It has been widely reported that the presumptive Republican candidate for President, Gov. Mitt Romney, recently suggested that in order to pay for his proposed income tax cuts, he would tinker with federal tax deductions. While there has been a lot of coverage of his proposal to eliminate the mortgage interest deduction on second homes, very little has been written about his proposal to completely eliminate the deduction for state and local taxes. This is a fight that I have already fought and won.
Historically, the state and local tax deduction has occupied a special place in federal tax law. State and local taxes, along with federal taxes, were the only deductions specified in the Revenue Act of 1862, the country's first income tax, which was enacted to finance the Union effort in the Civil War. These deductions were also included in the first iteration of the federal tax code, which was passed in 1913. No matter how far back you go, our nation has always allowed some type of deduction for state and local taxes.
Gov. Romney's proposal to repeal the state and local tax deduction is not new. In 1985, President Ronald Reagan presented Congress with a sweeping proposal to reform the national tax system in the interest of preserving fairness, stimulating growth, and creating simplicity in the tax code. Designed as "revenue-neutral," the idea was to reduce tax rates while eliminating almost all of what had become a complex system of itemized deductions, including all deductions for state and local taxes.
As a Member of the Ways and Means Committee in 1985, I was deeply involved in the heated political deliberation concerning this proposal. I informed the White House and the Democratic leadership that if the state and local tax deductions were preserved, I would work with them to enact meaningful tax reform. I was successful in the House in preserving the entirety of the state and local tax deduction. Unfortunately, the Senate, in trying to reach a top tax rate of 28 percent, eliminated part of the deduction.
Many argued that the deductibility of sales taxes was inefficiently complex because the keeping of receipts as proof of purchase for the tax deduction was perceived as cumbersome. However, the proposed alternative of providing tax tables was viewed as unrelated to households' actual purchase patterns. In 1984, Congress added a provision that allows any taxpayer to deduct either your state and local income taxes or your state and local sales taxes. Congress has extended this provision multiple times, and I have fought hard to maintain the deductibility of state and local taxes for the average American.
New York has the second highest state and local tax rates in the U.S. Nine million people a year file tax returns and about three million of them choose to deduct their state and local income taxes. The average New York deduction in 2009 was $12,000.00. Of these, 1.2 million taxpayers had incomes under $75,000. Gov. Romney's deduction clearly does not only target the wealthy, as he claims. Only 2.1 million New Yorkers even used the mortgage interest deduction. Many believe that only homeowners itemize their taxes, which is clearly untrue.
It is unfair to ask taxpayers to pay taxes on their taxes. If others levels of government (i.e. states and municipalities) are already claiming that revenue, it is not part of any taxpayer's disposable income. By removing the deduction for state and local taxes, Gov. Romney's proposal would mean that the government taxes ordinary Americans twice, which seems a little hypocritical coming from such an ardent supporter of tax cuts for the wealthy.
Although eliminating the deduction would hurt taxpayers in nearly every state, it would hit the states with greater income levels and higher local tax burdens the hardest. Over time, this could force state and local governments to cut expenditures. If tax payers, stung by the higher tax burden that would come from eliminating the state and local tax deduction, demand a cut in state and local tax rates, state and local governments are almost certain to cut the programs that disproportionately affect the Americans who are most vulnerable. The proposed Ryan budget believes in draconian cuts to programs for the poor. Perhaps Gov. Romney has the same goal in mind, but simply wants to take a different path to get there.