantage of its low taxes.

And now comes Mr. Strain summarizing his own economic ignorance:

The real change would be in the behavior of states.

Some would still choose to provide more services than others — this key feature of the U.S.’s federalist system would remain.

But they won’t be relying on a subsidy from the federal government — from taxpayers in other states — to pick up part of the tab.

No, Mr. Strain. Taxpayers in other states do not pick up the tab for better schools, better healthcare, better support for the impoverished, etc. that you seem to feel should be cut.

That is the right-wing, anti-poor, pro-rich theme. You should be ashamed.

Here is a good idea for everyone:

To contact the author of this story: Michael R. Strain at mstrain4@bloomberg.net

To contact the editor responsible for this story: Katy Roberts at kroberts29@bloomberg.net

Rodger Malcolm Mitchell
Monetary Sovereignty
Twitter: @rodgermitchell
Search #monetarysovereigntyFacebook: Rodger Malcolm Mitchell


The most important problems in economics involve the excessive income/wealth/power Gaps between the richer and the poorer.

Wide Gaps negatively affect poverty, health and longevity, education, housing, law and crime, war, leadership, ownership, bigotry, supply and demand, taxation, GDP, international relations, scientific advancement, the environment, human motivation and well-being, and virtually every other issue in economics.

Implementation of The Ten Steps To Prosperity can narrow the Gaps:

Ten Steps To Prosperity:

1. Eliminate FICA

2. Federally funded medicare — parts a, b & d, plus long-term care — for everyone

3. Provide a monthly economic bonus to every man, woman and child in America (similar to social security for all)

4. Free education (including post-grad) for everyone

5. Salary for attending school

6. Eliminate federal taxes on business

7. Increase the standard income tax deduction, annually. 

8. Tax the very rich (the “.1%) more, with higher progressive tax rates on all forms of income.

9. Federal ownership of all banks

10. Increase federal spending on the myriad initiatives that benefit America’s 99.9% 

The Ten Steps will grow the economy, and narrow the income/wealth/power Gap between the rich and you.


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s