George W Bush would never raise taxes, oh no. But according to a trial balloon
being floated today in the New
York Times and a few weeks ago in the LA
Times, he might eliminate tax deductions, especially those which
overwhelmingly benefit those notoriously blue states New York and California.
The federal deduction for state and local taxes, we’re told, is alone worth
$46 billion a year.
Despite having an extra three weeks to write the story, the New York Times
piece, by Ian Urbina, still doesn’t really add anything to the LA Times story:
in fact, it raises one enormous question which it doesn’t even attempt to answer.
The way this deduction works is that you don’t need to pay federal income tax
on money which you’ve already given to the state in the form of state and local
income tax. If you earn $100,000 a year and you pay $5,000 of that in state
and local taxes, you pay federal income tax not on your full $100,000 income,
but only on the $95,000 which is left over.
According to a New York City official quoted in the New York Times piece, the
change would mean that New Yorkers "could expect an 11 percent increase
in the amount they pay the IRS," because they take deductions not only
for New York State taxes but also for New York City taxes.
Then, however, things get confusing. According to the New York Times, "the
change would affect about 3.2 million households in New York"; the LA Times
is more useful, saying that those 3.2 million households comprise 37% of all
tax filers in the state.
Both papers quote Bruce Bartlett, a former Treasury official. In the LA Times,
he says that "it’s one of the biggest deductions most people have on their
tax returns". But in fact, even in New York and California, "most
people" turns out to be just 37% of tax filers.
This makes little sense to me. If you pay federal income tax, then you pay
state income tax. If state income tax is deductible, how come 63% of filers
fail to deduct it? I’ve been poring over my 2003 tax returns, and not only can’t
I find the deduction anywhere, I can’t even find a place where I might be able
to claim it.
Thanks to ehow.com,
however, I’ve worked out what’s going on here. Americans have a choice on their
tax returns: they can either itemize deductions, or they can claim the standard
deduction, which last year was $4,750 for single people like me, $9,500 for
married couples filing jointly, or $7,000 for people who qualify as "head
of household". After I worked out my adjusted gross income, I then subtracted
$4,750 from it along with $3,050 for each person dependent on me, which in my
case was just me alone. So my taxable income, on line 40 of my 1040 tax return,
was actually $7,800 lower than my adjusted gross income, on line 35. And that’s
actually the minimum amount by which adjusted gross income is decreased.
It’s possible to reduce your adjusted gross income by more than that, by itemizing
your deductions. The main ones are mortgage interest, state and local taxes,
and charitable contributions. If you add all those things up and they come to
more than your standard deduction ($4,750 in my case), then you should itemize.
Most people, however, don’t. Since I don’t have a mortgage and I paid much less
than $4,750 in state and local taxes, I was better off taking the standard deduction,
even after accounting for my stunning generosity to sundry charities.
All of which raises another question, however. If people stop being able to
deduct state and local taxes on their federal tax returns, more of them will
take the standard deduction instead. So while the LA Times says that "the
deduction is valued at $46 billion" this year, it’s not clear whether that
number represents the total amount of state and local taxes deducted from federal
tax returns, or whether it represents the amount of money that the federal government
would receive if the deduction was abolished.
What’s more, it certainly seems that New York City officials are being alarmist,
What with all the other deductions people can take, and the continued existence
of the standard deduction, I simply can’t imagine that New Yorkers would pay
the IRS 11% more if the state and local tax deduction is abolished. I, for instance,
along with 63% of other New Yorkers, wouldn’t see my federal income tax rise
at all. But as ever, when it comes to questions about taxes, reporters tend
to find it much easier to quote duelling officials than to uncover the actual
truth of the matter.
