Tax reform is making people salty. Probably because of all the SALT, the state and local tax deduction.
You might have heard last week that the Senate passed a tax reform bill. It’s been in the news. However, you would be forgiven if you thought it was all done. One of the features of our bicameral legislature is that both bodies — the U.S. House of Representatives and the Senate — need to agree to pass a law.
Coordinating the ideas of 435 individuals with those of 100 other individuals is, shall we say, complicated. So we have a process that lets each chamber pass a bill, then appoint a small committee to hammer out details. That final bill then goes for an up-or-down vote, full of compromise.
In this age of Twitter and people spouting off whatever idea pops into their mind, the hard work of negotiating is nearly impossible. While left-wing activists decry Sen. Susan Collins’ vote and “occupy” her offices, the reality is all she did was vote to move the concept of tax reform to a small group who can try to forge something worthwhile.
That isn’t to say the proposals are perfect as-is. Indeed, Washington seems to separate the question of “how much revenue should we raise?” from that of “how much should we spend?” That is a problem much bigger than tax reform. Even if the bill fails, America spent nearly $700 billion more than we took in during 2017. Out of all federal spending, nearly 50 percent goes to Social Security, Medicare, and Medicaid; entitlement reform is necessary no matter what happens with taxes.
That doesn’t need to be a bad thing. After all, the majority of our social safety net was built before 1970. To riff on a voice from that era, times have been a-changin’.
Reform should focus on what we want the safety net to accomplish, and utilize technological advancements to deliver it. Maybe “unemployment” should be changed to recognize non-traditional “jobs” like driving for Uber or freelance welding. “That’s how we have always done it” is not a good answer.
The same holds true with taxes. It is a politically powerful argument to claim “you’re losing under this deal, they’re winning,” mixing and matching definitions of “you” and “they” as necessary and pitting people against one another. Yet inherent in that approach is the assumption that our current tax code — “the way we’ve always done it” — is a worthwhile baseline. Is it?
Let’s check. Imagine three brothers — triplets — who each have the same job in sunny New Hampshire, with the same salary. They all itemize on their taxes and live in the exact same type of house. The U.S. military protects them all equally. They all build eligibility towards Social Security. Federal roads and courts are all available to them.
The only difference between them? One lives in Portsmouth, one in Kittery, and one somewhere in that dark place called “Massachusetts.”
Because of that little difference, they all pay different federal tax bills. The Granite State brother pays the most, Massachusetts a bit less, and Kittery the least. Why? SALT. State And Local Taxes, or, more specifically, the federal income tax deduction for them. Taxes paid at Maine’s 7.15 percent tax rate get deducted from your federal income, while the brother in income tax-free New Hampshire pays full freight.
That is just one example among many of the mess we call the “Internal Revenue Code.” If you repeal the SALT deduction and leave the federal government agnostic as to how states choose to fund their own operations, you will effectively raise taxes on some Mainers. And maybe that is OK.
Because the goal of tax reform should be to design a system for the world we live in today, rather than be hobbled by the ghost of 1986 and “the way we’ve always done it.”