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11/01/2005 Archived Entry: "Tax 'em Till They Turn Red"

Slate has a fascinating analysis of Bush's proposed federal tax reform, which is entitled "Tax 'em Till They Turn Red", written by Daniel Gross. It opens, The president's Advisory Panel on Federal Tax Reform will present its proposals tomorrow, and the bipartisan commission seems to have reached the following conclusion about how to improve revenue collection: Screw the blue states.

The gist of the analysis is this: [Please click on 'more' to continue]

The panel proposes eliminating the Alternative Minimum Tax by which millions lose deductions for property taxes as well as state and local income taxes each year. There are two proposals on replacing the lost revenue; both "severely limit the size of the home mortgage deduction." The current deduction is for up to the $1 million of a mortgage. The proposed limit is the "maximum that the Federal Housing Administration will insure" -- $312,895. The national average mortgage is $244,000. Both plans "eliminate deductions for interest on home-equity loans or mortgages for vacation homes"; both eliminate "the deduction for state and local taxes paid, including property taxes."

Gross continues, "regional variations in home prices and state and local taxes would heavily skew the burden of these tax changes onto blue-staters [Democrats]. Who has the most to lose if the mortgage deduction is capped at $313,000, and if you can no longer deduct local taxes from your taxable federal income? People who live in places where (a) real estate is expensive; (b) states and/or cities tax income; and (c) property taxes are high, to support local schools and services. In other words, people who live in California, Seattle, the entire Atlantic seaboard from Maryland up to Maine, and well-off suburbs of Chicago." The foregoing are well-known Democrat strongholds. On the other hand, "If you live in a $300,000 McMansion in a state with no income tax, like, say, Texas or Wyoming, these changes aren't likely to affect you at all." The MidWest, which is a Republican stronghold, is far less likely to have mortgages over the $313,000 cap and people there are far more likely to be uneffected or benefited by the changes.

I expect these reforms will pass with some ease, and for at least two reasons. 1) The Alternative Minimum Tax is generally hated and the reform sweeps it away. 2) It will be sold as a populist measure that helps working people and impacts only the rich who can afford to pay a bit more in property taxes. After all, they choose to live in McMansions on the beach or in Connecticut, where prices are high by any standard.

Hat tip to Lew Rockwell for this item.