The last big battle over federal deductibility of state and local taxes was fought in Washington 30 years ago.
High-tax states like New York held their ground.
But past performance never guarantees future results.
GOP President Donald Trump’s proposal to stop taxpayers from deducting state and local levies in some ways echoes the recent scrum over health insurance.
The last Trumpcare proposal on which Senate Republicans punted would have sharply reduced Medicaid funding for big blue and purple states while red states might have fared better.
Trump’s deductibility proposal, as sketched, also tilts toward red states like Mississippi, Wyoming and Tennessee. It lowers the boom on California, New York, New Jersey and Connecticut.
Republicans in the House of Representatives have been pushing to write off this huge write-off for years.
For red-state fiscal hawks, the logic for doing so is clear. When you use your heavy property or income tax payments to reduce your federal tax bill, Uncle Sam is arguably helping pay for services from police to garbage to schools.
People in low-tax states essentially ask why their federal government should subsidize public goodies in Manhasset, Manhattan, or other expensive places.
As president, Ronald Reagan is quoted as having called deductibility “the most sacred of cows.” Should Trump and House Speaker Paul Ryan (R-Wisc.) win this one, they could claim a victory that eluded their party’s icon.
Killing or curbing state and local deductions would end an “increasingly costly anachronism which favors high-income earners in wealthy states,” declares the conservative Tax Foundation.
Of course, such citizens as police officers and teachers who own homes in Nassau and Suffolk don’t see themselves as “high-income earners.”
But living costs and salaries differ across the nation to the point where people in say, Nebraska, seem to traffic in an entirely different currency than ours.
The Republican White House and Congress have great incentive for killing deductibility outright as part of a broader tax-reform package.
The change would raise $1.8 trillion in federal revenues over a 10-year period, according to the Tax Foundation. That could go a long way to fund large-scale corporate and other tax cuts that they say will boost the economy.
And it could come with a parental lecture from the fiscal hawks: “Hey, northeastern suburbanites, we’re teaching you to live within the means of your local and state tax base. Cut your budgets and services and patronage jobs to a sane level to adapt.”
Back in the last deductibility fight, Democrats and northeasterners held a collectively stronger position in the Congress.
As before, key details of the Trump proposal remain to be revealed.