Tax Plan

05.02.12

Romney’s Plan to End State Income-Tax Deductible Could Screw States Like New York

Under a President Romney, state income and property taxes would no longer be eligible for federal deductions. That would mostly affect Democratic-leaning states like New York and California—and clearly has partisan overtones.

Mitt Romney’s tax proposals ostensibly would cut taxes without sacrificing revenue. Romney said he would do so by closing loopholes. However, one of the loopholes Romney would remove from the tax code, as overheard by reporters when he made remarks at a closed, high-dollar fundraiser in tony Palm Beach in mid-April, would trigger massive hikes on taxpayers in solidly Democratic states already lined up behind Barack Obama in November.

In Palm Beach, Romney told donors that, if elected, he would end the federal deductibility for state income and property taxes. This may seem like an unexciting and technical change, but it would absolutely wallop residents of states like New York and California, which have high state income taxes. In contrast, it would have far less impact on voters in swing states like Florida and New Hampshire or, in deep red Texas, who don’t have a state income tax.  It’s a sign that, in an increasingly polarized country, Republicans are increasingly writing off voters in some of the country’s most prosperous and vital areas.

Romney’s plan to remove the deduction for state and local taxes would increase revenues by $70 billion, according to one estimate. Romney’s plan wouldn’t affect all residents—only those middle- and upper-income Americans who take the time to itemize their deductions. But those Americans would be severely hurt, as they would be unable to deduct state and local income taxes, which, in New York City for example, combines to be more than 10 percent. Getting rid of this deduction would raise the average affected family’s taxes by nearly $9,000 nationwide, and by more than $12,000 in New York.

Kirk Stark, a professor of tax law at UCLA’s law school, notes that while this isn’t a position totally out of the mainstream—ending this deduction is a feature of proposed centrist budgets like Simpson-Bowles as well as the plan proposed by conservative Republican Congressman Paul Ryan of Wisconsin—it does have a clear partisan overtone. Stark said it was a debate that can be seen through a “red/blue lens.” Since the urbanized states that the deduction benefits most are overwhelmingly Democratic, the fight over the deduction takes on a partisan sheen. After all, according to data provided by Stark, the states where the highest percentage of taxpayers are affected—Maryland, Connecticut, New Jersey, and Massachusetts—are all solidly Democratic, and those where it has the least impact—West Virginia, North Dakota, South Dakota, and Tennessee—are very conservative.

Romney’s tax plans haven’t prevented him from holding major fundraisers in New York (including a secretive one at the home of controversial hedge-fund mogul John Paulson, uncovered by The Daily Beast). And, according to Stark, it may not even be bad policy. The GOP frontrunner’s plans, however, do represent something even more problematic: continuing geographic political balkanization in the United States.

Romney’s statement came on the heels of failed GOP efforts to defund mass transit in Congress. This would have disproportionately affected the same urban areas, where many workers use mass transit rather than automobiles to get to work every day.

Romney has little incentive to appeal to New Yorkers or residents of most other urban areas.

But in a political environment in which Northeastern Republicans and Southern Democrats are both virtually extinct—and gerrymandering has almost annihilated the presence of centrists in the House of Representatives—Romney has little incentive to appeal to New Yorkers or residents of most other urban areas. He can just fly in for a fundraiser or a photo op, like his May Day appearance with Rudy Giuliani, and not have to tailor his pitch to urban Americans.

Regardless of the merits of the policy, it is a sign of how polarized American politics has become.