The Republican tax plan — more than a 1,000 pages covered in last-minute scribbled annotations and pastebombs, passed without any substantial debate or analysis — is a fucking mess.
One of its goals was to stick it to blue-state voters by raising their taxes. This would be accomplished by capping the deduction that taxpayers could claim on their state income taxes — thus people who live in comparatively wealthy, high-tax jurisdictions (which are blue) would have to pay more tax overall, and might even pressure their state governments to lower taxes to the same rates as the comparatively poor, low-tax regions (primarily red states).
The GOP couched this in the language of fairness. By dint of living in high-tax, high-service jurisdictions, Democrats were able to duck some of their obligations to the federal government, while the low-tax Republican taxpayers of the red states were forced to subsidize the shortfall with their own federal taxes.
But this argument runs up against reality’s well-known left-wing bias. Because trickle-down economics doesn’t work, states with very low taxes are poor, and the people who live there are more likely to rely on federal assistance to avoid starving to death or dying of preventable diseases or treatable injuries.
Meanwhile, states with higher taxes and better services have more productive workforces who are able to buy more things from each other because they spend less money trying to inefficiently pay for vital services out of their individual pockets, instead enjoying the efficiencies of collective pursuit of public health, sanitation, fire prevention, education, etc. They are also more likely to enjoy workplace protections, paid leave, and higher wages.
So blue states like New York and California send significantly more money to the federal coffers than they get back in services, and are net givers; meanwhile, deep red states are totally dependent on federal programs to provide the minimum necessity for the working poor to do the work that keeps their elites in ivory-handled back-scratchers. Those states are net takers.
Nevertheless, the GOP tax plan was supposed to punish those states for not being cruel enough to their poors, by raising taxes on them by capping the state income tax deduction.
However, it was such a fucking mess that they failed to realize that it will be trivial to escape the cap. All that blue states will need to do to protect their tax-payers is convert the state tax from one that is paid by individuals, and turn it into a payroll tax instead. By having employers collect the tax, rather than having employees pay it at the end of the year, the blue states will convert it from an individual tax and into a corporate tax, and the GOP just effectively abolished corporate taxes.
Doing this will also take a huge bite out of the scammy tax-prep industry, which lobbies to prevent the government from offering you pre-filled tax returns showing what it thinks you owe and letting you amend it, insisting instead that we should all pay them to do our taxes for us, despite the fact that pre-filled tax forms work well and only involve the government disclosing to you what it already knows about your finances.
What’s more, the psychology of payroll taxes and salary posting means that many employers will raise wages to offset the new payroll tax, putting more money in their pockets.
It turns out that being the party whose ideology insists that governments are incompetent means that you will be incompetent at governing.
Baker and veteran California policy journalist David Dayen both report that policymakers in California are considering this kind of shift. In theory, there could be appetite in a number of liberal-dominated states, from New Jersey to Connecticut to Hawaii to New York (where Republicans control the State Senate, but only with the consent of a dissident faction of Democrats who might back this change). If Republican governors get on board out of a desire to look out for home state residents, Massachusetts and Maryland could be in as well.
But the plan isn’t necessarily foolproof. The biggest obstacle would come if Republicans in Congress change the tax code to limit deductibility of employer-side payroll taxes, perhaps eliminating it at the state level. Then again, with tax reform signed into law Republicans have already used up their one opportunity for passing legislation with 51 Senate votes, and would need nine Democrats to support this change. It’d be a coup if they could get those defectors, but it’s unlikely.
The plan also jeopardizes state-level income tax deductions. States tend to allow fewer deductions and credits than the federal government does, but especially in states with state-level Earned Income Tax Credits, eliminating deductions and credits outright (perhaps except for a standard exemption, but even that could be hard to implement) would be a significant change, and potentially a tax hike on poor families. These states would need to think hard about how to implement the change in a way that ensures those families still get the benefits they receive under the current income tax regime.
This one weird trick lets blue states avoid Trump’s tax hike
[Dylan Matthews/Vox]
(Image: Ken Teegardin, CC-BY-SA)