State and Local Federal Income Deductions Enable Malfeasance

One of the sticking points to passing generational tax reforms for all Americans is the ability for state taxpayers to deduct their state income tax and real property tax from their federal income tax liability.

Currently, taxpayers who itemize their deductions on their federal income tax returns are entitled to deduct state and local real estate and personal property taxes as well as their income tax or general sales tax.

Both the House and the Senate are wrestling with what deductions will stay and what deductions will go in order to simplify federal income tax filings and make it more fair and equitable for all.

Both the House and Senate tax bills preserve the deductibility for charitable contributions and home mortgage interest — although there may be negotiated caps to it.

The differences between the House and Senate Bill with regard to state and local taxes are as follows:

House: The House bill would allow a deduction for up to $10,000 in property taxes, but end deductions for income or sales taxes.

Senate: Would eliminate all of them.

Some states like California, New York, Illinois, and New Jersey are livid that Congress is considering ending these deductions and claim that such actions will amount to a tax increase for its citizens and is unfair in that it targets them to their detriment.

The questions that should be addressed with regard to state and local deductions are these: Does the ability to deduct state and local taxes amount to a federal government bailout or handout? And, does the ability to deduct state and local taxes enable states and local governments to be less accountable to their citizens?

Let's look at the financial health of the big states I have mentioned and who claim to have the most to lose should Congress eliminate or curtail the ability to deduct state and local taxes.

According to a report by the Mercatus Center of George Mason University, “On the basis of its fiscal solvency in five separate categories, New York ranks 39^th, California ranks 43^rd, Illinois ranks 49^th, and New Jersey ranks 50th among the U.S. states for its fiscal health.”

USA Today on April 16, 2017, published the rankings of all states with regard to real property taxes and found that New Jersey ranked #1 for the highest real property taxes in the country followed by Illinois, New York, ranked 7^th, and California, 35^th.

USA Today reported on October 13, 2017, that our two most populous states — New York and California are among the top tier of state income tax burdens in the country — New York ranked #1 and California ranked #5 while Illinois and New Jersey are within the top ten as well.

247wallst.com on December 6, 2016, published: “The Best and Worst Run States in America: A Survey of all 50.” In determining the ranking they took into account the following factors: 1. Debt per capita; 2. Unemployment rate; 3. Credit rating; and 4. Poverty level. Low and behold the states that have the most to lose should Congress eliminate state and local tax deductions are the same bad actors: Illinois ranks 49^th worst run state, New Jersey ranks 43^rd, New York 33^rd and California 16^th.

There is no doubt that the elimination or reduction of state and local taxes from federal income tax returns will be a huge wake-up call for states and local governments to get their financial houses in order. Why should the rest of the nation pay for the mismanagement and largess of state and local governments?

Our biggest states are poorly managed and are gouging citizens with high taxation and unsustainable debt. The federal government today enables bad governance at state and local levels by allowing deductions without qualification or obligation. The constituencies of state and local governments should not be angry with those in Congress advocating for the elimination or reduction of state and local tax deductions on their federal income tax returns — they should direct their anger to those most responsible, and that is their state and local officials. Citizens should demand fiscal discipline, accountability, fairness, and transparency from their state and local officials.

States and local governments must be held to account within its own borders by its own citizenry. Following the Constitution, the federal government should do what is required and not be the underwriter of poorly managed states. States should pick up where the federal government leaves off and provide all the services that their own populations can afford.

I suggest that Congress find middle ground with regard to the deductibility of state and federal taxes and sunset the deduction over period of ten years. The sun setting can be graduated. This would allow states to get their financial houses in order and to plan well in advance for the lost benefits.

The federal government certainly does not have “clean hands” when it comes to fiscal responsibility or discipline but this “monkey see, monkey do” excuse is no reason to give states a windfall on the backs of all Americans.

Bradley Blakeman was a member of President George W. Bush's senior White House staff from 2001 to 2004. He is also a frequent contributor to Fox News and Fox Business Channel. He currently is a Principal with the 1600group.com a consulting company. — Click Here Now.