New York State of State Response
In Governor Andrew Cuomo’s state of the state address, the governor declared that New York is “once again the nation’s beacon for social progress” due in part to enacting “a more progressive tax code.” In the same speech, Gov. Cuomo also claimed that capping the state and local tax deduction (SALT) and mortgage interest deductions (MID) amounted to an “economic civil war” waged against “blue states.” Given the regressive structure of these deductions, Gov. Cuomo should applaud the cap rather than abhor it. The governor’s accusation is a diversion from the brutal reality of New York’s poor fiscal policies and low-growth tax structures.
The SALT deduction allowed taxpayers who itemize to deduct state and local property taxes and either general sales or income taxes from their federal taxes. Itemizers fell roughly in the top third of the income spectrum; 88 percent of the tax savings from the SALT deduction flowed to individuals making $100,000 dollars or more. This allowed high-income individuals in high tax states to pay lower federal taxes than they would otherwise owe, forcing federal tax rates for the rest of the country upwards.
As John Cochrane, a senior fellow at the Hoover Institution at Stanford explains, “Suppose you are in the top, (roughly) 40 percent marginal federal tax bracket. If you pay an extra $100 in state taxes, you deduct $100 from income and pay $40 less in federal taxes. So, you really only pay $60 in state taxes. The federal government effectively transfers $40 to the state from taxpayers in other states.”
Much like the SALT deduction, the mortgage interest deduction disproportionately skewed toward the top of the income spectrum, where households that made $200,000 dollars or more, about the top 6 percent, claimed nearly half (46 percent) of the MID’s benefit. The MID distorted housing markets toward larger homes—thus sometimes called “a subsidy for McMansions”—and does not appear to have increased home ownership rates.
The SALT and mortgage interest deduction were two of the three largest and the most regressive tax expenditures in the federal tax code. The recently enacted federal tax reform addressed the regressivity of the SALT and mortgage interest deduction by capping them at $10,000 and $750,000 dollars, respectively. The reform not only limits the benefit for high-income households, it doubled the standard deduction. By doubling the standard deduction, the reform will reduce itemization to the top 10 to 5 percent of the income spectrum. In addition, scaling back these deductions enabled the tax rate for every income level to be reduced.
Despite these improvements and the rationale inspiring them, Gov. Cuomo derides federal tax reform on the grounds that it is, “robbing the blue states to pay for the red states. It is crass, it is ugly, it is divisive, it is partisan legislating, it is an economic civil war.” His governor’s past support for a progressive income tax seems to be trumped now by raw political tribalism as he now argues that lower income earners in a state like New Hampshire should subsidize a relative handful of high-income earners in his home state.
It’s no surprise that Gov. Cuomo pivoted to the “economic civil war” more than a dozen times during his speech. After all, railing against the Trump administration serves as an excellent distraction from the tax, regulatory and labor policies weighing down one of the most powerful economic engines in the world.
New York ranks last in the Rich States, Poor States ALEC-Laffer State Economic Competitiveness Index, a ranking system which uses 15 variables associated with economic growth such as top marginal income tax rates, public employment as a percentage of total population and tax expenditure limits. The policy choices of New York legislators and Gov. Cuomo are driving residents into other states, causing New York’s population to drop for the first time in a decade. Reforming the bureaucracy, streamlining regulations and reducing taxes are the key to sustained prosperity for all—not pursuing imagined villains.