How to Fix the GOP Tax Plan

Instead of rolling it back, why not use a carbon tax to fix its regional tilt and benefit all Americans in the process?

Jonathan Ernst / Reuters

Blue-state taxpayers are hopping mad about the loss of their state and local tax deductions. The latest Wall Street Journal / NBC poll shows that the voters hit hardest by the GOP tax hikes moving furthest toward the Democrats. While the nation as a whole leans 10 points more Democratic than in 2014, college-educated voters favor Democrats by 16 more points than they did four years ago.

You can see why those voters are so mad. From their point of view, the tax plan looks like a scheme to shift the cost of government from the truly wealthy onto the merely affluent.

And you can see, too, the temptation to Democratic opponents. The Republican tax plan is the most nakedly sectional revenue measure the United States has seen since the high-tariff era before the Great Depression. Even before the GOP tax plan, the state-by-state map of American federalism’s “makers” and “takers” looked like the Trump-Clinton map in reverse, with states like California, New Jersey, and New York the biggest net contributors, and states like Kentucky, Alabama, and Mississippi the biggest net beneficiaries. The Republican plan loads even more of those costs on blue states: The Joint Committee on Taxation estimates that the federal government will cost taxpayers there almost $670 billion over the next 10 years by limiting the deductibility of state and local taxes and of mortgage interest.

Those extra funds, squeezed disproportionately from states like California, Maryland, New Jersey, and New York, just suffice to offset the revenue loss from the GOP’s tax cuts to corporations and pass-through businesses.

Yet as aggressively sectional as the GOP plan is, once done, blue-state legislators should hesitate to undo it. If the mortgage interest deduction was ever a good idea, that time passed a long while ago. Canada, without the deduction, actually has a higher home ownership rate than the United States, 67.8 percent  vs. 63.7percent. But while the average new home in Canada hovers at about 2,000 square feet, the average new home in the United States is nearing 2,700 square feet. The deduction is advertised as supporting more homeownership; instead, it subsidizes larger homes. How is that a valid policy goal?

The deductibility of state and local taxes is better grounded, but not much. The policy traces back to the very first income tax, imposed during the Civil War. Its authors were impelled more by constitutional than economic concerns. In the modern era, its effects have been dubious. It probably has subsidized blue states to tax and spend more than they otherwise would. Ultra-high state income-tax rates—reaching 13.3 percent in California, 8.82 percent in New York—might trigger more debate, even in those one-party states, if the people paying them felt their full weight. The federal government cushions the pain, especially for those state citizens who might otherwise complain most effectively. (According to the Tax Foundation, 88 percent of the benefit of the deduction flows to taxpayers with incomes over $100,000.) That cushioning, in turn, enables high-tax states to yield to pressure from other local interest groups. One striking example: While the Vera Institute calculates that across the nation it costs an average of $31,000 per year to incarcerate a prisoner, California spends more than $75,000.

Rather than restore these deductions, which have subsidized bad policies, especially in the blue states, the right way to redress Republican sectional chauvinism is by addressing the biggest subsidy to the worst policies of the red states—and especially their profligate spewing of greenhouse gases. Just as the blue states have used the mortgage and state-and-local deductions to offload the cost of their generous state governments, so red states have inflicted on others the climate consequences of their lifestyles.

The map of carbon-intensity by state looks like the map of state and local spending, upside down.

The top five most carbon-efficient jurisdictions are D.C., New York, California, Vermont, and Massachusetts. The five worst: Wyoming, North Dakota, West Virginia, Alaska, and Louisiana.

A carbon tax of $15 per ton would raise something over $700 billion over the next 10 years. That money would a) very neatly balance the 2017 GOP revenue raid on blue-state tax deductions, b) reduce the current carbon-dioxide emissions trajectory by about 10 perent, and c) reduce by half the GOP plan’s estimated increase in the federal debt. The revenues from the tax would help to avert the impending cutbacks in Medicare and other health programs about which the GOP House leadership is now noisily contemplating.

It’s often complained that carbon taxes are regressive. This objection is true, as far as it goes, but also highly misleading from a policy point of view. Poorer households spend a lot on energy relative to their incomes, but surprisingly little in absolute terms. In 2013—a year of high fuel prices—the bottom fifth of American households spent about $1,160 on gasoline and motor oil. That cost weighed heavily upon them, but it remains a small enough target that it can be offset without too much of a bite out of the tax’s contributions to federal revenues.

Perhaps the ideal way to do the offset is by cutting the federal payroll tax, another tax that bears most heavily on lower-income earners. The regressivity of this tax goes under-discussed—indeed often unmentioned. When White House press secretary Sarah Sanders suggested that the richest tenth of the American population bear 59 percent of the tax burden, she reached her conclusion by ignoring the biggest tax paid by the majority of the population, a tax that contributes one-third of federal revenues—three times as much as the corporate income tax before the Trump tax cuts. Reducing that burden by just a few hundred dollars per household would do more than anything ever urged by Donald Trump to stabilize the finances of poor and working America—and to justify taxing the fuel that drives monster homes and private jets as well as pick-up trucks and commuter buses.

A century ago, George Washington Plunkitt memorably described the plunder of New York City by upstate Republican legislators.

Did you ever go up to Albany from this city with a delegation that wanted anything from the Legislature? No? Well, don’t. The hayseeds who run all the committees will look at you as if you were a child that didn’t know what it wanted, and will tell you in so many words to go home and be good and the Legislature will give you whatever it thinks is good for you. They put on a sort of patronizing air, as much as to say, “These children are an awful lot of trouble. They’re wantin’ candy all the time, and they know that it will make them sick. They ought to thank goodness that they have us to take care of them.” And if you try to argue with them, they’ll smile in a pityin’ sort of way as if they were humorin’ a spoiled child.

But just let a Republican farmer from Chemung or Wayne or Tioga turn up at the Capital. The Republican Legislature will make a rush for him and ask him what he wants and tell him if he doesn’t see what he wants to ask for it. If he says his taxes are too high, they reply to him: “All right, old man, don’t let that worry you. How much do you want us to take off?”

“I guess about fifty per cent will about do for the present,” says the man. “Can you fix me up?”

“Sure,” the Legislature agrees. “Give us somethin’ harder, don’t be bashful. We’ll take off sixty per cent if you wish. That’s what we’re here for.”

Then the Legislature goes and passes a law increasin’ the liquor tax or some other tax in New York City, takes a half of the proceeds for the State Treasury and cuts down the farmers’ taxes to suit. It’s as easy as rollin’ off a log – when you’ve got a good workin’ majority and no conscience to speak of.

The 2017 tax law was written much in that same spirit. The best requital is to reverse that spirit in a way that protects the planet that is home to all Americans, whether they live in blue states or red.