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I’ve not understood this and am strangely on the side of removing all deductions. Why should anyone pay less federal tax than a person living across the border

by erentz 8y ago

I’ve not understood this and am strangely on the side of removing all deductions. Why should anyone pay less federal tax than a person living across the border just because you pay tax to your state? If you don’t like it and think the other state is right not to collect income tax and that state is doing better for it, then surely it’s on you and everyone who agrees to set about voting to remove your own state tax. Not to expect the federal government to give you a special deduction that the other person doesn’t get.

pwthornton 8y ago
It's a double taxation thing. It's not like low-tax states don't have services. They simply rely on the federal government to provide them. States that have low state and local taxes do so because the federal government subsidizes their low taxness. States with higher local and state taxes are subsidizing the low-tax states. In addition, the higher-tax states are also more productive. If anything, the argument should be that the federal government should stop providing so much assistance to low-tax states. There are perverse incentives at work here, however. The Senate provides every state with the same amount of representation. So a state with a small population can choose not to tax itself much and simply rely on federal spending bills to cover a lot of its needs. The SALT deduction has existed from the very beginning of the federal income tax. Part of its purpose is to incentivize states so that they don't simply stop spending their own money and pushing everything off onto the federal government: "The Revenue Act of 1913, which introduced the federal income tax, states that 'all national, state, county, school, and municipal taxes paid within the year, not including those assessed against local benefits' can be deducted."
- sorryforthethro 8y ago
  That is the hypothetical reason, but in practice, what are the services that low-tax states consume disproportionately? In WA state I can't think of any, other than federal programs that use the land (like nuclear containment)
  - pwthornton 8y ago
    The biggest ones off the top of my head are: 1) Transportation. Most spending in this area is by the federal government. But dense areas that rely on public transportation have to rely heavily on state and local taxes to support projects, whereas many roads, bridges, and even intersections are built in suburban and rural areas almost entirely with federal dollars. This is part of why our country has so little public transportation versus other countries. The federal government spends disproportionately on roads, which benefits certain areas and segments of the population a lot more than others. 2) Healthcare. Many states began expanding healthcare after the Affordable Care Act brought in Medicaid expansion. This is almost entirely paid for by the federal government. Higher-tax states already had higher levels of healthcare spending through programs to expand coverage. Some states like Massachusetts already had models like the ACA in place. Many higher-tax states have unionized state and local workers who are provided with high-quality healthcare and insurance. In other states where a lot of outsourced, it is a much different picture.
    - dantheman 8y ago
      MA was receiving large amounts of federal funding for its healthcare. e.g. 385 million per year for uninsured patients https://en.wikipedia.org/wiki/Massachusetts_health_care_reform https://en.wikipedia.org/wiki/Massachusetts_health_care_refo...
  - woolvalley 8y ago
    https://www.moneytips.com/is-your-state-a-net-payer-or-a-net-taker/356 https://www.moneytips.com/is-your-state-a-net-payer-or-a-net...
- anemitz 8y ago
  States that have low state and local taxes do so because the federal government subsidizes their low taxness. Yes and no. Texas and Nevada are bottom 10 ranked on federal funding per capita. They also have no income tax. Alaska and Wyoming are top 10 ranked in federal funding per capita. So it's not as black and white as you're claiming. Revenue comes from many sources at the state level not just income: licenses, mineral rights, sales, property, etc..
  - pwthornton 8y ago
    You can't rely on income taxes a proxy for tax rates. Many states with low or no income taxes have monster property taxes. State, local, and property taxes are all one bucket. You have to make sure you are counting all of these together when you talk about taxes. I live in Maryland and my property tax is like 1/4th of my parents in Ohio, and there are a lot worse states for property tax than Ohio. Texas is an outlier, however, due to its history with oil and mineral rights. Alaska is another one. These states didn't earn the natural resources they are exploiting, but they have benefitted from them considerably, and this has allowed them to operate differently than most other low-tax states.
    - Nrsolis 8y ago
      Earn? Did NYC "earn" it's first-mover advantage, natural harbor, and particular terrestrial makeup that supports high-rise buildings on the solid granite beneath the feet of every NYC resident? Did CA "earn" it's fertile central valley, diverse climates great for agriculture and recreation, and miles of gorgeous coastline? Each wave of residents exploits the resources available to them. No more. No less. Let's not pretend otherwise. Economics is not a morality tale.
      - saalweachter 8y ago
        While I'm not going to dispute your larger point, I do want to point out that New York was not originally the shipping capital of the colonies; Philadelphia was. New York City only became the center of trade that it was for so many years after constructing the Erie Canal, allowing trade to easily reach into the Great Lakes and the center of the continent. Many of New York's subsequent advantages (such as the dominance of the NYSE as the various exchanges consolidated) stem from this. Likewise, California has a great climate for many types of agriculture precisely because it gets so little rain in the Central Valley; farmers can irrigate their crops to the ideal amount water at each point in their lifespan, while farmers elsewhere in the country are subject to the whims of nature. Integral to California's success in agriculture, then, is their investment in irrigation. Again, I don't mean to dispute your core points, but while it's good to be lucky, investments also compound. California and New York have both historically invested in their economies through massive public works.
- erentz 8y ago
  That’s not double taxation. The federal government takes X% of the total. The state government takes Y% of the total. They’re aware of each other. They can coordinate accordingly. Avoidance of double taxation is not accomplished with a deduction it is done with a tax credit. That is when I pay A% of tax first to the country of primary residence, and then work out I need to pay B% to a country that has secondary claim on it, I can deduct the whole amount of A tax from B tax. I understand the inequitable spending. Yes richer states subsidize poorer states. But is the right solution to that a complication of the tax system? I don’t think so. I think that’s a spending problem that should be addressed for what it is. And it will never be possible to have equitable spending. There will always be poorer and richer parts of the country. We can’t make the poorer parts richer by giving them less money. Within a state like CA or NY there are also richer and poorer parts that may not get equal spending from the state. People in CA and NY get a raw deal mostly because they wind up paying as much (if not often more) taxes as countries that offer universal healthcare, or better education, (and which can manage to build a friggen railway). But that again isn’t resolved by an extra federal deduction. It’s resolved by addressing the dysfunctions or poor spending priorities head on. To which the complaint is usually again that the fault lays with the poor “red states” who prevent that. To which I say, no stop scape goating. Nancy Pelosi is from CA and doesn’t support fixing any of those things. She’s a blue state representative at the highest level of the house. So no, CA and NY politicians are just as much a part of the problem. Stop blaming “red staters”.
  - daveFNbuck 8y ago
    > They’re aware of each other. They can coordinate accordingly. The thing you're arguing against is coordination.
  - jeffbax 8y ago
    Agreed. The total disregard for caring how effectively money is spent in high tax states is a huge problem that does a disservice to the goals of the voters. The pension bomb is going to be a reckoning.
- ataturk 8y ago
  I don't know what all these 'services' are and I don't want them. All I want is my own money that I earned and to hell with this bloated mess that is making me into a serf. Fuck the Federal Government, fuck it hard. Just a bunch of drunk, money-wasting slobs who are abrogating my rights.
- tracker1 8y ago
  I pay taxes on my income, then still have taxes on sales, property, and every single utility bolted on. It's not like it isn't already there. It just puts a cap on what you can deduct from federal. Personally, I think most taxes should be abolished and a return to taxes on sale/trade would be preferred. Then again, I'd also like a bit more sanity in IP as well.
- ensignavenger 8y ago
  I don't think this is true across the board- do you have a source? Looking at https://www.frbsf.org/economic-research/publications/economic-letter/2013/december/taxes-transfers-redistribution-us-federal-government-states/ https://www.frbsf.org/economic-research/publications/economi..., I see a lot of relatively low tax states that have a positive net transfer to the federal government.
mikekij 8y ago
It feels unfair to be forced to pay the federal government taxes on money you’ve never seen. If the state takes $10k away from your paycheck before you ever see it, should this really be treated as income for federal taxation purposes?
- yostrovs 8y ago
  By that reasoning one should be able to write off federal taxes off of their federal taxes.
  - woolvalley 8y ago
    Maybe off of your state taxes I think makes more sense.
    - yostrovs 8y ago
      In some places, such as New York city, there's also a city income tax. Do the states with such cities allow the writing off of the local tax off of the state tax?
      - greenyoda 8y ago
        You can not deduct NYC income tax on your NY State income tax return. (I know this because I'm a NYC resident.)
- anemitz 8y ago
  When you purchase something at a store in California is the city sales tax calculated on the pretax price of the item or post state and county tax? If you look at other forms of compound tax rates you'll see the same pattern AFAIK.
- kolbe 8y ago
  'It feels unfair' can describe myriad aspects of our tax system.
- 8y ago
dragonwriter 8y ago
> Why should anyone pay less federal tax than a person living across the border just because you pay tax to your state? Because state taxing and spending decisions are part of what creates the opportunity to earn income, and if state taxes aren't deductible than federal taxes distort those decisions and artificially promotes lower tax policy even when the higher tax policy expands the production possibilities curve and yield more income. The federal thumb should be off that scale and the only way to do that is full deductibility of state and local taxes. It's a lot like why business expenses are deductible, why you are only taxed on the net proceeds of capital (whether it is used as regular income or long-term gains), or why even hobby expenses are offset against hobby income.
compiler-guy 8y ago
If the feds charge X% and the state charges Y%, then it is entirely possible that x + Y > 100%. When SALT is deductible, it prevents that scenario. That isn't the case today, but it is well within the realm of possibility if, say, one the Democrats' maximum-tax-rate proposals are enacted (which I broadly support). The states and the feds historically don't coordinate taxes well, but the SALT deduction was one way of coordinating. It hasn't been replaced by anything, and it needs to be.
- moate 8y ago
  It will likely be replaced by greater demand from those states for Federal Funding if they're forced to lower their state taxes in order to offset constituent fears.
throwaway34241 8y ago
There are two separate arguments I can think of for deducting state taxes. First, the federal tax rates are heavily graduated on the grounds that it's less burdensome to tax people that make more money. But in states with high (also graduated) income taxes, high taxpayers aren't personally making that money (in any meaningful way), nor are they generally getting it back from a proportionally higher amount of government services. States are essentially redistributing income from high-income taxpayers to beneficiaries of social insurance programs and state residents overall. From that perspective, it might make more sense to tax the increased level of state services as income to those who receive it. With a flat federal tax it would make no difference in total collections, but with the graduated federal income tax this would be a much lower on average tax rate. Second is much simpler: most of the state government spending is on education, social services etc... things that are in line with tax-deductible charities. So it's not inconsistent to have state taxes be deductible too (of course getting rid of both deductions is also an option).
jliptzin 8y ago
States should pay federal taxes out of their own budgets. How the individual states decide to collect that revenue from their residents is up to them. There should not be individual taxes paid to the federal government and to state governments which now results in some degree of double taxation due to the elimination of SALT deductions. After all, the people do not choose the President, the states do. Each state has a certain number of electors in the electoral college and they can allocate those electors to the candidates as they see fit. In most states that happens to coincide with state's election in which the popular vote of the state determines all the electors (some states split electoral votes) but it doesn't have to be that way (see National Popular Vote Interstate Compact). Additionally, the Senate does not represent the people, it represents the states. That's why there's huge power imbalances among people in the Senate living in California vs. Wyoming, for example. The supreme court is chosen by the President and confirmed by the Senate. The only branch of federal government chosen by and representing the people is the House. So if the people are not even directly choosing the major branches of the federal government, they should not be directly paying taxes to it.
- jrs235 8y ago
  >Additionally, the Senate does not represent the people, it represents the states. While that is how is was originally designed, the 17th Amendment kinda of took that away. Originally the state legislatures elected their state's representatives (Senators) in the federal government. With the passing of the 17th Amendment, the direct election of Senators has contributed to the ridiculousness of our federal government. I would bet few state elected Senators (who actually represent their state governments) would ever pass federal laws/mandates that would punish a state and withhold funds if they didn't comply with the federal governments demands such as the National Minimum Drinking Age Act of 1984.

by erentz 8y ago

pwthornton 8y ago

It's a double taxation thing. It's not like low-tax states don't have services. They simply rely on the federal government to provide them. States that have low state and local taxes do so because the federal government subsidizes their low taxness. States with higher local and state taxes are subsidizing the low-tax states. In addition, the higher-tax states are also more productive. If anything, the argument should be that the federal government should stop providing so much assistance to low-tax states. There are perverse incentives at work here, however. The Senate provides every state with the same amount of representation. So a state with a small population can choose not to tax itself much and simply rely on federal spending bills to cover a lot of its needs. The SALT deduction has existed from the very beginning of the federal income tax. Part of its purpose is to incentivize states so that they don't simply stop spending their own money and pushing everything off onto the federal government: "The Revenue Act of 1913, which introduced the federal income tax, states that 'all national, state, county, school, and municipal taxes paid within the year, not including those assessed against local benefits' can be deducted."

sorryforthethro 8y ago
That is the hypothetical reason, but in practice, what are the services that low-tax states consume disproportionately? In WA state I can't think of any, other than federal programs that use the land (like nuclear containment)
- pwthornton 8y ago
  The biggest ones off the top of my head are: 1) Transportation. Most spending in this area is by the federal government. But dense areas that rely on public transportation have to rely heavily on state and local taxes to support projects, whereas many roads, bridges, and even intersections are built in suburban and rural areas almost entirely with federal dollars. This is part of why our country has so little public transportation versus other countries. The federal government spends disproportionately on roads, which benefits certain areas and segments of the population a lot more than others. 2) Healthcare. Many states began expanding healthcare after the Affordable Care Act brought in Medicaid expansion. This is almost entirely paid for by the federal government. Higher-tax states already had higher levels of healthcare spending through programs to expand coverage. Some states like Massachusetts already had models like the ACA in place. Many higher-tax states have unionized state and local workers who are provided with high-quality healthcare and insurance. In other states where a lot of outsourced, it is a much different picture.
  - dantheman 8y ago
    MA was receiving large amounts of federal funding for its healthcare. e.g. 385 million per year for uninsured patients https://en.wikipedia.org/wiki/Massachusetts_health_care_reform https://en.wikipedia.org/wiki/Massachusetts_health_care_refo...
- woolvalley 8y ago
  https://www.moneytips.com/is-your-state-a-net-payer-or-a-net-taker/356 https://www.moneytips.com/is-your-state-a-net-payer-or-a-net...
anemitz 8y ago
States that have low state and local taxes do so because the federal government subsidizes their low taxness. Yes and no. Texas and Nevada are bottom 10 ranked on federal funding per capita. They also have no income tax. Alaska and Wyoming are top 10 ranked in federal funding per capita. So it's not as black and white as you're claiming. Revenue comes from many sources at the state level not just income: licenses, mineral rights, sales, property, etc..
- pwthornton 8y ago
  You can't rely on income taxes a proxy for tax rates. Many states with low or no income taxes have monster property taxes. State, local, and property taxes are all one bucket. You have to make sure you are counting all of these together when you talk about taxes. I live in Maryland and my property tax is like 1/4th of my parents in Ohio, and there are a lot worse states for property tax than Ohio. Texas is an outlier, however, due to its history with oil and mineral rights. Alaska is another one. These states didn't earn the natural resources they are exploiting, but they have benefitted from them considerably, and this has allowed them to operate differently than most other low-tax states.
  - Nrsolis 8y ago
    Earn? Did NYC "earn" it's first-mover advantage, natural harbor, and particular terrestrial makeup that supports high-rise buildings on the solid granite beneath the feet of every NYC resident? Did CA "earn" it's fertile central valley, diverse climates great for agriculture and recreation, and miles of gorgeous coastline? Each wave of residents exploits the resources available to them. No more. No less. Let's not pretend otherwise. Economics is not a morality tale.
    - saalweachter 8y ago
      While I'm not going to dispute your larger point, I do want to point out that New York was not originally the shipping capital of the colonies; Philadelphia was. New York City only became the center of trade that it was for so many years after constructing the Erie Canal, allowing trade to easily reach into the Great Lakes and the center of the continent. Many of New York's subsequent advantages (such as the dominance of the NYSE as the various exchanges consolidated) stem from this. Likewise, California has a great climate for many types of agriculture precisely because it gets so little rain in the Central Valley; farmers can irrigate their crops to the ideal amount water at each point in their lifespan, while farmers elsewhere in the country are subject to the whims of nature. Integral to California's success in agriculture, then, is their investment in irrigation. Again, I don't mean to dispute your core points, but while it's good to be lucky, investments also compound. California and New York have both historically invested in their economies through massive public works.
erentz 8y ago
That’s not double taxation. The federal government takes X% of the total. The state government takes Y% of the total. They’re aware of each other. They can coordinate accordingly. Avoidance of double taxation is not accomplished with a deduction it is done with a tax credit. That is when I pay A% of tax first to the country of primary residence, and then work out I need to pay B% to a country that has secondary claim on it, I can deduct the whole amount of A tax from B tax. I understand the inequitable spending. Yes richer states subsidize poorer states. But is the right solution to that a complication of the tax system? I don’t think so. I think that’s a spending problem that should be addressed for what it is. And it will never be possible to have equitable spending. There will always be poorer and richer parts of the country. We can’t make the poorer parts richer by giving them less money. Within a state like CA or NY there are also richer and poorer parts that may not get equal spending from the state. People in CA and NY get a raw deal mostly because they wind up paying as much (if not often more) taxes as countries that offer universal healthcare, or better education, (and which can manage to build a friggen railway). But that again isn’t resolved by an extra federal deduction. It’s resolved by addressing the dysfunctions or poor spending priorities head on. To which the complaint is usually again that the fault lays with the poor “red states” who prevent that. To which I say, no stop scape goating. Nancy Pelosi is from CA and doesn’t support fixing any of those things. She’s a blue state representative at the highest level of the house. So no, CA and NY politicians are just as much a part of the problem. Stop blaming “red staters”.
- daveFNbuck 8y ago
  > They’re aware of each other. They can coordinate accordingly. The thing you're arguing against is coordination.
- jeffbax 8y ago
  Agreed. The total disregard for caring how effectively money is spent in high tax states is a huge problem that does a disservice to the goals of the voters. The pension bomb is going to be a reckoning.
ataturk 8y ago
I don't know what all these 'services' are and I don't want them. All I want is my own money that I earned and to hell with this bloated mess that is making me into a serf. Fuck the Federal Government, fuck it hard. Just a bunch of drunk, money-wasting slobs who are abrogating my rights.
tracker1 8y ago
I pay taxes on my income, then still have taxes on sales, property, and every single utility bolted on. It's not like it isn't already there. It just puts a cap on what you can deduct from federal. Personally, I think most taxes should be abolished and a return to taxes on sale/trade would be preferred. Then again, I'd also like a bit more sanity in IP as well.
ensignavenger 8y ago
I don't think this is true across the board- do you have a source? Looking at https://www.frbsf.org/economic-research/publications/economic-letter/2013/december/taxes-transfers-redistribution-us-federal-government-states/ https://www.frbsf.org/economic-research/publications/economi..., I see a lot of relatively low tax states that have a positive net transfer to the federal government.

mikekij 8y ago

It feels unfair to be forced to pay the federal government taxes on money you’ve never seen. If the state takes $10k away from your paycheck before you ever see it, should this really be treated as income for federal taxation purposes?

yostrovs 8y ago
By that reasoning one should be able to write off federal taxes off of their federal taxes.
- woolvalley 8y ago
  Maybe off of your state taxes I think makes more sense.
  - yostrovs 8y ago
    In some places, such as New York city, there's also a city income tax. Do the states with such cities allow the writing off of the local tax off of the state tax?
    - greenyoda 8y ago
      You can not deduct NYC income tax on your NY State income tax return. (I know this because I'm a NYC resident.)
anemitz 8y ago
When you purchase something at a store in California is the city sales tax calculated on the pretax price of the item or post state and county tax? If you look at other forms of compound tax rates you'll see the same pattern AFAIK.
kolbe 8y ago
'It feels unfair' can describe myriad aspects of our tax system.
8y ago

dragonwriter 8y ago

> Why should anyone pay less federal tax than a person living across the border just because you pay tax to your state? Because state taxing and spending decisions are part of what creates the opportunity to earn income, and if state taxes aren't deductible than federal taxes distort those decisions and artificially promotes lower tax policy even when the higher tax policy expands the production possibilities curve and yield more income. The federal thumb should be off that scale and the only way to do that is full deductibility of state and local taxes. It's a lot like why business expenses are deductible, why you are only taxed on the net proceeds of capital (whether it is used as regular income or long-term gains), or why even hobby expenses are offset against hobby income.

compiler-guy 8y ago

If the feds charge X% and the state charges Y%, then it is entirely possible that x + Y > 100%. When SALT is deductible, it prevents that scenario. That isn't the case today, but it is well within the realm of possibility if, say, one the Democrats' maximum-tax-rate proposals are enacted (which I broadly support). The states and the feds historically don't coordinate taxes well, but the SALT deduction was one way of coordinating. It hasn't been replaced by anything, and it needs to be.

moate 8y ago
It will likely be replaced by greater demand from those states for Federal Funding if they're forced to lower their state taxes in order to offset constituent fears.

throwaway34241 8y ago

There are two separate arguments I can think of for deducting state taxes. First, the federal tax rates are heavily graduated on the grounds that it's less burdensome to tax people that make more money. But in states with high (also graduated) income taxes, high taxpayers aren't personally making that money (in any meaningful way), nor are they generally getting it back from a proportionally higher amount of government services. States are essentially redistributing income from high-income taxpayers to beneficiaries of social insurance programs and state residents overall. From that perspective, it might make more sense to tax the increased level of state services as income to those who receive it. With a flat federal tax it would make no difference in total collections, but with the graduated federal income tax this would be a much lower on average tax rate. Second is much simpler: most of the state government spending is on education, social services etc... things that are in line with tax-deductible charities. So it's not inconsistent to have state taxes be deductible too (of course getting rid of both deductions is also an option).

jliptzin 8y ago

States should pay federal taxes out of their own budgets. How the individual states decide to collect that revenue from their residents is up to them. There should not be individual taxes paid to the federal government and to state governments which now results in some degree of double taxation due to the elimination of SALT deductions. After all, the people do not choose the President, the states do. Each state has a certain number of electors in the electoral college and they can allocate those electors to the candidates as they see fit. In most states that happens to coincide with state's election in which the popular vote of the state determines all the electors (some states split electoral votes) but it doesn't have to be that way (see National Popular Vote Interstate Compact). Additionally, the Senate does not represent the people, it represents the states. That's why there's huge power imbalances among people in the Senate living in California vs. Wyoming, for example. The supreme court is chosen by the President and confirmed by the Senate. The only branch of federal government chosen by and representing the people is the House. So if the people are not even directly choosing the major branches of the federal government, they should not be directly paying taxes to it.

jrs235 8y ago
>Additionally, the Senate does not represent the people, it represents the states. While that is how is was originally designed, the 17th Amendment kinda of took that away. Originally the state legislatures elected their state's representatives (Senators) in the federal government. With the passing of the 17th Amendment, the direct election of Senators has contributed to the ridiculousness of our federal government. I would bet few state elected Senators (who actually represent their state governments) would ever pass federal laws/mandates that would punish a state and withhold funds if they didn't comply with the federal governments demands such as the National Minimum Drinking Age Act of 1984.