On the face of it, there was something a little odd about the spectacle of Mark (“Tax the Rich”) Dayton indignantly defending a major tax break that favors the well-to-do.
But even though the governor tried to camouflage it, that’s what we were treated to last week when Minnesota’s DFL chief executive stepped forward to decry plans being considered by Washington Republicans to eliminate the federal income tax deduction for state and local taxes (the SALT deduction) as part of the GOP’s complex tax-reform/tax-cut package.
The tax bill unveiled last week compromises the issue, mainly in response to concerns from Republicans who represent high-tax states. As it stands now, the measure would still allow taxpayers to deduct local or state property taxes up to $10,000 — but not income or sales taxes.
Even this modified SALT repeal would sting Minnesota, including Minnesota government. Dayton’s apparent out-of-character concern for the comfortable reflects how most subsidies actually work — not least tax subsidies.
If you pay attention, you’ll notice that in tax-reform debates, real-estate brokers, homebuilders and mortgage bankers are impassioned defenders of taxpayers’ deduction for mortgage interest. Meanwhile, nonprofit groups of every kind sweat blood at the thought of taxpayers losing their deduction for charitable donations. Similarly, empires such as higher education and health care jealously guard tax credits and exemptions and deductions that go to purchasers of their wares.
Why are all these entities (and more) so protective of other people’s tax breaks? Because subsidies (through tax breaks or otherwise) attached to a particular kind of transaction, flow through in large part to the “sellers” in those transactions.
When the federal government lets you deduct from your taxable income costs related to tuition, or donations, or mortgage interest — or state tax payments — it lowers the price you personally pay out-of-pocket for those things. Hence, you’re likely to buy more and resist price hikes less where such favored items are concerned.
“The SALT deduction … subsidizes state and local governments,” pithily writes the Brookings Institution’s Tax Policy Center. “... This subsidy encourages state and local governments to levy higher taxes (and, presumably, provide more services) than they otherwise would.”
Now that sounds like a tax break Mark Dayton could love. As noted here before, Dayton has delivered on his promise to “tax the rich,” mostly through the state income tax, significantly increasing levies on the best-off Minnesotans during his tenure. But he has used the extra revenue more to grow government than to reduce the tax rates of other Minnesotans.
The SALT deduction takes some of the sting out of high state tax rates — effectively forcing federal taxpayers across America to bear some of Minnesota’s higher-than-average taxes. Losing the deductibility of state income tax would make high-tax states a bit less competitive, particularly for high-skill/high-income workers and their employers.
But to back up, Dayton of course didn’t describe the deductions he’s defending as mainly benefiting the affluent and subsidizing state government. He warned of the imminent demise of a “tax deduction for 900,000 primarily middle-class Minnesota families.” (Emphasis added.)
Are those, in fact, “primarily middle-class” families?
To claim the SALT deduction for state/local income and property taxes, taxpayers must itemize their deductions when they file their federal return. Something over one-third of filers in Minnesota do that.
But high-income folk are far more likely to itemize deductions. According to Minnesota House Research, just 12.1 percent of Minnesota tax filers with adjusted gross incomes from $20,000 to $30,000 itemized in 2014. More than 98 percent of filers earning more that $250,000 did.
Overall, 50 percent of all Minnesota families that itemized had incomes above $100,000, and more than two-thirds of them had incomes above $75,000.
Median household income in the state that year was something under $62,000.
Meanwhile, evidence suggests that the dollars involved in the tax breaks may be even more skewed to the prosperous.
Using national data from 2015, the Government Finance Officers Association, in a paper defending SALT, reports that 49 percent of all SALT deductions were claimed by filers with incomes above $200,000 — and 77 percent by those with incomes north of $100,000. As a proportion of income, SALT deductions claimed by filers earning more than $500,000 were four times as large as those claimed by filers with incomes under $50,000.
And there’s still another way that saving the SALT deduction seems a curious cause for champions of income redistribution.
It is true that SALT repeal would hit Minnesota hard compared with most states — partly, as Dayton says, “because Minnesota is one of the few states that receives less [in federal spending] than its taxpayers contribute in federal tax dollars.”
Minnesota has the seventh-worst return among all states on the federal taxes its residents pay. It also has the ninth-highest proportion of taxpayers claiming SALT and the seventh-highest average deduction per claimant, according to the Minnesota Center for Fiscal Excellence.
Such rankings are partly the result of Minnesota’s high state taxes — but, more important, they arise from the happy fact that Minnesota is a comparatively rich state.
Progressive federal taxation, combined with broad benefit programs and nationwide services — from Social Security and Medicare to Defense and the National Weather Service — constitute in large part a coast-to-coast “tax the rich” redistribution scheme. It takes from prosperous states like Minnesota, New York and Colorado to subsidize benefits and services in poor states like Mississippi, Kentucky and New Mexico.
“[A] SALT repeal,” the center writes, “would … cause wealthier states to subsidize poorer states to an even greater degree.”
So why isn’t Dayton applauding this as a breakthrough for economic fairness rather than denouncing it as an “offensive proposal”?
There’s much more to “tax reform,” of course, than the fate of SALT. As the whole package is worked over, its various virtues and vices will be debated. There is something to be said for tax provisions that encourage or discourage certain activities and choices.
But, in general, the fewer decisions tax considerations distort, the better — and the closer together costs and the decisions to incur costs are kept, the better.
So, considered by itself, letting rich-state voters feel the full cost of their governments’ spending doesn’t seem altogether crazy.
D.J. Tice is at Doug.Tice@startribune.com.