Republicans, ideology, and demise of the state and local tax deduction

In deference to the increasing influence of the virtual over the real in our political discourse, I begin with the caution Sportin’ Life provided in Porgy and Bess: “It ain’t necessarily so.”

Superficially, the debate over what amount of state and local tax (SALT) payments ought to be deductible from federal income taxes appears to feature two surprising role reversals. Conservative Republicans are defending their 2017 decision to increase taxes on some high-income Americans, while the effort to undo this is being led by liberal Democrats.

True, the GOP’s enthusiasm for increasing the revenue collected from the wealthy is largely targeted at voters in states that vote Democratic, and their 2017 law more than offset whatever increase falls on most of their supporters with other, larger reductions.

Even with this political selectivity, however, there still seems a big disconnect between the Republican article of faith that tax increases mean GDP decreases and their insistence on requiring greater contributions to the IRS from those who work in businesses where America’s global standing is highest: technology and intellectual property (California) biomedical research (Massachusetts) Finance (New York) pharmaceuticals (New Jersey).

But looking at this issue in the broader context of American politics makes clear that this is not an exception to the ideological division over the role that the government should play in our economy. It is instead not just an affirmation of it, but an indication of how visceral it has become.

For the right, ideological consistency is no match for the passionate desire to “own the libs.”

What is on display here is the depth of conservative determination to diminish the resources we devote to public purposes — in this instance by inflicting pain on those who take the opposite view. 

That is why the Republican success in fully assessing residents of high-tax states for income that they do not retain but automatically pass on to their sub-federal governments is a significant victory in their anti-tax crusade.

Understanding this requires paying attention to an often overlooked but very significant factor in American politics: the contemporary tug-of-war between the states.

Driven both by self-interest in expanding their economic footprint and the need to prove that liberal policies are bad for business, Republican governors and legislators not only try to keep taxes low, obstruct the growth of labor unions, and minimize rules that protect the environment, they vigorously advertise these results to the people who decide where enterprises are located.

An example of the strength of this motivation that has received far too little attention is how then-Sen. Bob Corker helped defeat an organizing drive by the workers at the Volkswagen plant in Chattanooga, Tenn. Worried by the company’s expression of support for the drive, Corker and other Tennessee Republicans threatened that if the union drive succeeded, a proposed package of financial aid for the plant’s expansion would be withdrawn. Asked why they opposed the union that the employers favored, Corker indicated that if the union won, there would be upward pressure on wages throughout the area, which in turn would make it harder for Tennessee to persuade businesses to leave places where workers were better paid.

Not only does the same logic apply to differentials in the level of public spending among the states, the Republican advocacy of higher taxation in this case creates a win-win situation for the right. If New Jersey, New York, Massachusetts, California et. al. do not cut their high-end rates, the siren song of the low-tax states will continue to resonate more loudly.

The evidence that the personal preferences of top executives have an influence on business location decisions lends weight to this rationale.

Alternately, if that pressure does produce a lowering of the revenue demands made by those more liberal states, anti-tax crusaders will sing a different but equally triumphant tune: They will cite this to counter the inconvenient fact that high state taxes are fully compatible with strong economic performance.

Republicans should not get this chance to chip away at one of their major philosophical disadvantages.

Two caveats are in order. One, there are principled advocates of tax fairness like Bernie Sanders (I-Vt.) who oppose the state and local deduction on legitimate ideological grounds. I believe that the imperative of supporting rather than punishing electorates that support higher levels of public spending outweighs the equity argument, but I recognize its sincerity. Second, I note that Jim and I are beneficiaries of the division as Maine residents — but I am prepared to supply a list of the parts of the tax code that I support which are unfavorable to me.

In summary, the central issue in this debate is whether or not you think the willingness of voters in some states to tax themselves more highly than do their neighbors ought to be discouraged. Remember we are talking here about a tax deduction, not a credit. Wealthy citizens of New Jersey, New York, California, and Massachusetts who chose not to move to low tax areas were paying more of their income to support what they believed to be the appropriate level of public services before the deduction was significantly reduced, as they will be if it is fully reported. 

What Republicans included in the 2017 tax bill to penalize high-tax jurisdictions was an integral part of their war against the public sector, under the banner of Ronald Reagan’s pronouncement that “government is the problem.”

Those of us who recognize that this view is a threat to our quality of life need not apologize for opposing what is — and is meant to be — a disincentive to those willing to pay higher state and local taxes to fund a sufficient level of public goods.

Barney Frank represented Massachusetts in the U.S. House of Representatives for 16 terms (1981-2013) and was chairman of the House Financial Services Committee from 2007 to 2011.