Mitt Romney’s Tax Idea Would Wallop High-Income Blue States
When candidates talk to high-level donors, they tell the truth.
And so despite his campaign’s strenuous downplaying, Mitt Romney’s open-mike “gaffe” revealing some details of his tax plan at a closed-door fundraiser in Palm Beach is real news.
Forget for the moment Romney’s announcement to the well-heeled crowd that he would likely let HUD die on the vine. And given that this was a crowd likely lousy with second homes, his talk about ending the mortgage deduction for second homes could perhaps qualify as political courage.
But Romney’s announcement that he could well end the deduction of state taxes is the real bombshell.
And because of the red state/blue state divide, there is a compelling political argument for the big policy idea: it would mostly punish blue-state voters who aren’t going to back Romney anyway.
That’s because blue states generally have higher state and local taxes. For example, many Californians and New Yorkers—nearly 50 million Americans—would see their taxes go up significantly.
However, in the nation's second-largest state, Texas, closing this loophole would have no effect—because Texas does not have state-income taxes. Neither would it impact the residents of Florida, the state where Romney was, not so incidentally, speaking in. Alaska, Nevada, South Dakota, Washington, and Wyoming also have no income tax.
But significantly—and here’s the political risk—many swing states would be affected, including Colorado, Iowa, New Mexico, North Carolina, Ohio, Pennsylvania, and Virginia.
The Romney camp would be quick to counter that his plan for an across-the-board tax cut would more than offset these lost deductions, but the idea of eliminating the local tax deduction gives Team Obama new argumentative ammunition in its courting of the middle class.
In general, I think politicians should be applauded when they offer details about their tax plans—especially because tax reform is an area where we should be able to get action from the next Congress, no matter who is president. And even as ambitious a plan as Paul Ryan’s did not offer details about the specific tax loopholes that would be closed to pay for lower rates for fear of alienating individuals and special interests.
On this Tax Day, these debates also illustrate the double level of debates going on about taxes. We often get suckered into thinking tax debates are about simple rates—for example the current top rate of 35 percent versus the Clinton era 39.6 percent. But what’s more significant is the effective rate, which helps explain how Romney pays 14 percent and President Obama just over 20 percent. Deductions for state and local taxes are an important feature for people living in higher-tax states, and losing those could mean a tax increase on their bottom line.
Policy debates matter much more than process stories or the manufactured scandals of things like “Rosen-gate.” Mitt Romney’s open-mike gaffe was revealing because it pulled back the curtain on what he’s really thinking, for better or worse. We could use more of those moments to counteract the constant saccharine spin.