Michael Barone points out the three big tax deductions which are hard to eliminate: the charitable deduction, the home mortgage interest deduction, and the state and local tax deduction.
I agree with him that elimination of the charitable deduction is wrong for Republicans. Home mortgage deductions could be eliminated for loans over $500,000 without eliminating middle class home ownership. (Though it would affect the building trades). But the real gold and political opportunity for Republicans is in State and local taxes.
As Michael points out, the highest earners who benefit the most from this deduction live in New York and California and vote Democratic. The most powerful and demagogic politicians from those states include Nancy Pelosi, Chuck Schumer and Barbara Boxer (millionaires all!). Other states with high tax state and local taxes are New Jersey, Maryland, and Massachusetts. The tax foundation calculates that the state’s with the highest tax burden are New Jersey, New York, Maryland, Connecticut and Hawaii. Not coincidentally, not one Republican Senator exists in those states.
The long term economic benefits of such a move are obvious. First, it creates incentives to keep state tax burdens low by, for instance, paying state workers market rates. It lowers the deficit and makes federal receipts less dependent on state tax decisions. It creates incentives for people to move from high tax areas to more productive low tax areas.
The political benefits for Republicans are even greater. Imagine the arguments of Chuck Schumer, Nancy Pelosi and Barney Frank opposing this proposal. They would either have to adopt Republican arguments (strengthening those arguments on the nature of taxes) or accept Republican proposals(fracturing their own base). The reduction or elimination of such deductions would set the “gentry liberals” and the government unions-natural Democratic allies-at each others throats.
The gentry liberals are often the high earners in democratic states most likely to be affected by the elimination of such deductions. The government unions are those who benefit when states are more insulated from the consequences of high cost government. The removal of the deduction would put pressure on those unions as states tried to cut costs. Moreover, for states that did not get the message, the movement of population away from them and towards states that did would accelerate the strengthening of Republicans in the House.
The best move for Republicans would be a gradual move to reduce the deduction. At first eliminate the deduction of state and local taxes for millionaires. Then work down from there. The issue would be alive for many election cycles-sapping Democratic strength each time. Those who pay no federal taxes would wonder why the Democrats were spending so much energy defending the rich. Democrats in the Far West, South, and Midwest would have to cast unpopular votes to support filibusters or votes protecting Hollywood fat cats and Wall Street denizens like John Corzine.
To the extent it was implemented it would create more synergies for Republicans. High earning liberal democrats would note they were paying even a more disproportionate share of the federal and state budget. Some might move to Republican states bolstering the tax base. In order to keep them, liberal states would be pressured to lower taxes and the size of local government.
No possible other proposal could so cause “confusion to the enemy” as the reduction or elimination of the state and local tax deduction. It would create stresses on the Democrats nationally by splitting Coastal from Western and Southern Democrats. It would put stresses on the Democratic coalition within states by severing the gentry liberals from the government unions. And it would also be a hard sell to the Democratic constituencies that pay no taxes. The more time the Democrats spent on defending the deduction the more alienated the non-taxpayers would be. Democrats have promised this part of the coalition “free money” for years. How can they explain cutting off a source of such “free money?”
This is a golden opportunity to 1) make the worst Democrats look bad 2) demoralize and divide the Democratic coalition nationwide; 3) demonstrate the rightness of the Republican view of taxes and incentives from the very mouths of its opponents; 4) tax liberals, 5) and to create a long term engine for lower taxes among the states. Even Grover Norquist should see the beauty of this, especially if it allowed a reduction in marginal rates.