Party of the Rich?

“Our tax code should work for everyone – not just for the highest earners.  That’s only fair.  But Washington is actually making these disparities worse”

Governor Ralph Northam
• “State of the Commonwealth” Address

Actually, it’s the other way around.

The federal Tax Cuts and Jobs Act (TCJA) put a cap ($10,000) on the ability of taxpayers to deduct their state and local taxes (SALT).  Allowing an unlimited deduction for state and local taxes essentially provided a subsidy to high tax jurisdictions like New York, New Jersey and California, since the “real cost” of those higher state taxes was lowered by the ability to deduct them on the federal tax form.  In short, it hit rich people more than the middle class, as did new limits on mortgage deductions.

Creating a SALT cap also affects what one pays in state taxes.  While the state taxes themselves are not deductible on your state form, local real and personal property taxes are, and if your real estate tax and car tax exceeded $10,000 part of it would no longer be deductible.  To a lesser extent this, too, affects higher tax jurisdiction and wealthier taxpayers more since the state deduction is a smaller form of subsidy for the local taxes paid.

Despite the fact that provisions of the TCJA hit the wealthy more than the middle class (and doubling the standard deduction helps the middle class more than the wealthy), liberal Democrats still insist on throwing out the canard that “Republicans are the party of the rich.”

And it appears that many Republicans in the House of Delegates are walking into the trap.  The Democratic Party of Virginia has already accused the House of Delegates Republican tax plan of being a “Republican super-rich tax giveaway.”

Among other provisions, the House Republican leadership tax bill eliminates the SALT cap in the state tax code:  If your real and personal property taxes exceed $10,000 you would benefit. 

Who would that be?  Among the 23 wealthiest House districts, where the median family income exceeds $100,000 (meaning half of families make more than $100,000), 21 seats are held by Democrats, only two by Republicans.  By reversing the SALT cap, the Republican proposal actually serves to help wealthy Democrats more than Republicans.

So much for “the party of the rich.”  Yet, the House GOP appears ready to take a political hit to help those in districts that vote against them.  This is the true definition of noble.

The Thomas Jefferson Institute’s tax proposal, on the other hand, seeks to make taxes simpler and fairer.  By doubling the standard deduction from $3,000 to $6,000 for an individual and from $6,000 to $12,000 for a couple it provides the same level of relief for tax relief for those who already take the standard deduction – more than 2.3 million, to which we can add hundreds of thousands more who would likely switch to the standard deduction. 

Who are they? We have data on standard deduction usage by locality, not legislative district. In the 23 cities and counties in which more than 80 percent of taxpayers use the standard deduction, 21 are represented by Republicans.  Not coincidentally, those cities and counties also overlap the poorer House districts in Virginia, and the ones least likely to be bothered by the SALT cap.

Steve Haner, the Jefferson Institute’s Senior Fellow for State and Local Tax Policy, notes that increasing the standard deduction is in ten of 15 bills introduced so far to make income tax policy changes – ranging from the leadership bill sponsored by Delegate Tim Hugo, which would increase it by 33 percent to Senator Glen Sturtevant’s bill, which would increase it 300 percent to match the new federal standard deduction of $24,000 per couple.  All are introduced by Republicans, save Delegate Vivian Watts’ bill to raise the standard deduction by 50 percent.

To be clear:  Tax legislation shouldn’t be about whether it helps Republicans or Democrats; wealthy or poor.  It should be about making it simpler for taxpayers, providing incentives for economic growth and job creation, keeping taxes low, and fairness.

But liberal activists started this fight, and years of tax debate allow us to anticipate the narrative that has already begun by the Left that tax reform helps rich Republicans – just as we saw that claim in the Reagan, Bush, and Trump tax reforms.  Knowing the reality is an important contribution to the debate.

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