High Tax States

The  income tax bill recently passed limits the amount of taxes to state governments which can be deducted from a person’s income on federal taxes. It is understandable that taxpayers in states with very high state taxes such as California would not like this. It is also understandable that politicians in those states also would be displeased since this makes the taxes they collect more onerous to their citizens and also at the margin gives people an incentive to leave or avoid moving to their states.  Some arguments against that part of the bill make sense, but one of the most commonly used does not.

That is the assertion  that since California  (or New York or Connecticut or wherever) pays more per capita in federal income taxes than, say, Mississippi or New Mexico, it is a “donor” state to the federal government and is subsidizing all those slackers in fly over country who do not pay enough. Viewed on the surface and even assuming the claim about the averages (which I have not checked) is correct,  that is nonsense. The  state government of California is a tax exempt governmental entity and thus pays no federal income taxes at all. That of course is not what is usually meant. The point being made  is that Californians pay federal income taxes disproportionally.  

That is specious too. Californians as a group do not pay federal personal income taxes. Only individuals pay them.   Some individual Californians  - those with large taxable incomes - pay  large amounts of federal  personal income taxes. Some pay less, and many pay none at all.  They are all  taxed under the same rules as taxpayers in the other 49 states.  Having lots of residents with large incomes and thus large federal tax bills, does not mean the state, as personified by  its politicians and officials, is being treated unfairly. It means only that  it has lots of residents earning enough to get slammed really hard by the feds.

 

The real problem for taxpayers in states with high taxes is that their state taxes are too high, not that they now can deduct a smaller amount of them. That should be obvious, but it is unlikely the politicians or their flacks in the media will be mentioning it.