The GOP will pass a tax reform bill this year. The best tax policy for our economy is broad tax rate cuts that generate broad incentives for work, education, and investment for all Americans. Special tax breaks for homeowners and state income taxes generate narrow incentives to buy houses and increase state government spending, but they don’t build incentives that generate strong economic growth and job growth in the national economy. Home renters get taxed more to subsidize home buyers, while people in FL and PA get taxed more to pay for big federal tax breaks for Silcon Valley billionaires who get to deduct millions in state income taxes. Why should people outside of CA and NY have to pay more federal taxes to subsidize vast, overstaffed state government bureaucracies working on unnecessary programs in California and New York? The answer of course, is they shouldn’t have to subsidize state and local government spending in other states. So that’s what the House bill is trying to do. It’s trying to generate broad incentives for economic growth that benefit all Americans in all states, which is best for our economy in the long run. It’s the starting point for negotiations.
But of course that kind of bill would be costly to some people who own expensive homes and pay lots of state income taxes in states like CA,NY, and TX. So to get the votes to pass a tax reform bill, the House GOP is going to have to keep a certain amount of specific tax breaks in the final bill that passes and is signed by President Trump. Most likely, this will end in a compromise bill that limits the amount of federal tax deductions for state income taxes and home mortgage interest, but doesn’t eliminate either deduction completely. I think the limits will end up being fairly high—something like a $70,000 limit on the state income tax deduction and a $50,000 limit on the home mortgage interest deduction. Then we won’t have middle class people subsidizing huge state tax deductions for Silicon Valley billionaires and professional athletes, but everyone in the middle class will retain all of their current federal tax deductions and get a big cut in tax rates. People with incomes in the millions in high-tax states will pay more taxes, but there will be no political cost for that tax increase, and if a few GOP reps from those places vote against the bill, so be it. It will still pass and provide big benefits for the vast majority of Americans.
It is refreshing to see a post that isn’t hysterically predicting the worse. Thanks.