Editorial: Save state and local tax deduction from 'fiscal cliff' deal
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President Barack Obama and House Speaker John Boehner (R-Ohio) met once again last night to talk about the "fiscal cliff," but they still appear to be a world apart on taxes and spending -- and more intent on winning the message war than bridging the divide.
Hopefully the public posturing is all for show and leverage. Behind closed doors they need to narrow their differences and earnestly work toward a deal to avoid the cliff of tax hikes for all and indiscriminate spending cuts slated for Jan. 1. The stakes are high: Economists say going over the edge would plunge the nation back into recession. Secrecy may make the difficult job of deal-making easier, since interest groups can't attack what they can't see.
Achieving the long-term goal of deficit reduction will require both real spending cuts and higher taxes. Any deal to avoid the cliff must be a step in that direction. But when it comes to taxes, how it's done is critically important.
Slashing the value of the deduction for state and local taxes, for instance, would be devastating for high-tax states like New York. Increasing income tax rates for the top filers -- along with taxing capital gains and dividends at the same rate as other income, while zeroing out the corporate income tax -- would be a better way to go.
People on Long Island and in the region pay state and local taxes that are among the highest in the nation. If Washington limits the deduction for those taxes paid to the state and Long Island's counties, towns, schools and special districts, the result would be a tax on a tax. That would make the burden even heavier, and not just for the most affluent.
Boehner has proposed raising $800 billion in revenue over 10 years by limiting deductions and loopholes. But the GOP point man has refused to say which ones. He needs to let the public in on what his party has in mind. Billions of dollars in tax breaks for profitable oil companies and agribusiness would be a good place to start.
Republican presidential candidate Mitt Romney laid out an approach that would retain the most popular deductions, including for charitable donations, but limit their value. The idea is to dump them in one "bucket" and cap the amount a taxpayer can claim at say, $25,000 or $35,000. That would raise taxes for the top 2 percent: couples with incomes over $250,000 and individuals over $200,000. But depending on the maximum amount taxpayers could deduct, the tax bills for people making less could also go up, particularly those who pay high state and local taxes.
Other big-ticket middle-class deductions for mortgage interest and employer-provided medical insurance should be phased out, in exchange for lower rates and a simpler tax code. But the state and local tax deduction should be off limits.