Politics, Moderate

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Politics

Republicans have a plan to hurt blue states. It could backfire.

Catherine Rampell on

Many blue states are in big, big trouble. Perhaps Republicans should be wary of causing them more, if they really think it through.

The new Republican tax plan is, on the whole, a bunch of tax cuts weighted toward the rich. To partly offset the cost of those cuts, the bill also closes some deductions and loopholes.

Among the biggest and most controversial of those disappearing deductions: all state and local income taxes. If Republican leadership has its way, the only state and local taxes you could continue to deduct on your federal personal income-tax return would be property taxes, and only up to $10,000.

This is not exactly a surprise. Red-state Republicans have complained about the state and local tax (SALT) deduction for ages.

They usually argue that the SALT deduction requires lower-tax, lower-income (i.e., mostly Republican) states to subsidize higher-tax, higher-income (mostly Democratic) states. They also complain that it incentivizes the latter to spend more on government services than necessary.

This critique is partly true. On the margin, SALT deductibility does make it easier for states and municipalities to raise taxes, since the feds implicitly bear some of the cost.

But the red-states-subsidizing-blue-states argument isn't quite right. At least, not when you consider the federal budget system as a whole -- that is, how much states pay into the treasury in total and how much they get back through federal spending and transfers.

On net, tax dollars actually flow from higher-tax states to lower-tax ones, according to research from the Rockefeller Institute of Government. New Yorkers are effectively subsidizing Montanans.

But forget for a moment this red-vs.-blue scorekeeping. There's a much more practical concern that should weigh on federal lawmakers.

It's this: Many high-tax blue states are in serious fiscal doo-doo.

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