Category: Taxes

Salt as sodium chloride is a necessity.  SALT as the State and Local Tax deduction is a luxury, and an irritating one at that — like pouring salt into open wounds if you live anywhere that didn’t give Hillary 60% of the vote.

One need not stroll into the culture war to be smacked with evidence of our great political and social divide.  The tax code is a lively arena for conflict. It is a monstrous affair, littered with baubles and beads, overlapping into almost all human activity,  and encrusted with boundless perks for politically privileged courtesans.  Not all tax code gimmes, though, are equal.  One – the deduction for state and local taxes (SALT) – has evolved into an icon of worship in blue state jurisdictions with a penchant for taxing and spending their way to heaven.  Take it away and they behave like alcoholics being forced into cold turkey treatment.

For low-tax locales,  they receive little or no benefit for their reluctance to turn their state tax offices into Soviet Lubyankas.  Their sole compensation is the exasperation of knowing that their self-restraint makes the subsidy more “affordable” to the public servants in hyper-taxed, Democrat-friendly environs.  People outside and between the urban and bi-coastal romper rooms know it.  It’s galling for them to know that the federal tax code incentivizes tax promiscuity.

SALT was born of the Civil War’s 1862 Revenue Act and the 19th century’s infatuation with sticking it to the super rich. (4)  Common terms  for the fat-cats that stretches across the last couple of centuries are “buccaneer capitalists” or “robber barons”.  It’s easy to find antique characterizations that align with the modern left’s preconceptions.

The excitement led to the passage of the 16th Amendment in 1913, which legalized the fed’s tax on income.  The federal tax on income was reified into the Revenue Act of 1913, and the state and local tax deduction (SALT) tagged along.

The archaic justification for SALT was the fear of the federal government swallowing up all tax revenue, leaving little for streets and public safety.  SALT was thought to preserve a slice of the cash cow for city hall.  How quaint.

A more modern pretext is the avoidance of double taxation.  You know, the same dollar of income being slammed by the locals and then hit by the feds.  But what isn’t subjected to double/triple/quadruple taxation in our own tax Leviathan according to this logic?  Think about it.  For today, the excuse becomes less than a pointless gesture.

Look below at the growth of our federal tax monster by page volume.  (5)

Does anyone claim that multiple taxation isn’t at work here?  There are so many ways to tax income, and, when you’re done, tax the things that were purchased with that taxed dollar.  We don’t even need the income to be from human beings.  We extract the pound of flesh from ghosts in the form of businesses.  The requirement of breathing isn’t necessary.

Let me count the ways beyond the tax on personal income.

• Estate taxes, assessments on your assets after you’ve left the land of the living.  Please remember, that stuff was most likely purchased with already taxed dollars.
• Corporate income taxes, the tax on a business as if it were real human being.  These taxes are layered on top of all the income taxes generated by all of the buying and selling involved in doing business.
• Tariffs and duties, the products being taxed at point of entry.  After facing this hit, these products will generate income to be taxed once again as estate, corporate, and income taxes.
• Sales and excise taxes.  These extractions are mostly generated from spending originating in previously taxed income.
• Ditto for property taxes.

Our whole tax system is a series of overlays of double/triple/quadruple taxation.  What’s the relevance of attempting to excuse state and local taxes from something that is so generic to our, or any, tax code?

If you believe the existence of “double taxation” is hyped – which some people do – the case for SALT teeters further.  A good portion of tax dollars to different levels of government goes to pay for different services.  Tax dollars to the feds for national defense aren’t the same dollars as those going to the state to fulfill a state’s policy of equalizing budgets among a state’s school districts.  It’s only when services overlap between layers of government do we run the risk of a taxed dollar being hit again.  The deduction purports to dodge something that doesn’t really happen in the first place.

Even more convoluted contentions have been summoned to keep SALT.  One mind-boggling claim is the belief, absent the deduction, state and local spending would be “sub-optimal”.  Wrap your head around that one.  Here’s the concoction: stir into the witch’s cauldron tax incentives to pay for more or less public services and add someone’s ideological preferences, and out comes the right amount of local spending.  Allegedly, SALT is the ingredient to go “optimal”.

Is it making any sense?  Only if you believe in magic.  The thing rides on the mystical power to glean SALT’s ability to encourage the funding of more local government services, services that might increasingly benefit non-residents.  Is that “optimal”?  I don’t know, though it smells fishy.  Strip away “optimal” and, in reality, you are left with a simple local decision to fund a service.  Nothing more.  Whether it aligns with a pundit’s conception of “optimal” is  meaningless.  In reality, SALT is the noise in the calculation to finance a park.

If the mystical sound of “optimal” doesn’t sound convincing, a second line of trenches in defense of SALT is thrown up by blue-state advocates when they contend that they get fleeced more by the federal government and, therefore, are more deserving of a bigger break.  They trot out such crude numbers as the return on federal taxes paid  – i.e., residents’ taxes paid out and federal spending coming in, as in this chart appearing in a 2015 issue of The Atlantic (7):

Deep blue, Hillary/Bernie-loving sanctuaries as New York and California reside at the bottom of the chart.  They get less than a $1.00 for every one sent to the feds.  In contrast, redder-than-red South Carolina gets a whopping $7.87 back. (7)  Are some states riding on the federal teat as they keep their tax burdens low?  Are red states hypocrites?  Are blue state victims and therefore deserving of SALT?

The numbers in the “return on federal investment” chart are too raw to be of much value.  Local circumstances muddy the picture.  Number one on the list of federal contributors is military installations.  Northeast states aren’t likely to be the source of cheap real estate for sprawling tank exercises and bombing runs.  A state like California ironically is (Does the Mojave Desert remind you of anything?), and so are states populated by now-posthumous “yellow dog Democrats”and represented by long since gone-to-room-temperature congressional mandarins: South/North Carolina, Texas, etc.

The presence of federal defense spending in a state has much to do with historical inertia.  Those states long in the game have the advantage.  It’s a mixture of red and blue states.  Of the top ten receiving the lion’s share of the defense pie, 4 are solid blue states (California, Maryland, Washington, and Massachusetts);  2 are purple (Virginia and Pennsylvania); 4 are red (Texas, Florida, Georgia, and Alabama).  (9)  Nothing remarkable here since the federal pipeline was long established before the current progressive/left mania came to make blue states “blue”. (10)

Looking at it from the perspective of the importance of the federal defense spending on a state’s economy (GDP), 4 of the top jurisdictions are solidly blue (Hawaii, DC, Maryland, and Maine) and the rest are purple or red (Va., Alabama, Alaska, Miss., Kentucky, Arizona).  (9)   Once again, a blend.  Regardless of a state’s political hue, Pentagon dollars mostly go to facilities that predate ’41 Pearl Harbor. (10)

So, what do we have?  We have some blue states with a large infusion of federal defense money, coexisting with a tax-spend-regulation frenzy, all the while screeching about the loss of SALT.  Suddenly, the picture ain’t so clear.

Anyway, the scramble by localities for bases resembles the hustle for the next Google server farm, and should be viewed in that light – not as a “federal handout”.  Defense is an industry, and like any industry, it brings paychecks to be spent in the state.    It works the same as an Amazon distribution center.  If it adds to the state’s coffers in the same way as a Google or Amazon facility, so what.  A state can’t present itself as a victim of the federal tax monster as it shuns, or is incapable of attracting, industry – federal or private.

A growing state economy from expanding industries means a growing state tax base and a decreasing bite for each taxpaying resident … under normal mathematical rules.  Hence, low tax states.  High tax states punish economic activity, restrict the role of business/industry taxes to the state’s balance sheet, and create a greater reliance on personal tax extractions.  Up goes their state-driven personal tax load, up goes the desire to hide the gouging through SALT, and down goes the federal dollar influx.  The result is the funky calculation called the “return on taxpayer investment”.

And what about a state’s inflationary character that drives incomes and tax receipts?  That’s the other side of the “return on taxpayer investment” equation: the money that flows out of the state.  Yes, there is such a thing as a cost-of-living and income feedback loop.  As a state’s cost of living rises, so does the income to keep up; and as incomes rise, so does the cost of living.  Are state policies compelling an increase in the cost of living, and necessitating a higher income to maintain residence?

To no surprise, according to one measure, mega-blue and high tax states like California and New York nowhere appear on the list of the cheapest states to live.  Pride of place goes to 9 red states (Texas, et al) and 1 purple (Michigan).  (11)

On the flip side, blue states occupy near the top in the necessity for its people to shell out lots of cash to continue to live there.  (13) Two of the big stimulants are housing and energy costs.  Both are highly sensitive to a state’s public policies.  Environmental, land use, and growth control measures wreak havoc on the cost of living.  Add “prevailing wage” inflators to the mix and you have a recipe for escalating wage demands.  Plug those inflated income numbers into a progressive tax code and a river of money flows to the state capital and DC.

Californios, take a look at your electricity bill for a familiar inflator.  All that  “green” energy is expensive, and it shows.  See below. (12)

Utility rates are one of the favorite social engineering tools of the green lobby.  In many blue states, the presence of an all-powerful green lobby defines what it means to be blue.  Living in a 3 bedroom/2 bath house in the Central Valley of California means a $400/mo. electricity tab, unless you knuckle under to the state’s commissars and load your roof with solar panels.

The price of everything inexorably climbs.  An inflated utility bill component is factored into everything you buy.  No wonder a comfortable existence in these locales requires more green of the kind with presidents on them.

Democrat bastions don’t seem to be aware of the trap that they created.  It begins with an infatuation for progressive tax codes.  Then, greenie fascinations raise the price of existence.  Lump onto the process the attempt to raise wages by ukase (minimum and prevailing wage law), add a plethora of regulations to assuage any chic cause that comes down the pike, and the pitchfork-wielding peasants end up demanding more in their paychecks.  As they do so, they’ll be trapped into higher tax rates to artificially inflate the flow of cash to the feds.  At this juncture, there will be no shortage of number-crunchers to produce a kind of mathematical demagoguery to justify a special perk for the victims.

What started out as an honest gesture in the dawn of income taxation is a higher mountain of contradictions today.  The old pretext, along with these more modern ones, is baloney.  CPA status isn’t required to figure it out.  The real reason is something more simple.  After 104 years, people have grown attached to SALT, whether it makes sense or not.  In this sense, SALT is like today’s opioid epidemic.  An addict begins with raiding the medicine cabinet, a dependency develops and grows, and the person ends up as a client of the drug cartels.  Like an addiction, entire financial lives become wrapped around ages-old tax provisions.  Threats to take it away lead to the political equivalent of withdrawals.

Heebie-jeebies can erupt at any time from a blue-state anybody.  D’s we expect to be afflicted, but R’s aren’t immune from the spasms brought on by the threat to take away the perk.  It’s simply a blue or purple state thing – aka tax-happy jurisdictions – no matter the partisan color of their advocates.

Yesterday’s absurdity has morphed into today’s “necessity”.  As such, the inmates of tax-happy jurisdictions haven’t limited their defense to now-discredited claims.  They’ve invented additional arguments based on prudence.  Come to think of it, really, it’s the prudence of the addict.

The abolition of SALT, it is asserted, would wreak havoc on a state’s bond rating.  In essence, blue-state defenders are admitting that without the sweetener of SALT their residents would seek to be residents elsewhere.  Probably true.  Without SALT, residents would be exposed to the full effect of their blue-state’s tax mania.  The logic: out flows an alarming amount of the tax base, down goes the ability to make good on their bonds.  Elementary, my dear Watson.

Understandable, probably true, but as a defense, it’s bunkum.  The blue-state perk shields a state’s residents from the full effect of sky-high taxation while simultaneously making it easier for the state’s tax collectors to have a crowd to fleece.  The image recurs of a vampire with a herd of human livestock to feed upon.  Drugging the victims with SALT to make the experience more tolerable isn’t a valid justification for bleeding them white.  If they were sober, they’d flee like hell.  The argument for medicating the victims is an argument for exsanguination (sever loss of blood), without the slightest recognition about whether they should have their hemoglobin stolen in the first place.

Instead, sticking with the metaphor, wouldn’t it be wiser to start a campaign to eradicate vampires by recruiting an army of priests armed with wooden stakes?  In our case, cloning an army of Arthur Laffers would do the trick.  The effort would be expedited by a clear-headed confrontation with the horror among the patsies.  Eliminating SALT might produce outcomes such as an exodus (and a run on U-Haul rentals), mob exterminations of blue-state Republicans, and/or the patrons of Starbucks turning into icon-smashing peasants as they march to the homes and offices of the state’s revenuers and their abettors.  Maybe all three.

Number 2 on the probabilities list is a very real possibility: the extermination of blue-state Republicans.  Blue-state Republicans are already an endangered species.  SALT might make them go the way of Martha, the last known passenger pigeon who died in the Cincinnati Zoo in 1914.

Or so it is argued.  That might be the short term effect.  Beyond one election cycle, after the hypothetical  wipeout, the residents would be accosted with more tax-crazed “public servants”, further intensifying the state’s slide.  Don’t forget, your most likely choice on the ballot is between a tax lunatic (a “D”)  or  a now dispirited R.  After multiple waves of tax bingeing, an alcoholic’s bottom would be reached.  Then there’d be sobriety and a cleaning up – i.e., a return to tax sanity.  A short term loss might be acceptable if it results in a long term fiscal clean-and-sober.

But try selling the logic to a soon-to-be-unemployed Republican legislator in a hostile state.  Yet, is the preservation of his job a sufficient justification for keeping an iniquitous tax perk?  The rationale worked to keep the antebellum South married to slavery.  The South’s entire way of life , they cried, couldn’t survive the loss of their human property.  The argument was as dubious then as it is today in its latest incarnation for SALT.  The only difference in the 2 scenarios is the object of veneration and preservation.

While the tax perk may preserve a few “R” politicos, it continues to do violence to equity among the our sovereign states.  States that prudently restrain their state Leviathans also have modest tax regimes.  They receive little, if any, benefit from the perk.  There’s just too little to deduct to reduce a taxpayer’s overall burden.

The calculus is reversed in most blue states.  Nanny states are expensive, and so is their tax bite.  The deduction is a salve to a gaping wound.  Not surprisingly, it is coveted by tax hells and viewed contemptuously by places not located anywhere along Dante’s descent through tax “Inferno”.

There you have it: love of SALT is synonymous with jurisdictions defined by words such as spendthrift, irresponsible, gouging, and excessive.  For those locales not so enamored by SALT, words like prudence, modest, and limited apply.  Put the two sentences together.  SALT enables all that should be avoided in a universe with a reasonable relationship to reality.

It is, literally and figuratively, pouring salt into the open wound between the states.  It has no rationale other than to make the consequences of  irresponsibility less felt.  But that isn’t reasonable, is it?

RogerG

 

Bibliography and sources:

1. “Congress might eliminate California state and local tax deductions. Here’s a look at the numbers”, Kurt Snibbe, Orange County Register, 10/27/2017,   http://www.ocregister.com/2017/10/27/congress-might-eliminate-california-state-and-local-tax-deductions-heres-a-look-at-the-numbers/
2. “Which Places Benefit Most From State and Local Tax Deductions?”, Alan Coe, Tax Foundation, 4/27/2017,   https://taxfoundation.org/map-state-and-local-deductions/
3. “The State and Local Tax Deduction: A Primer”, Jared Walczak, Tax Foundation, 3/15/2017,  https://taxfoundation.org/state-and-local-tax-deduction-primer/
4. For a modern leftist rendition of the demographic, see: “Michael Novak’s Ethics of Buccaneer Capitalism”, Frank Cocozelli, 10/1/2007, Daily Kos,  https://www.dailykos.com/stories/2007/10/1/392711/-
5. “Look at how many pages are in the federal tax code”, Jason Russell, Washington Examiner, 4/15/2016,   http://www.washingtonexaminer.com/look-at-how-many-pages-are-in-the-federal-tax-code/article/2563032
6. “Which States Rely the Most on Federal Aid?”, Morgan Scarboro, Tax Foundation, 1/11/17,  https://taxfoundation.org/states-rely-most-federal-aid/
7. “Which States Are Givers and Which Are Takers?”, John Tierney, 5/5/2014, The Atlantic, https://www.theatlantic.com/business/archive/2014/05/which-states-are-givers-and-which-are-takers/361668/
8. This article was cited in the above piece: “2017’s Most & Least Federally Dependent States”, John S Kiernan, Senior Writer & Editor, 4/21/2017, WalletHub,   https://wallethub.com/edu/states-most-least-dependent-on-the-federal-government/2700/  .
9. “MILITARY’S IMPACT ON STATE ECONOMIES”, National Conference of State Legislatures, 2/21/2017,  http://www.ncsl.org/research/military-and-veterans-affairs/military-s-impact-on-state-economies.aspx
10. Virginia’s Hampton Roads has 20 military facilities, many date back to the Civil War and before.  For one compilation refer to wikipedia, “Hampton Roads”,  https://en.wikipedia.org/wiki/Hampton_Roads#U.S._military
11. “Top 10 States With the Lowest Cost of Living”, Rick LeBlanc, The Balance, 5/16/2017,  https://www.thebalance.com/states-with-lowest-cost-of-living-4137935
12. “Electricity Prices Rise for 30 States, But Some State Leaders Want Them Even Higher”, Heath Knakmuhs, Senior Director, Policy for the Global Energy Institute, U.S. Chamber of Commerce, 4/8/2016,   https://www.uschamber.com/above-the-fold/electricity-prices-rise-30-states-some-state-leaders-want-them-even-higher
13. “See how your state scores for living costs”, Natasha Sporn, MSN: Money, 12/22/2016,  https://www.msn.com/en-us/money/personalfinance/see-how-your-state-scores-for-living-costs/ss-AAlEaoG#image=31