Capping tax deductions

While President George Bush is pushing for a reduced tax rate on capital gains, he also is seeking a cap on the amount of state income tax that can be deducted on itemized returns. The former measure would benefit a relatively small number of taxpayers in every state, but the latter would come down comparatively harder on an even smaller number of filers living only in the states with income taxes.

The measures would giveth, but also taketh away from people in upper income brackets.

For average Maine taxpayers, the tug-of-war over these beefy checkbooks may seem remote and irrelevant. Who cares if a couple with joint taxable income of $100,000 or more pays more in federal taxes because the government decided to limit their deduction for state income taxes paid to $10,000?

Their income may be in the stratosphere by Maine standards, but every taxpayer should be interested in the issue.

In its effort to reduce the deficit, the federal government should be obligated to spread the pain, evenly. Picking on taxpayers already burdened with state income taxes is the wrong way to make up for years of overspending at the national level. That’s discriminatory.

The change would distort the real income of these taxpayers. Existing tax law acknowledges that for federal tax purposes the IRS should not include as “income” money that the taxpayer is paying to the state in form of income taxes. By capping the deductibility of state income taxes, the federal government would wind up taxing state taxes. That’s bad policy.

In some income-tax states, leaders fear an exodus of wealthier residents or at least a more aggressive effort by their tax accountants to avoid paying state taxes. Either way, average taxpayers would have to take up the slack. That would be unfair.

Such a change in the tax law would set a terrible precedent. If Washington can treat upper-income taxpayers unfairly today, it will be easy for the feds, under pressure to balance the budget at some future date, to squeeze down the cap on state tax deductibility. That will be directly painful, for everyone.