Michael Barone brings up a potential logical consequence of Wisconsin’s traditional high-spending high-tax policies in proposals to raise federal revenue by eliminating tax breaks:
… most really egregious tax preferences don’t add up to much money. Just as the big money for long-term spending cuts must come from changes in entitlements — Social Security, Medicare, Medicaid — so the big money you can get from eliminating tax preferences comes from three provisions that are widely popular.
The three are the charitable deduction, the mortgage-interest deduction, and the state-and-local tax deduction. …
… what about a cap on the state-and-local tax deduction? Initial conservative reaction will likely be hostile: Why increase some people’s federal tax bills? Isn’t that attacking a core Republican constituency?
Actually, it’s not. The state-and-local tax deduction is worth a lot more to high earners than to modest earners, and it’s worth nothing to the nearly half of households that don’t pay federal income tax.
But it’s worth the most to high earners in high-tax, high-spending states. Those people are more likely to be Democrats than Republicans. The 2008 exit poll tells the story.
Nationally, voters with incomes over $100,000 voted 49 percent Obama to 49 percent McCain in the presidential race. Those with incomes over $200,000 voted 52 percent to 46 percent for Barack Obama. …
In contrast, in low-tax, low-spending states with relatively inexpensive housing, $100,000-plus voters favored John McCain, who won 65 percent of their votes in Texas, 55 percent in Florida, and 61 percent in Georgia.
It is no coincidence that the high-tax, high-spending states tend to have strong public-employee unions. In effect, the unlimited state-and-local tax deduction is a federal subsidy of the indefensibly high pay, benefits, and pensions of public-employee union members. Limiting the state-and-local tax deduction would create a political incentive to hold those costs down.
So ironically, limiting high earners’ lucrative tax deductions may prove a harder sell among Democrats than Republicans. But maybe Republicans should give it a try anyway.
High-tax high-spending state? That certainly would be Wisconsin. “Relatively inexpensive housing” certainly does not describe Madison or suburban Milwaukee. “Strong public employee unions” with “indefensibly high pay, benefits, and pensions”? Welcome to Wisconsin. And it’s not as if Wisconsin has benefited from government largesse, given that this state’s per capita personal income growth has trailed the national average for more than three decades.
If Republicans in Congress wanted to stick it to, say, Sens. Barbara Boxer (D–California), Ben Cardin (D–Maryland), Richard Durbin (D–Illinois), Frank Lautenberg (D–New Jersey), Dianne Feinstein (D–California), Kirsten Gillibrand (D–New York), Robert Mendenez (D–New Jersey), Barbara Mikulski (D–Maryland), Charles Schumer (D–New York) or other Democrats representing high-tax states whose voters are stupid enough to continue to endorse high taxes, I’d be fine with that.
The problem, however, is that this high-tax state is represented by new Sen. Ron Johnson (R–Wisconsin) and Reps. Sean Duffy (R–Ashland) and Reid Ribble (R–Sherwood). While neutering the reprehensible public employee unions is a good start, state Republicans have so far failed to permanently cut Wisconsin’s taxes, which means we continue to have a reputation as a tax hell. And eliminating the federal income tax deduction for state and local taxes would suck more money out of Wisconsin wallets, which also would not help the reelection prospects of Johnson, Duffy or Ribble.
Another issue comes up in one of the comments. Most people would agree in theory with the concept of simplification — eliminating “loopholes” in return for lowering tax rates. As one comment on Barone’s column put it:
I like the idea of getting rid of the deduction for state and local taxes. I think that’s an asinine deduction, anyway. …
Of course, the flip side of this is that we need spending cuts. And, if we get rid of loopholes, we should also decrease the overall tax rate.
Another thing we should definitely do – get rid of all business loopholes, but drastically lower the business tax rate from 35% to 15%. That would get rid of favoritism and things like GE not paying taxes, but help us compete, overall, in the global marketplace and help small and mid-sized companies.
But the term “loophole” is in the eye of the beholder:
I am acquainted with a trucker that earns about $100,000.00 per year in pre-tax dollars. Of that money fully 65% goes to pay for fuel, insurance, truck payments and repairs. If you do away with all of the deductions the trucker would be paying 35% income tax on $100,000.00 which would be $35,000. So that would mean that he could literally send in everything he made and borrow money to eat, feed his family and have a house for his wife and kids. Where is the line drawn on all of this nonsense? If you take away all deductions then you will have to triple the amount of what the trucking industry gets paid so the people that drive the trucks can live. That in turn would triple the costs of everything that you buy in stores.
We need to get to something simple, but balancing the budget on the backs of the middle/lower classes is not the answer.
Using the first comment’s parameters, the choice would be between a 35-percent tax rate on $35,000 net income after business expenses ($12,250) or 15 percent on $100,000 in loophole-free taxable income ($15,000). Cut loopholes and tax rate, and the result is a 22.45-percent tax increase.
As it happens, I have the answer for this specific conundrum: The trucker’s correct tax rate is zero because the correct tax rate on business income is zero. The second comment is absolutely correct in that any business taxes increase “the cost of everything that you buy in stores.”
More generally, though, there are actual consequences of not reining in spending by far more than the Walker administration and Republicans in the Legislature have done. At some point, proposals to eliminate state and local tax deductibility will be made in Congress. And if you live in a high-tax state, to paraphrase a former coworker of mine, it will suck to be from Wisconsin.






